I have many fond memories of my high school business class. This is mostly because the teacher was knowledgeable and engaging – and pretty much a walking caricature of a high school business teacher, right down to the bow tie. But the curriculum was useful too, a mix of commonsense personal budgeting strategies and basic lessons in macro- and microeconomics.
We couldn’t cover everything in a single semester though. I graduated from high school believing that every business was run according to the same basic model: Earning a profit by directly selling a product or service for more than it cost to produce or provide.
Suffice to say, that’s not the only viable business model available to today’s entrepreneurs. Many successful businesses don’t directly sell anything, and instead serve as middlemen or brokers for other service providers. Some earn money by saving their customers money on services that they don’t directly provide, such as power generation. And some even stay in business while putting the welfare of people and the planet ahead of the profit motive.
Innovative Business Models
Here are several innovative, nontraditional business models redefining popular conceptions of how companies function and make money.
1. Benefit Corporation
What do Patagonia, Etsy, Ben & Jerry’s, and Cabot (the Vermont cheese company) have in common? They’re all certified as B Corps (benefit corporations), companies that “meet rigorous standards of social and environmental performance, accountability, and transparency,” according to B Lab, the nonprofit body that issues B Corp certifications.
To qualify for benefit corporation certification, companies must submit to a thorough analysis that weighs their impact on traditional shareholders as well as non-financial stakeholders, including employees, customers, and the people and natural environment near where they do business. Though B Lab is based in the United States, certified B Corps can be based anywhere – according to B Lab, there are more than 1,200 individual firms operating in 38 countries as of early 2015.
Certified benefit corporations pledge to follow a “triple bottom line” that gives equal weight to the social, environmental, and financial impacts of their activities. Analysis of social and environmental impacts is typically just as rigorous as traditional financial accounting. For instance, MicroGrid Solar, a Missouri-based energy services provider, incorporates all three bottom lines into its quarterly reports.
Existing firms often need to amend their governing documents to incorporate this pledge and obtain board approval (if applicable) to ensure that officers aren’t hit with professional penalties (such as bonus reduction or terminated employment) or for using considerations other than profit maximization (fiduciary duty to shareholders) as the basis for their decisions.
Many states have laws recognizing the benefit corporation as a special legal entity, providing legal cover (from shareholder lawsuits alleging breach of fiduciary duty) for officers who follow the triple bottom line. This includes Delaware, where many companies are headquartered for tax purposes. While companies are free to amend their bylaws, obtain certification, and operate as benefit companies no matter where they’re based, favorable state laws lessen the likelihood of shareholder lawsuits related to alleged breaches of fiduciary obligation.
It is important to note that official B Corp certification from B Lab is important because it holds accountable the companies claiming to operate as benefit corporations. As B Lab puts it, “B Corp is to business what Fair Trade certification is to coffee or USDA Organic certification is to milk.” But your company doesn’t have to have this official certification to operate following the tenets of a benefit corporation.
2. Power Purchase Agreements
Long-term purchase agreements or contracts are quite common in business-to-business transactions. They’re used in a variety of industries, from transportation and logistics, to utilities. The overarching goal is to clearly outline the terms of a major transaction with legally binding stipulations that protect each party’s interests if economic conditions or other factors change. A simple example: According to a release from Southwest Airlines, the Dallas-based carrier agreed in mid-2014 to purchase at least three million gallons of low-carbon jet fuel per year from Red Rock Biofuels, beginning in 2016.
But one particular type of purchase agreement, a “power purchase agreement,” underpins an entire business model common in the rapidly growing solar energy niche. Power purchase agreements outline a long-term relationship – typically 15 or 20 years – between the service company that installs rooftop solar panels, and the residential or commercial property owners who use the power they produce.
The Environmental Protection Agency describes a solar power purchase agreement as “a financial arrangement in which a third-party developer owns, operates, and maintains the photovoltaic (PV) system, and a host customer agrees to site the system on its roof or elsewhere on its property and purchases the system’s electric output from the solar services provider for a predetermined period.”
