For the past few years, I’ve been summarising my thinking through a series of ‘thought-experiments’. A ‘thought-experiment’ offers an alternative to the prevailing ‘mental models’. It is - hopefully - a coherent ‘thought’ which summarises and builds on countless ‘dots’: discussions, observations, and thinking. It is an ‘experiment’ because it is the very first step in putting an article out into the world and inviting others to build on it or knock it down, with the intent to rebuild it stronger.
Some of these thought-experiments have already inspired organisations to create new roles (e.g. thought-experiment #25); others may be something ahead of their time, while others may not work at all.
The following thought-experiments are all about questioning and proposing new government models of execution:
- Thought-experiment #38: Government Models: Govups - government startups
- Thought-experiment #39: Government Models: Policies-as-Apps (PolicyStore)
- Thought-experiment #40: Government Models: Government business-models
- Thought-experiment #41: Government Models: Government Ventures Studio
Please connect with me if you’d like to build on these thought-experiments.
Abstract: The world has never been changed merely by the invention of new products and services. Sustained, disruptive, and global change only happens when we change the business models.
Business-model innovation typically involves some fundamental re-combination of profits, incentives, risks, and rewards.
Governments would do well to diversify their business models, moving beyond flat rate taxes and fees. They could take a leaf out of the book of venture capitalists, startups, and academia in terms of experimenting with subscriptions, usage pricing, and equity financing.
This 5-part thought-experiment focuses on the potential of subscription business models for driving, housing, setting up a business, and patents.
Part 1: Introduction
In the middle of the 19th century, inventors Agustin Mouchot and Frank Shuman pioneered the solar energy steam engine and the first solar thermal power station, respectively. Around the same century, Colonel Drake discovered oil in Pennsylvania - a prelude to Spindletop’s discovery in Texas in 1901. Both fuel technologies were relatively nascent. However, it was the business model of oil which was politically and economically more attractive, ultimately creating an oil-based global economy. But what if the world had chosen differently back then?
Dig into any significant world problem today, and you’ll find one of the root causes is a business model that is perpetuating and reinforcing the problem.
Take, for example, education. Many individuals from academics to parents acknowledge the model is not fit for the 21st century, yet the system doesn’t change - because the business model of validation, certifications, doesn’t change. Change the business model, change the system. Simple. But deceptively hard.
Looking at the corporate world, it isn’t the product or service innovation that creates wildly successful organisations. It’s the business model innovations. As cliche as they have become, Amazon makes its profits not through the business model of its more well-known e-commerce division, but rather by pioneering a business model for cloud computing. Or Apple, whose services business, largely powered by the business model of the Appstore, according to Piper Jaffray analyst Michael Olson actually generates more revenue than its hardware business.
This leads us to the question of business models in and of governments. Although governments aren’t businesses, it’s an unavoidable fact that every government operates with multiple business models. Whether they see themselves as wealth creators, redistributors, or somewhere in between, governments need to innovate on new business models that don’t rely on the old mental models of the past. Income taxes, fees, VATs, and import duties were all designed for problems that existed decades ago. The issues the world faces have moved on, yet the old business models deployed by governments remain.
Part 2: Connecting the dots
There are a number of tectonic shifts happening in society. There is the shift to green energy, challenging the dominance of oil. The climate emergency is shifting focus from linear to circular economies. Online learning challenges the model of traditional physical school buildings and face-to-face teachers. Each shift is being enabled, empowered, or exploited with one or more business models behind it. These shifts have enormous consequences and challenges for governments.
Yet another shift is the deep digitisation of society, everything from products, to work, to consumption. Allow me to share three ‘dots’ that led to the penning of this article.
Dot one: Digital products. In a post-oil world, the growth of electric cars will leave a “£30bn hole in tax revenues” (UK Treasury, 2021). This has sparked a debate of the right way to tax electric cars. The GCC, a few years ago, introduced Value Added Tax to help it convert to a post-oil world - and yet more changes are required to support government visions and agendas. More ‘deep-digital’ products will challenge the government business models that were designed for the analogue world.
