Changing Your Business Model Series — The Brokerage to The HardTech Business Model

In our last newsletter, we covered the Lease, Rent, Referral, and Direct Sales Business Models.

Today, we’re looking at the Brokerage, Insurance, and HardTech / Deep Tech / BioTech models.

Here’s the list of business model categories we provided at the start of this series that you can reference as you evaluate the models that you might consider changing your business to —

• B2B (Business-to-Business) — where companies sell their solution to other businesses or organizations.

• B2C (Business to Consumer) — companies that sell to individual end consumers and may use retailers or wholesalers to sell to their customers.

• DTC (Direct to Consumer) — companies that sell directly to individual, end consumers.

• B2B2C (Business to Business to Consumer) — companies that sell their solution to other businesses to help those other businesses sell to consumers.

• C2C (Consumer to Consumer) — companies facilitate consumers selling to other consumers.

• B2C2B (Business to Consumer to Business) — companies who sell to the employees of other businesses who then advocate for their employer to buy the original company’s solution.

• B2G (Business to Government, also Business to Public Administration or Business to Public Sector) — companies sell their solution to government entities.

• C2G (Consumer to Government) — companies facilitate consumers directly interacting with a government entity.

Today’s Business Models — Brokerage, Insurance, HardTech / Deep Tech / BioTech

The Brokerage Business Model includes businesses that don’t sell a product themselves but connect buyers to sellers offering particular products or services.This model type can fall under the B2B, B2C, DTC, B2B2C, B2C2B, C2C, B2G, & C2G categories.

The Insurance Business Model includes businesses that take on the financial risk of particular events on behalf of an individual consumer or a business in exchange for premium fees paid by the consumer or business. This model can fall under the B2B, B2C, B2B2C, B2C2B, C2C, B2G, and C2G business model categories.

The HardTech / Deep Tech/ BioTech Model includes businesses that develop products that require high levels of investment and take years to bring to live or commercial versions. Customers sign LOIs (Letters of Intent) to show their interest in purchasing the live products when they’re ready. Revenue for these businesses can often be many years out, and high risk can be involved because of the technical and regulatory aspects of the products these businesses are developing. This business model type can fall under the B2B, B2C, DTC, B2B2C, B2C2B, C2C, B2G, and C2G categories.

Mapping The Model: Brokerage Business Model

If you mapped out the Brokerage business model, it could look something like the following —

The Brokerage Business Model

Let’s look into some examples.

Brokerage Model Example #1

Expedia is a full-service online travel agency platform and one of Expedia Group’s travel fare aggregators and travel metasearch engines. It allows travelers to research and book travel packages, flights, hotels, vacation rentals, rental cars, cruises, activities, attractions, and related services. Expedia Group also owns Hotels.com, Vrbo, Travelocity, Hotwire, Orbitz, ebookers, CheapTickets, CarRental.com, ExpediaCruises, Wotif, Trivago, Expedia Group Media Solutions, and Expedia Group Partner Solutions. They believe travel can bring good into the world, so [their] mission is to power global travel for everyone, everywhere. As an online full-service travel agency, Expedia brokers — or facilitates — interactions between buyers and sellers of travel and travel accommodations, helping travel businesses list their services and accommodations on the platform and providing an easy search-and-select experience for travelers. When Expedia sells travel and accommodations directly to end consumers, the company receives a commission from the travel service businesses for brokering the booking (like the airline, hotel, or rental car companies). Expedia will also buy hotel rooms in bulk for discounted rates, add a markup margin, and sell them to travelers — at times providing them with better rates than if travelers had gone directly to the travel services to purchase them on their own.

In addition to providing ad space for travel services to connect with travelers using the platform, Expedia provides white-label travel services to power travel bookings for other companies like airlines and banks. Expedia’s API allows Travel agencies to integrate Expedia’s database of flights and accommodations into their platforms for booking travel, allows companies to enrich their loyalty programs by offering travel incentives to program participants, enables airlines to provide hotel and car rental options to passengers with their flight purchase, and hotels can use it to manage their inventory of rooms and their rates.

