Business Model Innovation and Cat Cafes

During the holiday break I was convinced by my daughter to head off to Melbourne’s only Cat Cafe. Now I’m not much of a cat fan but I am a fan of my daughter. So reluctantly I decided to take a day off and attempt the feline caffeine experience.

I have recently been working with a gaming insights and analytics provider. Helping them identify and create new and innovative business models for their launch and growth phases. Along with gaming, business model innovation is one of my passions, so my mind has been mellowing in this soil for the past week and was clearly looking for some form of outlet.

Part of what I talk about at conferences and teach in our courses is for each of us to become supermixers. Individuals that can mix multiple insights from different knowledge areas and ideate around new products, services and business models. With this in mind I found myself doing a bit of business model analysis on the Cat Cafe as I sat there and watched the engine of this little business operate. I always find it fascinating how some of these ideas get off the ground and generate a viable model that is desirable to customers as well.

From what I could see the primary model was pay-per-use, where you buy time slots with the cats at $12 a head per hour. Every slot for the day was full. Roughly 12 people allowed in to see the cats in their trendy loft apartment per time slot. A little bit of math’s gets us to roughly $280,000 a year in revenue potential if all business day slots are fully booked for the whole week. Not bad. But we all know that type of utilisation is impossible, especially since their service is perishable, in other words a time slot with a cat.

Perishability is a bit of a science but the basics of it are that once the timeslot has passed, there is no way to recover that revenue. It’s not like a product where you can just sell it again tomorrow. Perishability is particularly relevant to service organisations since a service is time bound.

Because of perishability this particular business would need to create additional revenue streams. There are a few strategies to deal with perishability. One of them is yield management, the process of managing short-term demand and capacity through tactical pricing and service capacity allocation. Since the Cat Cafe sells time slots that are perishable, each slot loses value over time. If I arrive half way though the hour the value is diminished and there is no way to recover the lost 30 minutes. The challenge that our feline cafe also has is that once they have sold all their slots, they have reached the revenue ceiling for that day and there is no other way to sell more slots as they are a finite resource. Then there is the challenge of having a flat rate of $12 an hour with no flexibility for other models or different uses of the time, for example what if I book in advance, can I get a discount?

So the goal for this business, and any service business for that matter, is to maximise the average revenue per available time slot per day. There are a number of forces impacting demand for these slots at any given time. The strategy that the Cat Cafe needs to pursue is to find a balance between hourly rate, costs, and occupancy of the time slot in order to maximise revenue.

This is all part of revenue modelling and is one of the activities that you need to perform in order to create differentiation in the marketplace.  From the above schematic you can see that there are other components that you can work with in order to design or optimise a business model. So if you already have a business model in place, you can use these components to help improve your outcomes, for both your customers and your business.

But at what point must I innovate my business model? Under normal circumstances if I alter two or more of the above components then I am in the business model innovation space, in other words, I’m changing how we do business. You can see, from the fascinating study conducted by IBM below, that over the years there has been a need to focus on more and more of these components in order to create more value. As I mentioned in a previous post, a business model normally needs to be rebooted according to the economic lifecycle, which you can see in this research. However, due to the acceleration of digital technologies, time and space has been reduced, accelerating the economic lifecycle. Meaning that business models go sour sooner and need to be re-invented more often. Ask Kodak and Nokia about that one.

If you have a close look at the study, you will start to see some patterns emerge. For example, there is a pattern in the sequence of components that I focus on at different points of the cycle. Therefore when you innovate your business model, you could focus on who the customer is (who), what services or products you are going to sell (what), what value you are going to create for the customer and capture for your business (why), or how you will deliver this value (how).  Some of these patterns have been documented in various publications, the St Gallen Business Model Navigator is one of the publications that provides a great overview of the types of business model patterns that have emerged, all 55 of them.

Now in business model innovation situations, organisations create mixes of the full business model patterns. So you can imagine that if I have 55 base models how many different mixes I could create, exciting times for innovative business models. Our Cat Cafe had a few mixes as well, and could possibly afford to experiment with a few others to test for desirability, viability and feasibility.

I noticed the use of the cross-selling model to subsidise their income. They included coffee and treats as value adds. I saw these as value adds since most people were there for the primary value of time-with-cats, and not coffee and food. I suspect there are some behaviour and sanitary hurdles that need to be overcome before visitors sip their lattes and bite into a slice of cake covered in cat hair. I’m not sure how effective the cafe and cat model is for the coffee mad Melbourners.

The cross-sell model that would work for them was to sell cat products, like board games, cat window loungers and scratch pads etc (I have attached a few photos you can look through  as examples). This seemed to be a good revenue source for them, the store was pretty busy with cat admirers looking for toys for their four pawed companions.

The decor was great and really creative and appealing. These touch on aspects of the experience provider model. Most of the props and decor focussed on their primary value, the cats, so there were tunnels, bridges, platforms, toys, etc all focussed on making life as comfortable as possible for the cats.

Experience provider is an interesting model and one that Starbucks has used with great success. Let’s face it, if you are in Melbourne, it’s a bit of crime to be seen drinking Starbucks. So it’s not the coffee that gets people through the door, it’s something else. Having been to the Starbucks in Silicon Valley I got a glimpse into the experience model by sitting at the long table where everyone was working whilst sipping their lattes. Free Google fibre and sitting opposite the lead product designers and developers for Google, Facebook and eBay was indeed quite an experience. I also love the gamification aspects they have created with products like the betacup. As a means to reduce waste from take-away cups they created the reusable cup called a betacup. But how to get customers to use it? The innovative part was to wrap some game mechanics around it. Now every tenth person to arrive at the front with their betacup, gets their coffee for free; Brilliant.

I thought that an additional combination of the digitisation model and the customer loyalty model might help to create an emotional connection with the customers. The primary value is that they are appealing to the emotions of customers around adopting and caring for homeless cats. Therefore, providing them with loyalty cards that are associated to each cat, and giving some form of online adopt a cat mechanism will most certainly create an emotional connection between that cat and customers like my wife and daughter. One of the cats was called Shakespeare. My daughter had already developed an attachment to this cat before even arriving by reading through his online profile. She plays a game called Foopets, where you feed and care for digital cats and dogs, ensuring they are groomed, fed and healthy. Linking this digital medium to the actual cats with an adopt a cat loyalty card, wrapped in a subscription model could create some interesting outcomes.

I see there is some advertising revenue that they might be leveraging through T-shirts with sponsors and it looks like the pet food might be sponsored as a trade-off for advertising on these T-shirts and in the shop; an affiliation business model. I think there is also some opportunity to include a subscription model of sorts and possibly even extend the revenue model to place a fee on adoptions.

As you can see, the Cat Café has some exciting options to explore. The point is that once you understand the patterns and building blocks, then you can mix better, you can develop your own unique and innovative business model.

The beauty of using design thinking for business model innovation is that you don’t have to implement the full business model to test each of these options. They can be done in models and workshops and only small aspects of them tested and validated with customers.