Dot two: Digital lives. Governments have created huge infrastructures, from roads to commercial districts and free zones, to support the face-to-face economy. With the mega-trend of people living digital lives, working (and playing) from home, this is challenging the current economic model. Some experts, like economists from Deutsche Bank, suggest a 5% salary tax. This tax would be paid for by employers, with the income generated being paid to people who can't do their jobs from home. This could raise $48bn (£36bn) if introduced in the US, £6.9bn in the UK. Regardless of the level of funds raised or where and how they are deployed, the need to address remote working from an economic business model perspective has been around for the best past of a decade in some countries. However, the pandemic has just made it even more urgent and important to address.
Dot three: Digital consumption. Google’s biggest innovation wasn’t the search engine, it was the business model of Adwords. Similarly, Facebook’s wasn’t social media, it was the business model of putting a price on privacy. These giants generate billions, stored in offshore tax havens - they are not paying their fair share. For example, in 2014 Facebook paid just £4327 in corporation tax in the UK. However, it isn’t productive to blame them - instead, blame the policies that support their actions. Governments have not truly experimented with charging digital-first companies. Australia has recently attempted to do so, with the passing of a world-first law aimed at making Google and Facebook pay for news content on their platforms. Of course, these giants didn’t like it, and used their lobbying power to get some amendments, but in the end both companies have now committed to paying lucrative sums to some big Australian publishers. The law has been seen as a possible test case for similar regulation in other countries to get payment from digital platforms for news.
There is inestimable value, if governments can deploy business models which are designed for digital-first world.
Part 3 Power of business models
The power of business models cannot be underestimated. They have the power to fundamentally change relationships between creation and consumption, between risk and reward, between the current need for growth and future sustainability.
Business models are not simply about changing pricing. Their potential for impact is nothing short of transformational. For example, the major shift in the utility of mobiles occurred when companies started pricing unlimited usage per period instead of fixed fees or cost per minute. Once these usage limits were replaced, consumption use exploded, and this brought forth the promise of a truly mobile computer.
The repercussions of changing business models can not only impact all sections of society, but also all sections of organisations. For example, in shifting to ‘usage’ based business models, the traditional sales process from generating leads to closing sales is no longer relevant - here, “closing the deal” becomes an interim step, because the contract will generate substantial revenue only if the customer subsequently uses (and keeps using) the service at higher volumes. In short, this transformation of the business model would require not just a change in strategy but a change in virtually every function in the organisation.
Daimler Trucks, for instance, have shifted from leasing vehicles to large companies such as UPS for set periods of time, to charging them for miles driven. The subscriptions involve whole organisation level changes from resegmenting the customer base, to rethinking the sales organization’s structure, to changing the way salespeople interact with customers on a day-to-day basis.
Part 4 Subscriptions as a business model
Today, airlines can get Rolls Royce engines on a subscription. And individuals can get everything, from their morning coffee fix, to Porche cars, to dental work, to razors on a subscription. The popularity of this business model has emerged because it focuses on time periods instead of units.
First, let’s explore when subscriptions are most relevant for governments, before sharing five examples of new, untried use-cases that are worth testing.
Subscription models typically lend themselves well to situations where there is a need to lower the upfront costs for customers - citizens - to access value.
But contrary to popular belief, “subscription pricing doesn’t work because of the lower price point that a monthly installment allows. It’s effective because a subscription reorients each customer’s mind from product function to value proposition”.
There are a number of benefits that governments can access for themselves by using subscriptions. For example, at the operational level, subscription services can allow government organisations to easily determine cashflow, revenue, margins and profits, which supports better organisational planning. At the strategic level, subscriptions can be used to catalyse innovation (see section 4b, 4c)
But the usage of subscriptions needs to be considered carefully because subscriptions are not a panacea:
- Relevance: They are not useful for every kind of government service. For example, a national ID document could not be funded this way. In this case it is harder to apply a subscription model, because people should not be able to cancel an ID card anytime or restart it whenever they have a need for it.