Brokerage Model Example #2

Uber Freight is a line of business and app under the Uber Technologies, Inc. umbrella that delivers an end-to-end enterprise logistics suite to shippers who need to send their goods to customers and carriers who want to provide shipping services for those goods. Uber Freight’s mission is to [lead] the pace of logistics to move the world’s goods. Carriers can find and book loads to haul with their freight fleet, and they can easily upload documents to the Uber Freight app and get paid quickly with the tap of a button. Uber Freight helps shippers and carriers maximize savings, visibility into, and efficiency in advancing supply chains. The company’s network currently manages $20 billion of Freight, and shippers and carriers can outsource all of their transportation needs or choose from Uber Freight’s menu of add-on logistics solutions and services to help them scale their operations as needed. A shipper will input their shipment details (like shipment date, distance, and desired trailer type) and will be given flat-rate freight quotes they can book based on actual market-based quotes. And, a carrier will look in the Uber Freight app to see what Uber’s algorithm for pricing certain shipment loads is to decide which they want to take on. The pricing of loads is based on an algorithm Uber Freight built that accounts for several market condition data points to get to a price including the day of the week, time of day, weather, seasonality, and how quickly loads are booked over time compared to normal booking rates. If there are more loads being booked than normal, prices might decrease. If there are fewer than normal, prices might increase. The algorithm makes real-time adjustments without human touch similar to airfare prices.

Pros of Using the Brokerage Business Model:

• No inventory management. Companies using this model don’t have to worry about the costs associated with having an inventory of products, like storage fees, depreciation, and the costs of unsold products.

• It can be easier to scale their brokerage network. When you have a network of buyers and sellers that need to do transactions through you to get what they need, it can be easier to expand your network without having to substantially increase the costs required to operate your business. Other buyers and sellers made aware of your network will be attracted to the opportunity to transact with it as well. There’s efficiency in serving particular markets because it’s connecting a specific demand with the supply designed for it.

• A less friction-filled revenue stream. A company with this business model provides a less friction-filled buying and selling experience for transactions made through it. The revenue comes from the fees or commissions charged per transaction, not upfront costs that could give buyers and sellers pause.

• A diverse customer base acts as a buffer. The fact that there are 2 main types of customer segments (diverse buyers and diverse sellers) means that, if there are any changes in the market or fluctuations in demand, certain products/services that aren’t experiencing that demand fluctuation will offset the impact on your business coming from those that are. It will help the company maintain its profitability.

• It can create strong credibility and increase brand loyalty. A company with a brokerage model that operates in a way that delights its customers and develops strong customer relationships with its network of buyers and sellers can build deep trust with its customers which can lead to recurring business.

• Great competitive advantage in data analytics. Companies with this model can capture data on transactions and customer behavior which can give them great insight into how they should make decisions and cater to their customers better than their competitors do.

Con of Using the Brokerage Business Model:

• Revenue is based on commissions or transaction fees. If there is a downturn in the economy or a brokerage company’s market, the slow transactions will decrease their revenue. This model can depend too much on variables outside of itself like economic conditions, market trends, and industry shifts that can have a great impact on the company’s stability.

• Market Saturation. There can be high competition in your industry that can make it more challenging to differentiate from them and sustain profit margins.

• Legal and regulatory compliance. Brokerage companies have to comply with legal and regulatory requirements that may be costly or complex.

• Continuous investment in brokerage platforms. If the brokerage is hosted on an online platform, continuous investment will have to cover costs for developing, improving, and maintaining it, as well as providing continuous security parameters and automation tools to stay competitive in modern markets.

• Risks to reputation. It’s imperative that companies with this model make sure all transactions are done ethically so they avoid damaging their brand reputation and stay out of legal trouble.

•  The network may decide they no longer need their brokerage intermediary. Buyers and sellers may decide they want to transact directly, so companies could lose strong customer relationships and revenue.

Up next is…

Mapping The Model: Insurance Business Model

If you mapped out the Insurance business model, it could look something like the following —

The Insurance Business Model

Here are a couple examples of this model.

Insurance Model Example #1

Lemonade is an insurance company built for the 21st century. They provide renters, homeowners, car, pet, and life insurance directly to customers. Powered by artificial intelligence and social impact, Lemonade’s full-stack insurance carriers in the US and the EU replace broker and bureaucracy with bots and machine learning, aiming to zero paperwork and instinct everything. As a Certified B-Corp, Lemonade gives unused premiums to nonprofits selected by its community, during its annual Giveback. Lemonade is available in the United States, Germany, the Netherlands, France, and the UK. It has intentions to continue to scale globally. They focus on delighting their customers and not being pit against them (a sentiment many people feel about their insurance companies today). At its core, the Insurance business is about monetizing probability theory (a branch of mathematics that focuses on quantifying uncertainty and predicting the likelihood of different outcomes). And so, Lemonade’s fast growth from their focus on delighting their customers led to them generating huge amounts of highly predictive and proprietary data on customers that they could then use to develop a sustained advantage at pricing and underwriting risk. Lemonades’ data servers train data sets for many aspects of the Lemonade business, so they can refine their algorithms, increase their efficiency, and lower their costs.

