The power of a simple business model

15 February 2010 | 6 Comments

“Everything should be made as simple as possible, but not simpler.”  Albert Einstein

I recently attended a talk by a LinkedIn executive where he quickly summarized the company’s business model and hit on a common theme with most “Web 2.0″ companies.   Almost all activities performed by the company were oriented around optimizing 3 things on the LinkedIn system: people, activities, and content.

Each of these elements worked to feed into the other two and increase the overall value of the platform.

The more people on the platform, the more activity (status updates, connections) and the more valuable content (posts, job information).  The more content, the more people will be attracted to the platform and the more activity will be generated. The more activity, the more content… and on and on.

And it all acts like a virtuous circle. Those familiar with the technology industry probably already know everything about “network effects” and how web 2.0 companies utilize them as a competitive advantage.

The revenue generators – advertisements, job postings, mail contact, etc – were all built on top of the platform, and seemed almost secondary.  They sit at the periphery and attempt to segregate the customers with a higher willingness to pay while not diluting the core user experience.  Although it’s clear these services keep the lights on, they did not appear to be the core of what the company focused its efforts on.

However, the really fascinating aspect of the talk centered on the fact that this exec was able to encapsulate everything one needed to know about the company in a simple chart he drew on the chalk board (replicated above).

I think there is real power in being able to articulate a business model as a simple diagram with even simpler variables to optimize. Having everyone in the company using it as a guide, it makes the decision-making process very easy. It really points out what matters, what doesn’t, and what will drive decisions going forward.  Every LinkedIn employee knows it just needs to increase the size of the core box by optimizing the 3 important elements – the rest will take care of itself.

This reminds me of a story – which could just be the stuff of start-up legend – of when Jeff Bezos first described his vision for Amazon.com.  He simply drew the following diagram on a napkin:

It seems to me he stayed true to his original vision and – $50 billion in market cap later – the company is still focused on those initial elements.

  • Matt Hunter

    Great post. This is one of the issues I had with one of my classes in Tokyo, where we had to map and assess the company's drivers among other things. The final product would have been great for a few key people in the organization, but too complex for most people. Keeping it simple is a much better approach.

  • http://KevinVogelsang.com Kevin Vogelsang

    The hard part for most internet startups is getting the cycle turning.

    I think the key point that you highlite is that an elegant representation makes the “decision-making process very easy.” In a company, many people have to make many decisions. This is always a dangerous situation as it tends toward chaos without a simple roadmap.

  • Kyle

    I think that's exactly right – if you have all the oars moving in the same direction, success becomes that much easier.

    Just think when you have lots of groups making decisions on products, it's impossible to keep everybody on task to make sure the decisions are consistent. Having everyone internalize something simple increases that consistency.

  • Kyle

    I always get frustrated when I see business model representations that have about 30 inputs and complex connections – what use is that? Everything can be broken down to simpler parts to guide decision-making, just have to be very analytical and thoughtful about it.

    If you read Warren Buffett, the guy is amazing about being able to boil down huge multi-billion dollar investments to a few key themes or variables.

  • Kyle

    I think that’s exactly right – if you have all the oars moving in the same direction, success becomes that much easier.nnJust think when you have lots of groups making decisions on products, it’s impossible to keep everybody on task to make sure the decisions are consistent. Having everyone internalize something simple increases that consistency.

  • Kyle

    I always get frustrated when I see business model representations that have about 30 inputs and complex connections – what use is that? Everything can be broken down to simpler parts to guide decision-making, just have to be very analytical and thoughtful about it.nnIf you read Warren Buffett, the guy is amazing about being able to boil down huge multi-billion dollar investments to a few key themes or variables.