BA 850
Sustainability-Driven Innovation

 

Profit Model Innovation

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Introduction

In understanding innovation centered around how the organization creates, structures, or times revenue flows from the offering, consider how flexible this form of innovation can be to the organization. In many cases, profit model innovation can be achieved with the same product or service, but delivered with what may be a more beneficial model for the customer.

From The Ten Types of Innovation:

"Innovative profit models find a fresh way to convert a firm's offerings and other sources of value into cash. Great ones reflect a deep understanding of what customers and users actually cherish and where new revenue or pricing opportunities might lie. Innovative profit models often challenge an industry's tired old assumptions about what to offer, what to charge, or how to collect revenues. This is a big part of their power: in most industries the dominant profit model often goes unquestioned for decades."

Profit Model Innovation in the Sustainability Space

Saint John's University: Sustainable Revolving Loan Funds

Consider that profit model innovations are not always strictly limited to the accounting definition of "profit," but can extend to innovation in how funding is structured. Saint John's University has an interesting approach (Sustainable Revolving Loan Fund) to how it funds sustainability projects at the University, one which balances the more immediate savings with a "snowball effect" for overall sustainability spending,

SJU has set aside a sum of money that will be used to grant zero interest loans to projects with cost savings. The cost savings will pay back the loan until 120% of the loan is paid off. As the fund grows, more and larger projects can be initiated. There are a multitude of ways we can decrease consumption of energy and products. The results are decreased operating costs and a more sustainable campus. Since part of sustainability is equity, anyone can submit a proposal and it will be reviewed. Projects will be audited and results will be posted to prove the viability and legitimacy of the fund. A committee of faculty, staff, administration, and students will govern the fund.

Solar City

In the case of Solar City, what is now the largest residential solar in the country, the profit model innovation has a few different facets, as they offer four distinct options to homeowners, ranging from leases to power purchase agreements (their most popular option). In this case, they install panels for free on your home and you pay a low rate to Solar City based on the electricity you use. Interestingly, this option is made possible by the fact that Solar City, as a business, can depreciate the solar panel assets (where a homeowner can't), as well as collecting what is currently a 30% Federal investment tax credit for solar panels.

So, while Solar City may introduce some element of uncertainty into their business with what equates to a subsidy loophole (which could close for them at virtually any time), it would seem that the hope is that they use this boom period to take as much market share as possible. You could consider that this strategy is working, as they are rapidly approaching a juggernaut 40% market share number.

From the customer side, all of this results in what can be significant savings, little to no upfront cost, and the pride of going solar. Wade Michels, a stock analyst, wrote an interesting article (What I learned..." recounting his experience with Solar City, both as a customer and potential investor. Here is what the cost options looked like for him:

The main reason SolarCity owns its market (its share is equal to its next 14 competitors combined) is its various Power Purchase Agreement plans. I asked my consultant: Who came up with this great idea? She says it came from Elon Musk. I'm sure you've heard of him, he has some pretty cool ideas for batteries, electric cars, and space.

The first option was the "Pay as you go" plan. This plan is popular because it requires no money down and would reduce the price of my energy by about 41.5%. My new estimated average electric bill would be about $50 less per month and I would save nearly $24,000 over 20 years. Obviously, with no upfront costs, I would be cash flow positive from day one.

The second option was the "Pay only for what you produce" plan. This required a $3,125 investment, but cut the price of my energy by 51%. Over 20 years, I would have saved nearly $29,000 and I would have gotten my money back by the fourth year.

But in my opinion, the smartest way to go is the "Full pre-pay plan." In this scenario, you pay for the amount of power your system will produce up front. It would have cost me only $0.066 per kWh, compared to the $0.188 I currently pay my electric company. That's a savings of 66% and I would save about $125 per month. My initial investment of $10,000 would be recovered by year six, and over 20 years, I will have saved more than $36,000.

Uber

In one of the more disruptive innovations in the last decade (just ask a taxi driver), Uber's innovations in bringing ridesharing to the masses have been not only to make it flexible, but to adjust the cost of a ride in real time, based on local supply and demand. Needless to say, the ability to increase the cost of a ride according to demand makes the Uber price model quite interesting, as Uber receives a share of the cost of every ride. Please watch the following 1:33 video.

Click for Transcript of Dynamic Pricing 101 Video

People depend on Uber to provide a reliable ride at all times. That’s what our riders tell us they want and expect.

The way we always come through for them is with a dynamic pricing system we call surge pricing.

When demand for rides exceeds the supply of drivers on the road, like after a big event, prices go to up to encourage more drivers to go online. The increase in price is proportionate to demand. And as soon as more drivers are available, prices go back down.  Riders always know the price before they request. The surge amount is always prominently displayed, and when it's more than double, they must type the amount themselves to confirm.

We also provide fair estimates up front when riders enter their destination. And offer to send notifications when prices return to normal. It’s important for us to give everyone a choice to get a safe, comfortable ride whenever they need one.  

Dynamic pricing allows us to meet high demand.

Riders always know the surge amount up front.

Surge amounts are prominently displayed.

When double, riders type the amount to confirm.

Fare estimates are available in the app.