- Behavioural considerations: There is already a sense of subscription fatigue amongst consumers. A recent survey found that spending on subscription services had more than tripled since the pandemic began.
- Flexibility: The major drawback with subscription pricing: you make it easy to get customers on board, but you also make it easy for them to leave.
Now let’s explore three potential use-cases for government subscriptions.
4a) Driving on a subscription?
Today, we have road-toll charges, petrol premium taxes, road-tax charges, vehicle readiness charges (e.g. MOT), and vehicle excise duties. These myriad of charges are largely the result of many decades of new fees and taxes being added without long-term architecture.
What if we didn’t have the legacy taxes restricting our thinking and actions? What if we were free to reinvent the business model? Whether one is or isn’t in favour of charging for roads is a separate issue, but when the tax on petrol brings in negligible value because most people have shifted to electric-powered vehicles, a logical option to consider is putting driving on a subscription. For example, using a car for 0-4,000 miles = free, 5,000-10,000 = $100 per month, 10,000-20,000 = $150 a month. These are just illustrative numbers, with a detailed cost-benefit analysis needing to be done.
It’s not a case of using subscriptions as yet another way to raise more (tax) money. Rather subscriptions can be used strategically as a way to address changing shifts in society.
4b) Business setup on a subscription?
Now let’s take another example: that of setting up a business. More specifically, setting up a business in the Gulf countries, who, many decades ago, decided against the corporate tax as a business model and opted for license fees instead. This model has worked wonders to attract companies globally, at a time when there were fewer homegrown companies. Yet today, the problem(s) have changed, yet the old business models remain.
Today, setting up a business in one of the Freezones - in the UAE as an example - can cost around 10,000 AED ($3,000) for a license. If you add in the visas and other fees, it is north of 50,000 AED ($13,000+) before the business is ready to bear tangible outcomes. Government agencies take a smaller percentage fee from that, while the rest goes to the Freezones for their services.
Yet, if you ask business founders, you’ll find they probably don’t care for all these layers of complexity, of fees, taxes, premiums, visas or licenses. Rather, my hypothesis is that they would prefer a simple, transparent, and visible subscription model that adjusts according to their lifestage.
The traditional, largely one-size-fits-all license fee model works for, say, a product- or service-selling business. However, for a tech startup it may work less effectively because many founders are being charged an upfront fee for an idea that they don’t even truly know will work or not. Overall, the cost of setting up a business is not proportional to the potential value of the business.
If we are to catalyse the next generation of startups, we can change, or at least experiment with on a smaller scale, the business model for specific types of companies the country needs more of. A government business model that better balances the risk and reward ratio with the organisation’s lifestage.
What if, instead of paying a license fee upfront, governments charged $100 per month as a subscription for a license, with a certain number of visas included? For as long as the organisation exists it will keep paying this subscription, so in the longer term the government can potentially earn more revenue. The key advantage here is a reduction in upfront risks and costs. We can term this a subscription because if the business doesn’t work out, a founder can easily stop it.
Experimenting on this policy right now, during the pandemic, makes even more sense. Because of many businesses closing, we need to inspire not 1,000 or 10,000 but millions of new businesses to replace them.
Subscriptions-thinking opens up whole new categories and segments of potential customers that are not accessible with the current business model. For example, there could be a subscription for full-time employees who want to create a ‘searchup’ (side hustle) before it becomes a startup. There would be a subscription for a deeptech startup founder who wants to come and try to launch a startup in the country for 6 months, but needs that time to network, build on some MoUs, or build a Minimum Viable Product.
There are so many sub-segments of potential entrepreneurs, who at the current high cost of the initial set-up, who are priced out.
Each organisation, defined in terms of employees or revenue or growth-stage (searchup, startup, scaleup) can have different subscription rates set up. Reducing the cost in the short term and increasing the upside in the medium term makes sense in today’s climate - and subscriptions allow you to do just that.
