[Case study] Can One Business Unit Have Two Revenue Models?
The case study published in the Harvard Business Review 2015 March issue deals with Siiquent-Teomik a Frankfurt-based company which has just completed merging two of their business units.
The business units produce similar products but have distinct business models. One unit makes money by selling “machines” the other through selling “stuff” that is used with “machines”. Both units also offer a variety of services to their customers, on which they do not make any profit. The option to introduce services as an additional revenue model was raised in the article but neglected by one of the business units heads because they have found that salespeople have issues explaining their values to customers. Essentially, the business units heads want to maintain the current model which is earning money on “machines” as well as on “stuff” and adapting it in accordance with new circumstances (customer demands, internal accounting guide- lines, and competitive threats).
The article’s questions reads: Should Peter (the decision maker and chief of the Diagnostics division) impose the structure of a single revenue model or let Siiquent-Teomik continue with its flexible strategy?
The following points have to be considered when making the decision:
- Do not organize strategy around products but around customers (raised in the article)
- Customers get confused by multiple strategies for similar products (raised in the article)
- Services valued by customers only when experienced first hand
- Shifting strategy could be considered opportunistic
- If one revenue model — which should be the blades which one the razors
- Shifting strategies due to customers, internal accounting guidelines or competition is positioning done wrong (competitive advantage should not rely solely on pricing but also on product innovation)
- Making sure that employees do not lose motivation if their products become the razors (the no-profit making unit)
I believe that a constantly shitting revenue model would increase internal operational overhead and might make the company look opportunistic. The biggest issue is, that the firm would not be able to operated efficiently due to low standardization. In one case the company, for example, switched from charging the customer per liquids used to amount of tests performed with that liquid.
Siiquent-Teomik does not have to go for a razor-bladed model, they can, and should, stay on both income streams. They must, however, not adapt their pricing on a case-by-case scenario, rather based on their customers’ trends.
Further, they have to ensure that their customers get not what they believe is best for them, but what, is, best for them and most importantly they have to ensure that their customers get the most out of their products.
If they adapted their revenue model based on each customers they run risk that customers would wish for something that they would get easily approved internally instead of choosing something that would make sense for them.
Siiquent-Teomik should continue making money on as well the machines and the stuff. Further, they should start charging for the services they offer, but differentiate between standard and optional services. They should also keep adjusting their business model, but they have to ensure that it indeed makes sense for their customers (e.g. that their customers can fully utilize their products and not just choose a revenue model which is easy for customers to get internal approval). Additionally, they must ensure certain standardized processes and not forget to try to innovate their products whenever possible instead of adapting their business model. It has to be considered that a need for a different business model can come from various sources (customer needs, competitors etc.). If a different revenue model would land a customer but harm the company’s long-term profit or competitiveness Siiquent-Teomik should always keep in mind whether there is a different solution to a customer’s request which would make more sense to both parties.