According to Nextility, a Washington, D.C.-based firm that provides solar power purchase agreements, rooftop solar panels are unlikely to provide 100% of the building’s power. However, they do dramatically reduce the building owner’s reliance on the local energy grid – and thus their monthly utility bill.
In exchange for eating the upfront cost of the installation and all maintenance and repair work until the contract expires, service companies like Nextility set rates for their arrays’ power at a fixed discount to local utility rates (such as for power produced by coal-or gas-burning power plants). The solar rates are typically higher than what the power actually costs to produce, but always lower than what the local utility charges.
Essentially, companies like Nextility take a cut of the customers’ savings – say, 25% – from using solar power. At the end of the contract term, host customers generally take ownership of their system and stop paying the service company’s cut, though they can continue to pay a flat fee for maintenance, if desired.
Companies that offer power purchase agreements typically benefit from state and federal tax credits designed to boost renewable energy investment. New York State, for example, offers a rebate good for up to $25,000 of a residential rooftop solar system’s installation costs, according to Wholesale Solar.
Such incentives have significant influence on corporate decision-making. For instance, though Nextility is expanding rapidly, it intentionally avoids some state markets due to poor or nonexistent incentives. And since these incentives might expire in one state and pop up in another, there’s always some uncertainty in the model.
“We’d like to be everywhere,” says David Hoedeman, Nextility’s director of business development, “but it only makes sense for us to operate in certain states at certain times.”
That said, falling costs for solar panels, better energy storage technology for nights and cloudy days, and overall improvements in generation efficiency are all conspiring to make the solar power purchase model more attractive without tax incentives.
3. Sharing Economy/Peer Economy
The concept of the sharing economy (also known as the peer economy) is simple: Using an app or other technological aid, an asset owner connects directly with a customer willing to pay to use his or her asset temporarily, without buying it or committing to a long-term relationship.
Aside from the app itself, which usually takes a small fee for the service it provides, sharing economy transactions have no middleman. Customers deal directly with owners, who are essentially monetizing spare time and excess capacity in owned assets.
For example, ride sharing services like Uber pair car owners looking to earn extra income with people who need rides but don’t have a vehicle of their own. There’s no need for a taxi or rental car company to be involved. Instead, customers deal directly with the driver, paying less than they would for a taxi or rental car because the driver doesn’t have the high overhead costs associated with a traditional transportation business.
Online used goods marketplaces, such as eBay and Raise, are another common expression of the sharing economy. Using an online platform to sell excess gift cards (in Raise’s case) or just about anything else (in eBay’s case) is far more efficient and profitable than organizing a garage sale, directly soliciting friends and colleagues, or selling to a secondhand store.
But ride sharing and used goods marketplaces are fairly vanilla examples of the sharing economy’s possibilities. Some truly innovative business models also fall under the sharing economy umbrella include the following:
- Divvy lets you share ownership costs for big-ticket (or not-so-big-ticket) items with other users. Commonly “divvied” goods include boats, camping equipment, home care equipment (such a lawnmowers), and even fancy kitchenware. You simply post a description of the item you want to share, along with any guidelines and restrictions for its use (such as where it’s to be stored and how co-owners can reserve its use). To find others willing to share the cost, you can either invite others (via social media or email) who might find the item useful, or search the Divvy community for users who have expressed interest in similar items. Each user pledges a share of the item’s purchase price. Once the item is paid for in full, Divvy collects the funds (adding a small cut for itself), orders the item, and ships it to the person who organized the “divvy.” Going forward, Divvy coordinates all future use through an in-house reservation system, mediates potential disagreements between users, and collects any funds necessary for maintenance and repairs.
- Skillshare connects people who want to learn a new skill with knowledgeable people who are willing and able to organize courses around the skill. Though Skillshare focuses largely on creative and artistic learning, its course offerings cover a wide range of useful competencies – for example, Photoshop and other graphic design programs, programming languages, and even online marketing techniques. Students can sign up for a free membership that allows access to a relatively small pool of free classes, or pay a fee ($8 to $10 per month) for access to more than 1,000 “premium” Skillshare classes. Skillshare even offers scholarships for students who can’t afford membership. Skillshare sets aside 50% of its monthly membership revenue for teachers, whose earnings are based on the number of student enrolled in their classes.
