Gennaro Cuofano's Blog, page 243

December 14, 2018

7 Ways to Cut Travel Expenses to Keep A Lean Business Model

When you run a business, there will be different types of expenses related to it, and some of them are quite mandatory. However, specific business operation related costs can be controlled with proper planning and analysis.

This is critical to maintaining a lean business model that can be quite profitable. The cost structure is one of the critical ingredients for a successful business model.

One such example is business travel-related costs. The reality is business travel cost is not easy to predict, and various unforeseen elements can increase it when you least expect.

Why business travel costs tend to be unpredictable

Before you delve into controlling the travel budget of your company, it is essential to understand why it may shoot upwards at times. Listed below are the reasons business travel expenses getting inflated:

Different employees may have different mindsets and habits which may add up to the travel cost. For example, some employees may plan a business trip with a personal vacation, and they may incur higher flight cost by returning after an extended weekend.
Sometimes, the companies fail to figure out factors like regional festivals and annual events, making accommodation costs, higher when their employees are on business trips in cities that are tourist destinations.
Sometimes, business trips may have to be planned at short notice and finding a budget flight and accommodation deals can be tough.

Ways to cut down business travel-related costs

While business travel will be a necessity, with proper planning and analysis, it is indeed possible to keep the cost under a limit. Listed below are a few handy tips to curtail your company’s business travel related expenses.

Cutting down on travel plans

Thanks to the progress of technology, it is sometimes possible to evade business trips and deploy advanced technological means to meet business needs.

For example, if you feel consultation with a foreign client can be done over video conferencing, travel cost may be evaded. Skype is there, and you can resort to similar feature-laden video conferencing apps for this purpose. This can help you save a lot of money.

Planning business trips carefully

Before planning a business trip to any place, analyzing certain factors that can add up to overall cost proves to be helpful. For instance, planning a trip to a city that is also a significant tourist destination in peak seasons can prove to be ineffective for business travel cost curtailing.

Any business trip in Christmas and New Year timing will be costlier than trips made a month earlier or later, as a thumb rule. Sometimes, using smaller airports near the destination can help you save more money.

Planning in advance

Planning business trips in advance help you save a lot in both transport and accommodation fronts. By planning trips of your company employees a few months in advance, you may get great deals on both airfare and hotels.

It will be a good idea to sign up for newsletters and emails of travel management service providers if your company employees need to make such trips a few times every year. You will get updates on bargain flight and accommodation deals and make the most of those!

Taking advantage of the loyalty/rewards program

Nowadays, the majority of hotel chains and airlines offer exclusive loyalty and rewards scheme for regular customers. These schemes can be utilized by the businesses as well.

You can save a significant amount by using flyers loyalty schemes offend by specific airlines by buying tickets from that airline exclusively for all business trips for the workforce. The same thing applies to hotels where those employees will be staying on such trips.

Setting realistic transport and food allowances

Sometimes, the employees end up incurring the bills on business trips by spending on intracity transport, food, and allied costs. This is where you need to put the focus on.

While it is true the employees will need some allowances for such things during business trips; overspending can be controlled. Set realistic travel and food allowances for the employees for those trips. Ask them to use public transport when possible at the destination instead of using a cab every time.

Making incentives and rewards

It can be a good idea to encourage employees to save money on business trips and to be more productive. You may introduce rewards for those employees who can save a significant amount from business travel allowances without cutting down on productivity.

This can be a monetary incentive or something that will be of use to them, eventually.

Using the services of a travel management company

If you find calculating and analyzing various nuances of business travel and finding the best deals for each trip complicated, there is a way out! You can opt for the services of third party travel management services companies.

You can find many such entities nowadays, and they cater to corporate travel needs.

Key takeaway

While business travel cost control can sometimes be complicated and analysis of several factors are involved, it is not exactly a Herculean task!

You need to get the basics right and plan for each trip well in advance to curtail the cost. Using technology and online services can be quite useful in this regard.

Guest Post by Namit Empronc:

Namit is fond of reading, writing & meeting people. He loves writing about Spend Management Software. In a former life, he worked as a content specialist and has good knowledge about finance.

Resources for your business:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
How to Write a One-Page Business Plan
What Is Business Development? The Complete Guide To Business Development
What is SEO Hacking? How to Steal Featured Snippets with These SEO Hacks

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Published on December 14, 2018 04:32

December 13, 2018

Snapshot: One Year Of “Business Model” Searches On Google In Review

If you ask around in Silicon Valley among the people who most contributed to the development of the tech industry many will agree on one name: Reid Hoffman.

