Business Models and Trust

Three years ago I sketched out three dimensions of business model evolution in response to the mounting performance pressure of the Big Shift. In this article, I want to highlight the role of this business model evolution in restoring trust in our corporations.

A growing number of surveys around the world highlight the continuing erosion of trust in all our institutions. While this is a widely recognized trend, relatively little effort has been made to explore why this erosion of trust is occurring and what can be done to restore that trust.

There are many factors at work here, given that the erosion of trust is occurring in all our institutions, and it's something that I've written about before in "Re-Building Trust In Our Institutions." In this blog post, I’m going to focus on how business model evolution can and will help to overcome the trust challenge for corporations. It will also highlight the growing risk of remaining wedded to existing business models that are contributing to the erosion of trust.

Payment

For those who haven’t seen my previous blog post on business model evolution, I started by focusing on the dimension of payment. Traditional business models have largely been built on the expectation that customers will pay upfront for a product or service. I suggested that we’re increasingly moving to business models where payment is based on usage – we pay based on our usage of the product or service with little, if any, payment up front. Looking ahead, I anticipated that payment models would further evolve to payment based on impact achieved, not just usage.

The more explicitly we can tie payment to impact achieved, the more successful we will be in restoring trust. In this model, the customer will not have to pay unless the promised impact has been achieved. Today’s upfront payment business models tend to foster a short-term transactional mindset in companies – make the sale, collect the cash and move on.

If we start to focus on impact, companies will need to evolve a longer-term view of customer benefit. Now, the “sale” will just be the catalyst for developing a much deeper relationship where the vendor is committed to working with the customer to achieve the promised impact. That mutual commitment to impact will help to re-build the trust of the customers that the vendor’s interests are aligned with their own interests.

Of course, there will be many challenges in evolving to this impact-based business model, but we're now developing the technology that will make it possible to vendors and customers to interact in a much richer, real-time way that can help both sides to focus on impact achieved.

Data

The second dimension of business model evolution involves the increasing revenue potential from providing insights from data back to the customer. As technology evolves to provide greater visibility into how products and services are being used by customers, vendors have an opportunity to harness the value of the data for the customers, creating helpful feedback loops for customers.

They can start by providing data-driven services to give customers more insight into the current context in which they are using products and services. As data technology evolves, there’s an opportunity for vendors to provide customers with the ability to anticipate problems and opportunities that might arise as they use the vendors’ products and services. Given further evolution, vendors can harness data to provide more prescriptive value to customers, not just helping them to anticipate future events, but providing valuable advice in terms of the best ways to respond to these future events, so that customers can receive even more value.

This is in sharp contrast to how most data about customers is used today. Vendors generally use customer data today to improve the efficiency of their internal operations and to help them more efficiently target customers from a marketing viewpoint. Customers increasingly realize that the data about them that is being captured by the vendors is being used by the vendors to create more value for themselves, rather than for the customers. The result? Trust erodes.

As business models evolve on the data dimension, companies have an opportunity to re-build trust. Now they become focused on providing more and more value back to the customer based on the data that is being accessed. As customers begin to see the value of these insights offered by vendors, they are likely to be more and more willing to pay for the insights generated from the data they have provided. They are also likely to be willing to provide vendors with access to even more data about themselves because they can now see the tangible value they are receiving in return. Trust will be restored as they see that the vendors are committed to helping customers get even more value from the products and services they are offering.

Participants

In today’s business models, the ideal outcome for the vendor is a one to one relationship with the customer. This is the nirvana of push-based marketing.

That’s going to change. As customers become more powerful and demanding, they are going to seek out vendors who can connect them with a broader range of products and services from third parties. Initially, vendor business models will focus on building platforms that can scale and provide access to more and more third parties. Over time, technology infrastructures and tools will evolve to the point where vendors are able to connect customers to relevant third parties wherever they reside, whether or not they are on a specific platform.

Vendors who help customers to connect with a broader range of products and services from third parties will be able to capture some of that value for themselves by charging customers for this service. Rather than trying to isolate and insulate customers from everyone else, vendors will see that there’s an untapped opportunity to deliver more value to customers and, in the process, capture some of that value for themselves. The key is that the customers need to pay for this service, rather than having third-party vendors pay commissions. If it is a commission-based model, customers will likely suspect that the needs of third-party vendors are being served, rather than their own needs.

If customers pay for this service, they will begin to see that vendors have their interests in mind and are becoming more and more helpful in connecting them with the resources and expertise that are most valuable to them. Rather than seeing vendors as trying to “capture” them, they will see vendors as trusted agents who are providing them with more and more value by connecting them with a broader range of resources.

Tying it all together

My earlier blog explicitly cautioned that I was not suggesting that business models for all vendors would evolve to the same extent across all three dimensions. These are simply three paths for evolution and vendors will need to determine which position on these three dimensions is optimal for them. Nevertheless, I did indicate that I believed there would be significant evolution on these three dimensions given the growing power of customers and the evolution of technology capabilities that would make it increasingly feasible to evolve on these three dimensions.

As business models evolve on these three dimensions, there will be an opportunity to deepen the alignment of the long-term interests of vendors and customers. Rather than pursuing short-term transactional models, vendors will find themselves building much deeper, trust-based relationships with customers.

I should note, as I did in my original blog, that I have explicitly not included any discussion of advertising- based business models. This is because I believe advertising-based business models will likely be unsustainable in the Big Shift. Push based advertising   may be a less and less effective way to reach and engage with ever more powerful customers.

Instead, we are likely to see pull based marketing approaches prevail. As a result, vendors will need to find ways to deliver more and more value to customers in ways that will make customers more willing to pay for that value themselves. In the process, customers will develop more trust in vendors because they will be paying the bills, rather than advertisers, so the interests of the vendors are likely to be more clearly aligned with the customers.

Bottom line

Erosion of trust in companies is a growing challenge that all companies will need to address. One powerful way to do this is to evolve business models in ways that move companies from a short-term transaction mindset to a mindset that focuses on building long-term, trust-based relationships. Companies that remain wedded to our current business models are likely to find themselves increasingly marginalized as more and more powerful customers seek out vendors who are willing and able to embrace business models that more effectively align the interests of customers and vendors.

This shift in business models will be one important dimension in the broader shift in institutional models from scalable efficiency models to scalable learning models. This institutional innovation will be deeply challenging, but the rewards will likely make the journey very worthwhile. Rather than just focusing on the diminishing returns of internal efficiency, companies will find that they are able to create and deliver far more value to their customers as they embrace business models that drive them to learn more about the value that is most meaningful to their customers.

 <This article originally appeared as a blog post on my blog "Edge Perspectives" which started here but recently has moved to here.>