Insurance Model Example #2

The Hartford is a leader in property and casualty insurance (both personal and commercial), group benefits, and mutual funds. The Hartford has been in business since 1810. They wrote the first insurance policy for Yale University, provided a policy to protect President-elect Abraham Lincoln’s Illinois home during his first term in office, and paid over $11 million in damage claims to their customers in 1906 when 500 San Francisco city blocks were destroyed by an earthquake and the resulting fires that burned for days. They helped insure the Hoover Dam in 1931 and the Golden Gate Bridge in 1937, and they paid $850 million in claims to their customers to support them after the tragedy of 9/11. They say they have provided people and businesses with the support and protection they need to pursue their unique ambitions, seize opportunities, and prevail through unexpected challenges.

In its insurance model, the company collects premiums from its policyholders, generates revenues from investing the premium payments into diversified investment portfolios, and is paid fees for its asset management services and the administrative charges attached to its insurance products.

Pros of Using the Insurance Business Model:

• Stable revenue source. Insurance policyholders pay monthly, quarterly, or annual recurring premiums that ensure the company a predictable, steady revenue stream.

• Risk pooling. Since policyholders help spread the risk of events across them, companies with an insurance model can manage the losses from providing coverage and create profits.

• Relatively easy to scale. Customer reach can be expanded at a relatively low cost. There is no inventory of products that need management or services that need resources to be fulfilled. This makes it easier to scale.

• The ability to invest in other opportunities. Traditional insurance companies invest the premiums collected from customers into financial markets to make additional revenue. Modern companies, like Lemonade, give unused premiums to nonprofits selected by their policyholders. A company with this model can look for opportunities that are in alignment with them and their brand.

• Customer retention can be high. Insurance companies can require long-term commitments from customers in order for the policyholders to use the benefits that come with their policies. The need to cover life’s risks and the long-term relationship that comes with that can create a preference in customers to stay with a company. It makes the business and brand stickier.

• There are multiple markets to serve. Companies with an insurance model can offer several insurance products or policies to create additional revenue streams, including property, health, business, auto, and life insurance.

• The insurance industry has great stability. Market volatility is reduced because the insurance industry is heavily regulated. That regulatory support can be a big part of the business’s sustainability.

Cons of Using the Insurance Business Model:

• Claims risks. Disasters and unforeseen events can create an extraordinarily massive amount of claims for payouts to customers. This can severely impact a company’s profitability.

• There’s a large amount of regulatory compliance involved. The insurance industry is highly regulated which means higher operational costs and further complexity added to your business operations.

• Highly competitive. Customers constantly compare policies between competing companies and are sensitive to pricing. Pricing and the benefits attached to policies between these companies can make customer retention difficult.

• Fraud. Customers committing fraud through fraudulent claims can create increased losses for a company with this model and can increase the costs that come with investing in monitoring and managing fraud.

• Customer trust can become fragile. If customers feel they’ve been treated unfairly or are dissatisfied with their experience with the company they’ve made a commitment to (for example — a denied claim they feel is a valid instance for coverage), there is a high risk of damage being done to a business’s brand reputation and the erosion of customer relationships.

• Risk management. As mentioned earlier, businesses with insurance models are traditionally based on monetizing probability theory. If they miscalculate the risks related to certain outcomes they can end up in a financially unstable place.

• Fluctuation in the economy. When economic downturns occur, a company’s end customers may decide they want to reduce what they spend on insurance, which can hit the company’s revenues hard. Companies with this model are sensitive to fluctuations in the economy.