He’s been part of the PayPal Mafia who managed to build a multi-billion dollar company eventually bought by eBay.

Once cashed his check from the PayPal acquisition, Reid Hoffman didn’t rest on his laurels. Instead, he decided to launch another company, which today we know as the professional social network, acquired by Microsoft in 2016 for over $26 billion, I’m talking about LinkedIn!

If you ask Reid Hoffman what contributed and determined the success of both PayPal and LinkedIn, he’ll mention a key ingredient: business model innovation.

As Reid Hoffman mentions in Blitzscaling and his Blitzscaling business model innovation canvas, the ideal scenario may be that of designing a business model while launching or before launching a company with the purpose of scaling that up.

However, designing a business model beforehand is not always simple as iteration might be needed before you’re able to tweak the most scalable model for your business.

As business modeling is growing in popularity as a topic, it is interesting also to notice how it is perceived worldwide.

For this, I looked into Google Trends and Searches over 2018 to understand what people think of business models and how they associate it with.

A spike in interest for business modeling

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By comparing the interest in the overall “business model” topic, it seems that it has improved substantially from the end of 2017 to the end of 2018.

If we look into which countries contributed the most to the rise of interest in “business model” China seems to be the one leading the pack:

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Other countries like Zimbabwe, Jamaica, Singapore, and Ghana follow.

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It is interesting to notice a spike in interest in Zimbabwe and its main areas:

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However, if we zoom it in and look at cities instead, the major commercial and business center neighborhood in Tokyo, called Shibuya leads the pack:

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Other areas in Tokyo called Chiyoda and Minato follow, followed by Amsterdam and Seoul.

Let’s look now at the related queries.

What do people associate with the “business model” topic?

Looking at the top related queries can give us a good understanding of how people perceive the topic “business model” overall:

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The interesting take from this graphic is that people mostly associate “business model” with “business model canvas.”

What are the business models people are curious about?

By looking at the rising queries related to “business model,” it seems people are more and more curious about new business models that are emerging:

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Some of those examples comprise Big Basket business mode, Indeed business model (in Japan).

In mid-2018, Goldman Sachs released a report called The Genome Revolution which posed the question “Is curing patients a sustainable business model?” and explains the rise in this particular query.

Among the top related topics people search for when searching “business model” they seem to look primarily at business, business model canvas, innovation, strategy, and business plan:

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One thing that seems clear from those queries is how people perceive “business model” and “business model canvas” as a synonym. I looked more into this to see if it got confirmed by the correlation of the trends of those topics.

Business model and business model canvas perceived as synonyms

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If we look at the data from Google searches it is interesting to notice how “business model” and “business model canvas” seems to follow an almost identical trend.

This might imply that people confuse business model for business model canvas. As pointed out several times on this site, a business model is a framework which aim is to represent the essential elements of an organization.

The business model canvas is a tool to achieve that understanding.

What conclusions if any?

A few interesting takeaways from this snapshot are:

business modeling is a global phenomenon. It isn’t circubsribed to rich or western countries like the US. Instead it is of interest of countries like China, Zimbabwe, Ghana and many others
most pople seem to mean “business model” and “business model canvas” as synonims
a good chunk of people also confuse a business model for a busienss plan
innovative business model like Indeed, HQ Trivia or Big Basket spark the curiosity of many people
business modeling is tied to strategy and innovation which connect to a value proposition any organization is able to offer

Resources for your business:

Handpicked popular case studies from the site:

The Power of Google Business Model in a Nutshell
How Does Google Make Money? It’s Not Just Advertising!
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
How Does Netflix Make Money? Netflix Business Model Explained
How Does Spotify Make Money? Spotify Business Model In A Nutshell
The Trillion Dollar Company: Apple Business Model In A Nutshell
DuckDuckGo: The [Former] Solopreneur That Is Beating Google at Its Game

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Published on December 13, 2018 13:38

December 12, 2018

What Is A B2B2C Business Model? B2B2C Business Model In A Nutshell

A B2B2C is a particular kind of business model where a company rather than accessing the consumer market directly it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C.

Therefore, the company offering the service might gain direct access to consumers over time. This kind of model can help build a robust B2B as the foundation to the consumer market. While it makes it less scalable in the short term, if well executed, it can scale.

