The other day I was listening to a very interesting Space on X and one of the speakers was saying that there will only ever exist a handful of different business models (I think he said 6 or 8) and any seemingly "new" model is either a twist or a combination of the existing ones.
I don't know whether that is accurate or not but it got me thinking about the business models I know about and reminded me of a very particular and interesting one so I decided to write an article about it.
How most businesses operate
Before we take a look at this odd business model, let's first think about how most businesses usually work.
When a person who wants or needs a particular service or product meets a business that offers that product or service for a price that the person finds reasonable, a transaction happens.
The business provides the product or service, the person pays for it. Everyone got what they wanted.
The person is happy because they got their need fulfilled. The business owner is happy because they generated a sale. It's the typical "win-win" situation that makes the world go round.
However, there is one business model that works the exact opposite way.
The breakage business model
As we just saw, most businesses make money when people use their services but the breakage business model is the exact opposite: the business profits when people do NOT use a service or product they purchased.
This may sound nonsensical at first but it's more common than you may think.
Take the gift card businesses, for example.
People who receive gift cards only sometimes redeem them. They either lose it, forget about it or don't use up the entire value of the card.
This is "free money" for the company that operates the card business because people are paid for something that they never used. In accounting, that kind of revenue is called breakage.
Another example of that is gyms. They usually work on a monthly subscription (or some other pre-paid period), meaning customers pay the same amount whether they actually go to the gym every day or not at all.
As you can see, the breakage business model can be very profitable.
The breakage problem
The breakage business model sounds great at first. After all, who wouldn't like to make money by not providing a service or product? It's a no-brainer, right?
The problem with that business model is it can be challenging to scale since you are receiving value from customers without customers actually receiving value in return.
One interesting situation that showcases this is Blockbuster.
Before streaming, people used to rent DVD movies from Blockbuster for something like $5 for two nights or so. If you forgot to return the movie on time, they would charge you a $3/day late fee.
Data reveals that those late fees comprised 70% of Blockbuster's income.
That is also a form of breakage. Blockbuster was making most of its money from people who were too lazy or forgetful to the DVDs on time.
When Netflix first started, before it was a streaming company, it had a subscription-based DVD rental by mail business. For a flat fee each month, you could keep the movies you rented for as long as you wanted.
That was very appealing to people who paid a lot of late fees on a regular basis, so it was an easy decision for them to move from Blockbuster to Netflix, and because those were Blockbuster's most profitable customers, they ultimately went bankrupt.
Final thoughts
The breakage model is a very interesting one because it works in the opposite way of most other businesses.
Instead of making money by providing a product or service that is used by customers, breakage business profit when their products or services are not used.
That is an interesting business model but the fundamental problem with it is that the business is receiving value from customers without customers actually receiving value in return, making them vulnerable to competitors that disrupt the market.
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I think in the long term this business model becomes unsustainable. Because value transactions plateau or begin to decline. It's interesting to know that this model made up for 70% of Blockbuster's income, it makes use of our inability to prompt with time.
Yes, it's much harder to scale in that model and new businesses are created all the time to try and disrupt companies that exploit breakage