I have noticed that most people see only one way of doing high-tech business: creating a product or service and selling it via one-time transactions. Just like a computer manufacturer or car producer that creates a product and sells it to a customer.
However, this is just one way to monetize high-tech alongside all the other products and services that complement the high-tech offering.
There are several other business models for high-tech companies that may be better options than one-time transactions. Which business model is most effective depends on numerous other factors. Important factors are target customer groups and their preferences and willingness to pay, as well as the competitors’ business models, regulatory environment, and the firm’s competencies in general.
Since the question “Which business model should I use?” depends on so many other factors, I will focus only on explaining the main types of business models for high-tech companies.
Dimensions of business models for high-tech
To distinguish between four main types of high-tech business models, I created a two-by-two matrix. A two-by-two matrix involves two essential dimensions that can explain or divide a subject, which in this case, is types of high-tech business models.
The first dimension is object of sales. Basically the questions here is; what object do the customers pay for? Is it a product that involves some of the high-tech or is it the technology itself? The object of sales can thus be divided between sales of product and sales of technology. Large tech companies usually sell both of these.
The second dimension is type of sales. The question here is; how do the customers pay for the object? Do they pay once and then own it or do they just borrow it and pay for the access to use it? So basically, type of sales can be based on ownership change of the object or access to use it. This makes a big difference for the company’s operations as well as for the customers’ willingness to pay. For example, buying and leasing a new car require very different sets of processes within the company while the customer pays considerably less for renting than buying the car.
Here is an illustration that shows the dimensions and the business models within the quadrants.
When each of the two dimensions is divided between two ends, the matrix results in four quadrants that represent the four main types of business models for high-tech. Let me briefly describe each of them.
The first quadrant (upper left) combines the sales of product and sales of ownership. This is the most basic business model and one that many people think of as the first option to monetize anything: selling a high-tech product through a simple transaction that results in the change of ownership of the product.
For example, this business model is in place when you go to an Apple store (or their website), choose an iPad, pay, and go home. Similarly, you could go to car shop, choose a car, pay, and never interact with the shop again. And even if you do interact with them again, for example by going back there and buying another car independently of the first one, the business model is still the same.
Pay for use
The second quadrant (upper right) combines the sales of product and sales of access. So again, a company sells a product that is built on its technology, but it keeps the ownership of it. Instead, the company sells access to use the product. This access can be renting, leasing, subscription, or some kind of a pay-per-use model that charges customers for their consumption on the basis of time, amount, traveled distance or some similar measure.
For example, it is common to lease office equipment such as copy machines and printers. Car companies typically do not only lease (long-term rent that might include maintenance) but also rent on short-term basis. Nowadays many of them also offer car sharing (like Share Now by BMW and Daimler) that charges by usage, usually by time (for example $0.35 per minute). These business models typically involve more service-related operations and continuous customer relationships.
Sales of patents
The third quadrant (lower left) combines the sales of technology and sales of ownership. A company with this business model is typically an inventor that sells its patents and thus the exclusive rights to use the technology to other organizations.
Companies that use this business model are often not exclusively inventing new things, but they commonly also use those inventions to conduct their own business within the other quadrants of the matrix. Take any provider of communication technology or similar, and you’ll find that they have huge patent portfolios. Often, these companies don’t really need all their patents, so they decide to sell them and maybe buy other patents instead. Consequently, patent trading is a huge business.
Licensing and consulting
The fourth quadrant (lower right) combines the sales of technology and sales of access. So again, this business model deals with technologies that have likely been patented. This in turn means that the patent owner has exclusive rights to use the technology.
However, they can sell the right to use it without selling the ownership of the patent. This is called licensing, and it is a very common practice in high-tech sectors.
There are many different ways to make money from licensing. The licenser typically receives royalties that can be tied to the revenue of the licensee or something else. Instead of or in addition to licensing, a company might want to offer consulting services regarding a technology it has developed or knows very well.
It is important to note that companies in high-tech sectors typically operate more than one of the business models described above. In fact, it would not be unusual if a company was making money through all four business models.
If you look at any large tech companies, such as Apple, Samsung, and Sony, you will quickly realize that they have numerous patents (technologies) that they both license and sell. At the same time, they use those technologies in creating products that they also sell in different ways and in different combinations with other products and services. Smaller companies usually focus on implementing only one or two of these business models.
It is also crucial to understand that the four business models explained in this article are the main types. These types include sub-categories that can also be combined in different ways depending on the goals and competencies of the company.