One of the themes of innovation I like to pay attention to are business model innovations that require little in the way of product development. Most of the innovation examples we read about are technology or product innovations, but this can distract business leaders from innovative ways to re-order markets, consumer preferences, and cash flow without hiring a thousand engineers.
Retailers have been focusing on payments as a core area of innovation for the last several years. The amount of interchange taken from routine card transactions by the banks and card networks (Visa, MasterCard, etc) has been a long and vexing issue for the retail industry. Additionally, retailers are always on the lookout for low-cost access to capital in order to fund their business operations and expansion.
Enter the stored value card.
Many of us have a stored value card or account of some sort. These are the accounts where you put some money to spend with one specific retailer, and in return you get something of perceived value – loyalty points, a free gift, etc.
The king of these programs is Starbucks, which has about $1.6B in cash provided to them by their customers. For free.
In case you’re one of those people who glosses over numbers, let me stop you and ask you re-consider that number. $1,600,000,000 is more money than many banks have on deposit. It’s a huge number. See the tweet below.
Even better than the free $1.6B line of credit is Starbuck’s 10% breakage number. In the industry lingo, “breakage” is the portion of a stored value balance that never gets used. Typically these programs have terms that require a customer use a balance by such and such of time (e.g. an expiration date on a gift card).
This “breakage” is better than a line of credit – it’s free money the company gets to keep. When someone buys you a $25 gift card, and you end up using only $18 of it, the remaining $7 is considered the “breakage” and is kept by the company. In 2018, Starbucks recorded $155M in breakage.
So, Starbucks gets $1.6B in free loans from customers to fund their operations while keeping $155M in breakage.. Beats going to the bank for a loan – especially when you’re a coffee company with more money than the local community bank.
Of course, the customers are getting a deal as well. They enjoy other perks of loyalty, and even can make the case that they are getting a good deal:
JP Koning has a great post on this subject if you’re interested in more detail.
While coming up with alternative ways to lower their cost of funding makes huge sense for Starbucks, there are many other business model innovations that can provide leverage to a growing business. Adding value to a market niche and changing your role in the distribution channel from “sub-contractor” to “prime” can often be done without investing in new product. Changing your pricing strategy is another great business model innovation available.
As you’re looking at your own situation – whether it’s a company, a small group in your company, or your self-employed gig – look for ways to do things differently without requiring a different product. I recommend grabbing the nearest piece of paper and jotting down three ideas right now for how your world could be transformed by focusing on pricing, promotion or distribution changes.
Remember: “innovation” is the profitable application of creativity. Be creative.