4. Custom Style
The concept of personalized style has been around for centuries. In the past, wealthy people paid clothing designers, jewelers, and personal shoppers to find or create the perfect looks. People of more modest means procured raw materials and took the time to make their own clothing and accessories.
The Internet has made personalized style more affordable and convenient than ever before, and has given rise to an innovative hybrid business model in the process – call it “custom style,” “style concierge,” or simply “personalized style.”
Though the exact sequence varies from company to company, custom style typically entails a detailed analysis of your needs and preferences, either by survey or consultation with a human specialist. Based on your feedback, the service provider (or someone they contract with) gives you one or more items that fit the bill. In many cases, you can return items that don’t live up to your quality standards or otherwise do not fulfill your needs.
Though the custom style model is most often used for clothing and personal accessories, it can also be applied to other made-to-order products, such as artwork and furniture. Some popular examples of this model include:
- Stitch Fix bills itself as “your partner in personal style.” To get started, you answer a questionnaire that’s reviewed by an in-house stylist, who selects five pieces of clothing or accessories that he or she thinks fit your tastes and budget. You receive these pieces in the mail at no upfront cost, along with personalized styling tips to help you make the most of your new outfits. You then try on the items, keep the ones you like, and send back the ones that don’t work for you. (Returns have to be postmarked no later than three days after you receive the package, so you have some time to wear your picks out and about.) Stitch Fix only charges you for what you keep, though you get a 25% discount if you keep all five items.
- BoomBoom Prints connects artists and designers with parents looking for customized baby toys, clothing, nursery art, accessories, and even kid-themed stationery. Artists submit original designs that can be sized and customized (based on the customer’s request) to fit on clothing, cards, wall prints, framed pictures, and other media. Using previous sales data, BoomBoom Prints recommends a retail price for each design, though artists are free to change it as they please. BoomBoom Prints handles payment, shipping, returns, and all other aspects of the customer experience, a major difference from DIY platforms such as Etsy. It’s a win-win: Customers get to commission unique, baby-friendly designs far more efficiently and cheaply than by contacting individual artists, and artists get a wider audience for their work than they would through traditional means.
5. Service for Equity
A great product and solid business plan aren’t always enough to guarantee affordable financing for a nascent start-up. Traditional banks simply aren’t lending like they used to. Nontraditional lenders (including online and P2P lenders) often come with low borrowing caps or exorbitant interest rates, and venture capitalists typically ignore companies in the earliest stages of life.
Even startups that can scrounge up enough cash to get off the ground – whether from direct investments from founders and their friends or successful crowdfunding campaigns – don’t always have a lot to spare.
That’s where the “service for equity” model comes in. Companies that follow the service for equity model may offer to waive regular service fees in exchange for an equity stake in a client company, or a fixed percentage of the client’s initial crowdfunding campaign.
An example: According to VentureBeat, Britton, Silberman & Cervantez, LLP, a Bay Area law firm, offers cash-strapped startups unlimited representation on intellectual property issues in exchange for a 2% equity stake. Humdinger & Sons, an advertising and branding agency, prefers to take cash from in-progress crowdfunding campaigns, which the company views as less risky than taking a longer-term, possibly hard-to-exit equity stake (though crowdfunding efforts can certainly fail, leaving service for equity providers with an unpaid bill).
Service for equity is particularly fashionable in the tech space, where successful startups command eight-, nine-, or ten-figure valuations after just a few years of operation. In this high-powered economic environment, you don’t have to win all (or even most) service for equity bets. All you need is an occasional big win – a client company whose value grows by a factor of five, ten, or more within a reasonable time-frame, or whose crowdfunding campaign wildly exceeds expectations. Incidentally, this is the same logic used by venture capitalists, though they usually deal with more mature companies that are either already profitable or have a clear path to profitability, and thus seem likely to succeed.