B2B2C in a nutshell

In the business world, the difference between B2B vs. B2C businesses often seems clear and straightforward. However, there is a third kind of business model, primarily based on what might seem B2B strategy. However, the final aim is to build B2C company over time.

This model is called B2B2C or business to business to consumer. The logic is the following. If a business can’t have direct access to consumers, it will gain it via a second business.

That second business will allow the first business to gain access to its consumers, have its brand recognized and over time expands the overall consumers base.

Now the question is why an intermediary business would become the link with its consumers for the B2B2C business?

Did you know Google was a B2B2C?

One of the deals that made Google the tech giant it is today was the deal with AOL. At the time AOL was a tech giant, while Google was still in its infancy.

While the search engine from Mountain View was snowballing, it still missed the first-scaler advantage that would have given it the dominance of the search industry.

Google was already a consumer product. However, it needed to pass first through a set of bottlenecks to gain access to consumers. In addition, the more data Google gained over time, the more it got better.

And the more consumers knew about it; the more Google would be less reliant on distribution channels like AOL. This is not to say that Google took advantage of AOL.

Quite the opposite, Google offered to AOL a minimum guaranteed of revenues, and it bought a stake into the company.

Indeed, a B2B2C business model relies on a closely tied relationship which makes the intermediary business (which connects to end consumers) position quite good.

Let’s analyze the basis of this B2B relationship, which will then trigger the B2C opportunities. For the sake of this discussion we’ll call:

B1: the business trying to enter the consumer market via another business
B2: as the intermediary between B1 and consumers
C: as the consumers in that industry

Why not go directly to consumers?

One of the first questions that come to mind in designing this kind of business model might be about why not going directly after the consumers?

In reality, going after the consumers is the dream of many, but a few make it. The consumer market seems to be biased more than any other toward the winner-take-all effect.

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Source: Sapphire Ventures

In a study by Sapphire Ventures on the exits in the consumer vs. enterprise since 1995, the latter seems to have generated $825B compared to $582B in the tech consumer space.

An exit is a strategy where the venture capitalist or investor liquidate its funds in a previously invested startup, and it usually measures the ROI for the investor.

In short, from 1995-2016 there were 4,600 exits in enterprise tech and over 2,600 exits in consumer tech.

A little caveat: the numbers above are in no way to be interpreted as investment advice, instead this is just a strategic analysis of the business landscape.

This means that starting from a B2B, an enterprise business allows at least three advantages:

risk reduction
a more predictable growth path
easier financing as more investors can liquidate their position via an exit

One drawback, of course,e is the lack of scalability, unless you design a B2B2C business model.

How does a B2B2C relationship look like?

A B2B2C business model relies on a tight relationship between the B1 that wants to access consumers and B2, which instead has already access to the consumer market.

As it might not make sense for B1 to enter the consumer market, it will make sense to find the key players that can help it open it.

A partnership between B1 and B2 has – I argue – three main features:

it is not a white label: if it was a white label, final consumers would not recognize the product and brand over time
it has direct access to consumers’ data: many software as a service, and digital tools in general benefit from network effects. In short, the more data they have about the people using it the better those tools will get for each new user. If the business entering the consumer market via another business didn’t have access to their data, it wouldn’t be possible to benefit from network effects and scale up over time
it gains brand recognition: not only the B2B2C business will have access to consumers data, but its brand will be pretty visible to them. Thinking back to the Google deal with AOL where it got powered by Google searches, more and more people could recognize Google over time, at the point that it became a verb

What are the premises of a B2B2C relationship?

A B2B2C business starts with a few key partners, which are other businesses that can help it gain access to consumers. This relationship has to be highly beneficial to the business that has access to the consumer market.

It might look like a joint venture in practice, with a tight-knit that makes the incentives in favor of the business partner to distribute the product of the other business which doesn’t have access to consumers.