  Up next is…

Mapping The Model: HardTech / Deep Tech / BioTech Business Model

If you mapped out the HardTech / Deep Tech / BioTech Business Model, it could look something like the following —

The HardTech / Deep Tech / BioTech Business Model

HardTech/ Deep Tech/ BioTech Model Example #1

Boston Dynamics is the global leader in developing and deploying highly mobile robots capable of tackling industry’s toughest challenges. Their robots are equipped with advanced mobility, dexterity, and intelligence, enabling automation in unstructured or hard-to-traverse spaces, from industrial plants and construction sites to distribution centers and warehouses. Their mission is to imagine and create exceptional robots that enrich people’s lives. They see their work as the next step in the evolution of machines that reduce the danger, repetition, and physically difficult aspects of work. Boston Dynamic’s vision states they are driven to create robots that will fit seamlessly into our lives and expand our potential. They have just begun to scratch the surface of what robots can do, and [they] are excited to be building the future for today, tomorrow, and beyond. At this time, their products are designed for commercial, industrial, enterprise, and university uses only. As their technology matures, they are hopeful that they’ll be able to offer consumer-level products.

Boston Dynamics was started in 1992 when Marc Raibert spun off from the MIT Leg Lab to start the company. He was joined by Robert Playter shortly after. In 2004, their first quadruped robot, BigDog, left the lab to venture into real-world terrain. In 2013, their first generation robot called Atlas (their R&D robot) made its debut with full body balance and agility. In 2020, their robot Spot (their industrial inspection robot) became commercially available to early adopters and then to other industrial customers. In 2021, Boston Dynamic premiered Stretch their first-purpose built robot for tackling a specific set of warehousing challenges (including automating case handling). And now, they have hundreds of customers relying on their robot solutions to transform the way they work.

HardTech / Deep Tech / BioTech Model Example #2

Desktop Metal is the world leader in binder jet 3D printing and has the world’s largest networks of DLP (Digital Light Processing) polymer customers. They see both of those processes as the key to driving mass 3D production. Binder jet 3D printing is a rapid prototyping, additive (think “adding”) manufacturing technology that uses a liquid binding agent to selectively bond powdered materials layer by layer to create 3D objects from digital designs (it’s also known as ‘powder bed and inkjet’ or ‘drop-on-powder’). DLP polymer (Digital Light Processing polymer) is a liquid photopolymer resin (a light-sensitive epoxy or acrylate-based resin) that is cured (aka hardened) by a digital light projector to create solid 3D objects layer by layer. And, in 3D printing, a polymer is a large chain of repeating units of a material that come in the form of filaments or resins that are used as the primary materials for making 3D objects. Desktop Metal has helped reshape the Additive Manufacturing (AM) industry altogether. They have engineering facilities in California, Michigan, New Jersey, Ohio, Pennsylvania, Texas, Germany, Italy, Belgium, and Japan. And, their distribution network spans 65+ countries, with 200+ partners. Desktop Metal now powers some of the best known manufacturers in the world. They have 6,000+ customers, 650+ patents, and work with 250+ materials. The company was initially founded in 2015 to make metal and carbon fiber 3D printing accessible to all engineers, designers, medical professionals, and manufacturers.

Now, they have a portfolio of companies — or brands — to help drive the future of Additive Manufacturing (or production-volume 3D printing aka Additive Manufacturing 2.0). In 2021, Desktop Metal founded Desktop Health to deliver 3D printing and biofabrication solutions to drive the advancement of personal healthcare. ETEC is a brand that was founded in 2002 to deliver industrial-grade polymer 3D printing solutions. ExOne was founded in 1995 to deliver industrial sand 3D printing solutions for foundries (which are manufacturing facilities where metal parts are produced by melting metal and pouring the molten metal into a mold so it can cool to solidify into a desired shape). Their portfolio also includes materials covering nearly every category including metal, polymers, ceramics, and composites. They have premium materials like DuraChain 2-in-1 pot resins and Flexcera, and they also promote the use of upcycled materials like wood. The materials brands in their portfolio include Adaptive3D which was founded in 2015 to develop high-performance 3D printable resins that deliver breakthrough material properties needed for end-use products (which in 3D printing are goods that are made for an intended use, not just to be prototypes or test pieces). They’re the ones who created the DuraChain 2-in-1 pot photopolymer. The other materials brand is Forust, which was founded in 2019 to build a greener future through 3D printed wood derived from two waste streams — sawdust and lignin (a natural polymer that gives structural support and rigidity to the cell walls of plants; wood and bark in particular). After Cellulose, Lignin is the second most abundant biopolymer on Earth.

Their 3D printers, smallest to biggest, include the Studio System, Shop System, X-Series, and Production System. Along with printing materials, they also sell software to pair with the 3D printers. In total, it took approximately 2 years for the company to premiere its first commercial products, 3 years to start shipping its Studio System 3D printers to customers, and 5-6 years to fully commercialize its Production System high-speed metal 3D printers.

