The biggest challenge in business model creation and analysis is evaluating transactions. Strategy and management theory have tended to focus on resources. It is, simply put, easier to think of an organization as a bundle of resources than a collection of transactions.
Yet the origins of business model thinking and innovative internet-based business models have been centred on transactions. Start-ups and organizations that brought novel transactional systems to market often found enthusiastic partners and customers. These firms, intentially or accidentally, found ways to innovate at least one of the core components of transactions: structure, content, or governance.
Transaction structure represents the pieces and connections of the transaction. Who participates in the transaction, and how does the transaction take place? Simple transaction structures involve two parties exchange something of value for something else. Most commonly one of those “somethings” is money-- a customer buys an apple at Waitrose with a £1 coin.
Of course, many transaction structures are significantly more complex, involving multiple entities, multiple types of value exchange, and non-monetary exchanges. Consider the Return Path example. ISPs provide Return Path with anonymized email traffic and delivery data collected from their customers. Return Path integrates that information with data from other ISPs to generate industry-wide metrics and statistics. Then it provides reports to the ISPs showing how each compares to industry metrics and email user preferences. No money changes hands, and a variety of IT and software organizations are involved, directly and indirectly.
Transaction structure is probably the most deceptive of all business model components. As entrepreneurs, managers, customers, and users, we have a sort of built in understanding of how we interact with organizations. We tend to simplify back to the “buying an apple at the grocery store” model, when the reality of modern organizational transactions is often more complex and nuanced. Thinking carefully through your transaction structure can be a powerful start to your business model analysis. If you suspect that your competitors are doing something new with customers, but you are having trouble figuring out what it is, find a way to unpack their interactions with customers (or other collaborators and partners).
Brilliant tool: A customer journey map is an effective way to explore some of the most critical transaction structures in your business model.
Transaction content is whatever is being exchanged: goods, services, money, goodwill, information, ideas, and so on. Transaction content often gets ignored in business model analysis precisely because most entrepreneurs and managers approach the problem with the assumption that they already know what is being exchanged.
Jose Estabil, a high-tech entrepreneur and executive, paraphrased this as: “Most entrepreneurs just want to sell what they build, rather than build what they can sell.” In other words, if you start with an expectation about the transaction content, you severely limit the business model and value creation possibilites.
How do you overcome this hurdle? One powerful tool for exploring transaction content, and in particular for considering unanticipated or potential transaction content, is empathic design. The core process for empathic design is observation, rather than traditional data-gathering. Go to the various places and spaces where your product or service is utilized and passively observe what is going on. Is your product being used the way you thought? What elements of your service are not being used at all? What workarounds does your customer/partner/supplier employ to get what they really need?
A useful second (or alternative) step is to employ the customer journey map to unpack the content elements in your organization’s transactions. At the surface, it will be easy to identify what changing hands (product/service for money). But it is almost always the case that more is taking place below the surface. Think back to the apple purchase at Waitrose. What information does the customer receive about the store and the company when she walks in? What feeling or emotion does she experience when she interacts with the cashier? What signals or knowledge does she take away by observing other parts of the store or other products on shelves? At the Waitrose on Comely Bank in Edinburgh, the cashier would give green tokens to my kids to place in bins to “vote” for specific charities to receive contributions from that store. What is the transaction content here?
Brilliant tip: The customer journey map can be used for almost any transaction, by changing your definition of the customer. After all, your organization is the customer in your transactions with suppliers. If you have collaborative partnerships, then both entities are technically customers.
Transaction governance is the fine print of transactions. What monitoring is utilized? What are the terms, rules, and consequences of the transaction? What are the contingencies if the transaction fails?
Sometimes transaction governance seems to be unwritten. When I buy an apple at Waitrose, I don’t sign a contract or negotiate contingencies. But every transaction at your organization involves governance, whether determined by legal frameworks, store policies, or contract-specific terms.
Transacton governance is often totally hidden or ignored in business model analysis. First, it is often taken for granted. Second, it may seem to be obvious or unrelated to core value creation activities at the firm. Third, it may appear to be difficult to change.
It might not be the first place to start, but transaction governance can be a rewarding mechanism for improving a business model. Sometimes just revealing key transaction governance can improve transactions. For example-- what happens if your customer is unhappy with a purchase? Does the customer know what happens? Would she be more or less happy to fully understand her options? What if she went to one of your competitors?
Brilliant example: Hampton Inn and Suites is a subsidiary of the Hilton Hotels and Resorts Company. Based primarily in North America and Europe, the 2,000+ properties in the chain offer accommodations targeting business travelers and families. After staying at a Hampton Inn, customers are encouraged to take an online survey about their experience. One of the questions in the survey is “During your stay, were you aware of the Hampton Inn and Suites 100% satisfaction guarantee?” This is an effective mechanism to reveal transaction governance to customers in a positive way. It is possible that customers reporting problems might see this as either an opportunity to claim a refund or a reason to try a Hampton Inn hotel again. In either case, it provides a mechanism to remediate a poor customer experience. Satisfied customers likely perceive that they made a good choice.