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Posts Tagged ‘revenue model’

There is a thought among entrepreneurs from internet world that one needs to first focus on building a sizable user-base for their service/product; and think of its monetization later. Entrepreneur often end up making a very innovative service/product, but miss out on devising a sustainable revenue model. Later on as he tries to force-fit revenue model, he risks impacting the very core of the service/product, and might even prove fatal for the startup.

Selling the user-base to the marketers:

In today’s internet world, there is an increasing trend of letting the end-customer use the service/product free-of-cost; and instead charge institutions (read marketers) who are interested in reaching out to these end-customers through this medium. This activity of marketers advertising to end-customers need to be so well blended with the key proposition of the business, that the end-user does not mind it; else this can result into dilution of the very proposition on which the business has built the traffic and audience.

Let me explain this with an example. Twitter is today one of the hottest internet startups and has an exponentially growing user-base using the service for free. Also several social-media marketers have started using this channel to promote their stuff to this audience. Now tomorrow if Twitter starts charging these marketers hefty fees for using their channel, these marketers will also have to become aggressive in their promotions and advertisement in order to get a decent return for their investment. This might end up in making Twitter a commercial place with more spam content than actual micro-blogging generated content. Twitter will have to ensure a balance between this commercial content and the actual core offering of communicating “what are you doing”.

Of course this will be an extreme case, but the point is that if Twitter tries to generate revenue through this mechanism, it always risks spamming itself. Take example of Search business. We have one Google which owing to its almost monopolistic market share can afford to limit the number of ads to be shown on its search result page, allow only relevant ads and push up the price (revenue per search) through an auction-based model. The lesser successful search engines have to resort to showing as many as 4 or 5 ads above actual search results, and may also have to take all advertisements that they can get and compromise on relevancy of ads – resulitng in spamming their own service – to sustain their business. And still their price (revenue per search) lags Google. Startups should try to innovate around revenue model for search, instead of force-fitting one (by copying one which has been successful for Google and end up playing a catch-up game).

Making the service/product paid:

In a bid to force-fit a revenue model, one may stop offering the service/product for free, and ask the end-customer to pay a nominal fee to use it. The end-customer will pay the fee if the value he derives is more than the fees charged. However again, there is a chance that this may dilute the very proposition itself.

For example, say tomorrow Facebook becomes a paid service (at a very nominal cost like say Rs. 10/- per month), there would surely be a drop in the registered users. Even if I am ready to pay the fee, if my current network on Facebook shrinks, it reduces the benefit I am getting from the service. Then there are problems of collecting such nominal amounts through e-payment methods and so on. Something like LinkedIn – which offers basic service for free, and advanced features (which are an integral part of the core offering) for a charge – might work, but then this needs to be thought about at the beginning itself. What Facebook or Twitter service would you as a normal user would like to pay for?

Acquisition and Other Methods:

Entrepreneur by definition is an optimistic person, and acquisition will always remain a very attractive exit option. While every entrepreneur always starts with a confidence of building the Google-killer and hopes of getting acquired, having a sound revenue model is of utmost important to make that happen. An acquisition for the audience/traffic built will be possible only if the startup is among the top players in the segment. For others, having an operationally profitable revenue model becomes absolutely necessary.

There might be several other ways of monetizing the generated traffic and audience (like CPM based online advertising, database marketing, etc.) but one need to be ensure that the payoffs from these are enough to sustain the business on a daily basis.

Extending innovation to revenue model:

Entrepreneurship (even social entrepreneurship) is not philanthropy; instead it should be financially fulfilling for the entrepreneur, only then he will be able to continue. And for that to happen, devising a viable and sustainable (and also flexible) revenue model at the outset should be integral to the idea of entrepreneurship. This model might undergo changes as the business evolves, but it should always be of prime consideration for the entrepreneur. Postponing revenue-model for a later stage and then trying to force-fit one can be a very dangerous choice to make. Entrepreneur should not limit his innovation to the service/product alone, but should extend it to revenue model also, and have a rewarding entrepreneurial experience.

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