Pros of Using the HardTech / Deep Tech / BioTech Business Model:

• Barrier to entry is high. The advanced nature of the technologies created and their intellectual property make it very difficult for competitors to enter their space. These types of companies benefit from the competitive advantages that come with the exclusivity of producing their technologies and that provide them with diverse opportunities to monetize them.

• The potential to revolutionize industries is high. The technologies being created have the potential to disrupt the industries relying on the status quo systems and tools of today. Revolutionizing how things can be done to make everyone’s lives better can create the potential for a large market to transact with.

• They have an incredibly unique value proposition. Companies with these business models are solving problems with solutions that completely differentiate their business and brand from those that have existed before.

• Extremely attractive to investors. Many venture capitalist firms, research institutions, and governments look to support companies with these types of business models with funding and grants.

• They can have a great societal and environmental impact on the world. Companies with these business models take on the world’s biggest challenges, and their missions and ambitions make them extremely important to how our global community progresses. This makes them highly valuable.

Cons of Using the HardTech / Deep Tech / BioTech Business Model:

• Development cycles are long. Companies with this business model require years and often decades to commercialize their product/service, and the research and development needed to get their solution to the commercial stage can be costly, requiring ongoing extensive investment.

• The risk of failure is high. There is a lot of uncertainty around whether all forms of research and development in companies with this model will result in commercially viable products/services. The great investment makes great losses a possibility.

• Scaling can be capital-intensive. Scaling operations around the production of new technologies (including everything from ideation and R&D to software and handling regulatory compliance), the clinical trials of BioTech, and the manufacturing required to increase the volume of units available for commercial use require substantial ongoing investment.

• Compliance challenges. Industries that companies with this model are in have to follow strict regulations to successfully undergo complex approval processes.

• The markets the technologies are made for may lack the understanding to adopt them. A company has to educate its market on why and how they should change their behaviors to benefit from the revolutionary technology that will change their customers’ lives. Changing learned behaviors, however, can be a real challenge. That and the fact that there may be some added friction to a customer’s experience with the product because of possible learning curves can lead to slow adoption of technologies and slow acquisition of the needed market share.

• Acquiring the right talent can be tough. To maintain and improve the quality of these capital-intensive technologies, companies have to hire top-tier engineers, scientists, and specialists who are most likely highly sought after, which can be a costly and competitive process.

Key Notes About The Brokerage, Insurance, HardTech / Deep Tech / BioTech Models

Have you developed a network of industry relationships and accumulated deep industry knowledge that would help you educate customers on the best product or materials for their use case? And can you connect them with the right suppliers for their scenario? Could shifting your DTC eccomerce business model to a brokerage model or adding a brokerage model to your current one make sense? Education covering what someone should do to address a particular problem is extremely valuable to customers, and pointing them in the right direction (or providing them with a platform where they can find your recommendations and more) is an incredible value-add that could strengthen your brand reputation and increase the repeat business that comes from strong customer loyalty.

Companies with an Insurance or HardTech business model benefit from having a high barrier to entry to their industry given how difficult it is to start and grow these types of business models. Yes, there can be high competition in the Insurance Industry, but both are capital-intensive and highly regulated. So, the approval and certification processes for operating their companies are harder to obtain and can act as a great shield against competition that will help sustain their business in the long run. Does it make sense to provide further support to your customers by adding an insurance component to your business model?

Or are you a tech company considering deep R&D to create an incredibly high-value solution that will substantially differentiate you from your competitors, establish you as an exclusive owner and developer of that product/system, and give you the opportunity to monetize your solution in different ways using the HardTech or Deep Tech model for the long-term sustainability of your business? Is the risk for your company worth the reward of positive change that you could make in the world?

Next Steps

We will continue to look at examples of business model categories and the types we covered in our first newsletter over the next several newsletters to help you with your thought process around which business model may be a good fit for your business case.

If you’d like LUSID to help you work through your business model change and strategize around which business model is most appropriate for your company vision, you can set up a free call with us here. We’re excited to learn more about you and your company!

Feel free to reach out with any questions, comments, or additional thoughts you may have at [email protected]. We love connecting with visionary Founders, CEOs, and Leadership teams working on impactful ventures.

Let’s Make Your Vision Your Reality.    

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