Indeed, I argue – this kind of partnership has to have a few key elements:

willingness to offer a wider portfolio of products or services: often customers might ask to B1 for products or services that are not in its portfolio. B1 can make its customers happy by having your product or service featured. Going back to the Google deal with AOL, at the time search was seen as a secondary service, yet it was a nice to have feature for consumers. Google worked 10x better than its competitors and it made sense to offer searches powered by Google through AOL
price convenience: another key element is the convenience in distributing the product or service of B1
an economic opportunity: a very important element is about economic opportunities created for the business which helps access the consumer market. Indeed, if the product or service of B1 makes B2 able to expand its offerings to consumers. That opportunity is too good to be given up and this makes B1 in a position of sealing that relationship. Also, if B2 is driven by an economic opportunity, the chances that it will distribute the service provided by B1 will be higher. Indeed, one of the greatest pitfalls of a B2B2C business might be the lack of push and distribution from its partners
not interested in entering directly that industry: another reason why B2 might want to use B1 service to its consumers it’s because it doesn’t have any interest in entering that industry. Going back to the AOL deal example, the company didn’t have any interest in entering the search industry
a very good deal: last and important ingredient is about offering a deal that is too good to refuse. This deal is a marketing expense on the side of B1 to acquire consumers market share. On the other hand, it is for B2 a great opportunity to grow the business with no costs and risks

B2B2C marketing done right!

In order for the B2B2C business model to work, you’ll need to have a sort of barbel marketing strategy.

On the one hand, you want to have a structured sales force able to perform account management for those businesses acting as intermediaries to the consumer market.

On the other hand, you need to invest resources in branding and marketing effort. This will allow your business to be recognized from consumers over time. In this way, consumers will act as a push that will make your entrance in the B2B space easier.

While this process might seem simple in theory, it is quite complex in practice. But in this article, we analyzed the few key ingredients, which should give you enough information to get started.

Resources for your business:

What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
How to Write a One-Page Business Plan
What Is Business Development? The Complete Guide To Business Development
What is SEO Hacking? How to Steal Featured Snippets with These SEO Hacks

Handpicked popular case studies from the site:

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Published on December 12, 2018 13:48

B2B Vs. B2C Business Models In Nutshell

B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.

While this might seem a trivial distinction instead that is a fundamental shift in how your business will look like. From internal processes to product development, sales, distribution, and marketing.

Depending on whether your business is a B2B or B2C might change the physiognomy of your business. Let’s then consider the primary differences in B2B vs. B2C by looking at three key aspects:

target customers
distribution strategy
complex vs. simple sales
product development

B2B vs. B2C: target customers

A first primary difference between B2B and B2C is based on who’s your target customer. In B2B you’ll sell directly to another business. While in B2C you’ll sell directly to consumers.

Keeping this simple distinction in mind is extremely important because you will also need to understand the different purchasing intents of each of those segments.

For instance, if you sell a software as a service, and you sell it to another business, the reasons why those businesses, which are your customers are buying from you, are entirely different from the reasons why consumers might buy from you.

This will also fundamentally change your distribution strategy and the way you think about your product.

B2B vs. B2C: distribution strategy

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In marketing vs. sales, I dissected how to identify what kind of marketing mix your organization will need. This distinction can help you also understand what type of distribution strategy is better suited for a B2B rather than a B2C.

Indeed, in the former case, your final customer will be more sophisticated and usually will also require a different kind of support, assistance, besides needing your service or product in bulk.

This will allow you to sell a product at higher prices and in some circumstances at higher margins. You might also need a complex salesforce able to tailor the offering to the specific business clients’ need.

This means you will thrive with a highly diversified and tailored product, that requires more support and assistance from dedicated accounts that follow the client.

Yet it is important not to confuse a simple and complex sales based on how high is the price of the final product. For that, another key element to understand B2B vs. B2C is the type of transaction involved.

B2B vs. B2C: complex vs. simple sales

Prada is an Italian luxury brand which sells a high priced product. As a luxury brand, it sells mostly directly to consumers via its retail stores. However, its products are quite expensive and not affordable for anyone.

This might make you think the sale is a complex sale, yet it’s not – I argue. Even though Prada spends massive resources (45.8% of its revenues) in selling costs compared to adverting and communication costs.

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Source: Prada 2017 Annual Report

My argument is that those selling costs incurred are more as a marketing expense. When a salesperson deals with a customer to sell her a high priced bag worth a few thousand dollars, that is still a sale to a consumer (even though a wealthy one).

In this scenario, Prada engages in simple high-end sales rather than complex sales. Instead, a company like Salesforce which primarily runs a SaaS business model that sells to other businesses.

Its primary selling strategy will be based on hiring skilled salespeople able to support business clients throughout the whole process.

For instance, in 2017 Salesforce spent over $3.9 billion in sales and marketing, a good chunk through a direct sales force, which is comprised of:

telephone sales personnel based in Salesforce regional hubs
and field sales personnel based in territories close to the customers

Sales representatives support the telephone sales and field sales personnel, to bring leads across a process of qualification and closing.