It is important to note that due to its inherent riskiness, service for equity is rarely or never used as a standalone business model. According to Nicolas Berg, a Humdinger co-founder, the company earns at least 80% of its revenue through traditional fee-for-service relationships. It reserves the service for equity model for seriously cash-strapped startups with excellent ideas – and performs exhaustive market research and financial due diligence before making any commitments.
6. Flat-Fee Concierge Services
By virtue of years of training and difficult-to-obtain certifications, high-end professionals can charge hefty fees for the services they provide. According to a 2013 survey by the American Bar Association’s ABA Journal, U.S. law firms billed at an average hourly rate of $536 for partners and $370 for associates in 2012. But this nationwide rate is a poor benchmark – in specializations such as finance, and in high-cost areas like New York City, average hourly rates can be hundreds of dollars higher.
Medicine is arguably worse. Per Healthcare Blue Book, the fair price of gallbladder surgery by a U.S.-licensed surgeon is $5,583, not including the cost of an overnight hospital stay (often $2,000 or more). Costs vary widely here too – many providers charge double or triple this amount for gallbladder surgery, a routine, minimally invasive procedure that typically takes 90 minutes and requires a handful of followup appointments. Though insurance is likely to pick up much of the cost of a procedure performed by an in-network provider, you could still face a four-figure bill, depending on your policy’s deductible and coinsurance requirements.
How do these fees stack up to what the average worker earns? Not well. According to the Bureau of Labor Statistics, the average U.S. worker earned $24.78 per hour as of February 2015.
Innovative professionals and practice groups see an opportunity to reduce the upfront and long-term cost of professional services – even after taking things like insurance and payment plans into account – through concierge services that charge a flat monthly or annual fee, not a fee for each service. In both medicine and law, the overarching goal of the concierge model is to bring transparency, simplicity, and value to industries with notoriously complex, opaque, and often extortionate pricing.
In law, this is similar to the longstanding practice of charging a retainer, a monthly or annual fee that effectively functions as an upfront payment for services to be provided at a future date.
The difference is that a retainer often functions as an escrow account – when the client requires the lawyer or firm’s services, his or her balance is drawn down at an hourly rate proportional to the services provided. By contrast, a concierge fee typically functions as a lump-sum advance payment that isn’t translated into an hourly rate, though the lawyer or firm may set limits on the amount of time they’re willing to devote to a concierge client each month or year. Some offer differing levels of concierge service, with higher monthly fees translating to more work or additional services.
Concierge medicine is a bit more varied. Some medical concierge services only accept cash – patients pay a monthly or annual fee and can see a doctor, physician’s assistant, or nurse practitioner whenever they like, possibly paying more if lab tests, x-rays, and other services are required.
Others function as hybrids, using an upfront concierge fee to subsidize the cost of office visits, video consultations, lab tests, and basic procedures – not all that different from the insurance model, just without the insurance company. For instance, Retrace Health offers a no-fee package that includes “sticker price” charges for procedures and tests – the equivalent of not carrying insurance. It also offers a gold-plated package that includes most services in the $599-per-year, per-household membership cost.
Selling lemonade or hot chocolate on the sidewalk will probably always be a viable business model for pint-sized entrepreneurs. It’s a great way to teach a fundamental concept: To earn a profit, you need to set the price of each drink higher than what it cost you to make.
But it’s a safe bet that tomorrow’s most successful business leaders won’t be selling refreshments to their neighbors. If these business models are any indication of where the economy is headed, they might not directly sell anything at all. If they do, they might care more about how their activities impact the environment or the social fabric than their financial bottom line. And as the pace of technological and social change accelerates, the companies that get the most press and praise – the Apples and Facebooks of tomorrow – might follow business models that don’t yet exist. It’s an exciting time to start a business – if you’re willing to think outside the box.
What’s your favorite nontraditional business model?