4c) Patents on a subscription?
Another problem that some of the gulf countries face is the inefficiency of their innovation investments. According to the Global Innovation Index, many countries have high innovation input (spend a lot of money on innovation) but don’t see the corresponding innovation output in the form of patents, high tech businesses, and other indicators.
This is a complex problem. And with most complex problems, there is never one right answer. Many interventions have been tried before, from marketing, to support programs for innovators, to incentives for universities. Yet one of the biggest barriers remains - that filing a patent is extortionately expensive if you want to register it across all main global territories.
Another barrier is that the Arab residents are going to the US to file their patents, instead of doing it locally. What if patents could be priced on a subscription? This lower cost would invite children, retirees, employees, and even foreigners to consider patenting where otherwise they wouldn’t have.
The power of changing business models first is that they have an immediate potential to change behaviours.
In addition, before filing, individuals could subscribe to a set of benefits for a fixed monthly fee. After filing, it would jump to a higher rate. After approval, it would be yet another rate. The innovator always has the benefit of cancelling their subscription if the patent fails to yield value to them at any time. Of course, the pricing for employers and individuals can vary rather than the standardised, one size fits all model that exists today. Governments can, and need to, take a shared risk/reward view with subscription business models.
Part 5: Create a Government Business-Model Unit
Governments need to relook at the business models they deploy if they are to shift their role from being mere wealth redistributors to daring wealth creators. This thought-experiment is meant as a spark for further conversation and action to deploy real-world experiments to test behavioural and economic implications.
Whilst this post only explored subscriptions, there are many other business models that governments could deploy, such as equity stake or percentage revenue stake to borrow from the venture capitalist world (subject of future thought-experiments).
Implementation of such new business models won’t come overnight. As Sheikh Mohammed Bin Rashid Al Maktoum once asked “Why didn’t RTA (Dubai’s taxi service) come up with the idea of Uber?” The short answer is because entrenched business models are notoriously difficult to change. There are so many vested and entrenched interests. First, there needs to be an appropriate mindshift in the government leaders, away from the incessant focus on the ‘new’ ideas of policies, laws, and regulations. Instead, more attention should go towards the business models deployed by governments.
Second, there need to be new models of execution - for example, Govups. Just as the UK government pioneered the Behavioural Insights Unit to leverage nudges to change citizen behaviour, there is a need for a ‘Government Business-Model Unit’ (or an equivalent name). Why? Because the traditional machinery of government with independently mandated entities and ministries will typically reject risky (but potentially rewarding) business model innovation.
The job of a Government Business-Model Unit can include:
- running short-term experiments on the future business-models of government.
- reimagining the changes required in management (risk/rewards), markets, models and mindsets for business-model changes to be successful. In the short-term, there will be teething pains to facilitate any successful shift.
- working with individual ministries and authorities to help them realise the value of forgoing (sacrificing) shorter-term income for longer-term benefit.
- creating the sustained effort needed to scale new business-models because it won’t happen overnight.
The need for such a unit is even more pronounced because when you change business-models, they affect the entire value chain of government. Changes in business models need to be experimented with before being scaled. That is because changing one part of the business model, such as raising the electricity charges for businesses, can impact the number of businesses that could be forced to close down, which impacts the treasury income, which can in turn impact government funding of investments in electrical infrastructure.
Governments can’t strategise, theorise, or predict their way to implementing new business models. They have to take an experiment-first approach.
Finally, on a parting note, we often look back at history identifying clearly the inflection points, the tipping points, and neatly draw out the exponential growth curves. Yet, even in the present generation, we hold the power and potential to create new inflection and tipping points. But these will only be realised when we radically focus on (re)forming government business models. Most recently, the pandemic is an opportunity, if you can see it that way, to start changing the business models of society, of economies, and of governments - so we create a new normal that lasts not just for one year, but for future generations.
Before you go, please engage (like/share/comment) if you feel there is value, so that your network can come across it. Thank you.