This article is an excerpt from the Shortform book guide to "Business Model Generation" by Alexander Osterwalder and Yves Pigneur. Shortform has the world's best summaries and analyses of books you should be reading.
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What is the bait-and-hook business model? How do bait-and-hook businesses make a profit?
The bait-and-hook business model is where a business sells the main product (for example, coffee machine or printer) at a low cost in order to generate profit by selling complementary products/refills/top-ups (for example, coffee capsules, printer ink) at a high price. In effect, businesses choose to initially make a loss in the hope of making a future profit from ongoing purchases.
In this article, we’ll take a look at the concept behind bait-and-hook business models and how they generate revenue.
What Is the Bait and Hook Business Model?
Bait-and-hook business models are characterized by cheap or free products that provide customers with instant gratification but create demand for future products and services. Although businesses initially lose money, they can easily cover the costs and make a profit from the recurring income they receive from these transactions. For example, coffee machines that require specific capsules to function can sell at a loss since customers will inevitably pay for the capsules so that they can use the machine.
In their book Business Model Generation, business innovation experts Osterwalder and Pigneur suggest the following layout for this type of business model:
| Customer Groups | Focus on large customer groups. |
| Value Offer | Value comes from attracting customers with an inexpensive or free offer, which will lead to a necessary follow-up product or service. |
| Touchpoints | Depends on the product or service. |
| Interactions | Interactions need to encourage customers to have no choice but to purchase follow-up products or services. |
| Profit Sources | Profit will come from multiple purchases of the follow-up product or service. |
| Resources | Product patents, as well as brand equity—brand reputation and familiarity—will be the biggest resources. |
| Critical Actions | Focus on the production and delivery of follow-up products & services. |
| Network | Focus on developing partnerships that will make the production and delivery of follow-up products and services more efficient. |
| Expenses | The main expenses will be the subsidization of the initial value offer, as well as the production of the follow-up products and services. |
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Here's what you'll find in our full Business Model Generation summary :
- The nine elements that make up any successful business model
- Different ways you can combine these elements to create business model patterns
- Techniques you can use to generate innovative ideas