A complex sale might imply multiple touchpoints and a sales force able to identify what are the key contact points to close the deal are a critical resource for B2B business success.

B2B vs. B2C: product development

As B2C sales processes take a completely different turn. They also imply a different product development schedule. Indeed, in a B2C sale, you can pretty much sell the same standardized product or service to most of your customers.

Even though B2C has changed in the era of tech giants like the FAANG, there are still some fundamental truths that differentiate it from B2B product development.

Think for instance at how Netflix has changed the way people consume content by offering a personalized and customized list of content to consume. This also applies to Spotify in the music industry.

In this scenario, most of the resources for those organizations will be spent in two areas: technology and original content. Those two resources are meant to shape the way the service is provided.

With original content, those B2C companies are quite competitive. And with a significant investment in technologies, they can deliver a customized experience to millions of people across the world.

When it comes to product and service development Netflix ad Shopify are thinking in terms “what’s the content millions of consumers around the world would love?”

Welcome in the era of B2All

In an article entitled “The End of B2B and B2C Sales: Why It’s Now B2All” Colleen Francis points out:

Selling used to fall into one of two groups: B2B (business-to-business) and B2C (business-to-consumer). Each had its own set of rules. Selling to businesses took place in a fact-driven, risk-averse environment. Selling to consumers was a much more impulsive, emotionally driven exercise.

Today, B2C is having a major influence on B2B. And vice versa. It’s creating the democratization of the marketplace, or as I like to call it, B2All (business-to-all). Everyone is equal in this new way of selling, whether you’re a business or a customer.

The article opens up a few critical points. With the digitalization of the business world, it has become harder to keep a rigid distinction between B2B and B2C.

Therefore, an organization that can tap into a few key ingredients can both access businesses and consumers. This can happen especially if the organization focuses on three aspects:

use product development as a marketing tool: when your product has built-in features that allow it to leverage on virality and network effect, all of a sudden also a B2B can tap into consumers. We saw that with the freemium business model. Also, if you’ve focused on improving the product based on customers’ feedbacks that will make it successful both as a B2B than B2C. Indeed, your enterprise client might be the best suited to allow you to create an excellent product, quickly
make your brand irresistible: if consumers hear about your product and service over and over again, they will be the first promoters of it. Thus even if another business might be an intermediary between you and your final consumer, it will be the same consumer suggesting the business to provide your service
have a multichannel approach: in a digitalized world it becomes critical to be able to tap into several channels to connect with both businesses and consumers

Resources for your business:

Handpicked popular case studies from the site:

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Published on December 12, 2018 11:46

December 11, 2018

Business Model Vs Business Plan: When And How To Use Them

It easy to confuse a business model for a business plan. Yet those tools have specific functions, in some cases similar in most other cases completely different.

Indeed, while a business model is a framework to understand the way an organization works, a business plan is a document that helps to understand the future strategy of an organization and its expected performance in a three to five years time frame.

While in some cases a business plan can also serve the purpose of better understanding your own business and in some other cases the business model can be comprised within the business plan.

Indeed, as an investor, I want to know exactly how your business works or how you think it will work in the future. Keeping a distinction between those tools is critical.

In particular, I want to focus on the critical difference from two perspectives:

external (investors, stakeholders, and other parties)
internal (owners, top management, shareholders)

External: business plan or business model?

If you’re looking for a tool which aim is to show how attractive is your business, a business plan is the most suited for that. Indeed, if you want to attract investors and grow your business via external resources a detailed business plan is the most effective way to allow those investors to understand the several parts of your business.

Also, the business plan is a way to show where you see the business in the future. Indeed, one key ingredient of a business plan is a set of projections for three-five years.

While investors will also want to know what kind of business model you want to build (depending on whether or not your business model will be scalable will make or break the interests of investors).

The primary tool to show where your business will be in the future and to address the kind of resources needed to get there is the business plan. In short, for external subjects to know about your business and invest in it, the business plan is the best tool.

Internal: business plan or business model?

Among the tools to leverage on to understand your business, a business model is one of the most effective. Indeed, the business model is a framework (usually a one-page) that allows you to understand how your business works from several perspectives.

Depending on what kind of business you’re trying to build or where you want to steer your organization you might want to look at a few tools, such as:

Business Model Canvas
Blitzscaling Business Model Innovation Canvas
Value Proposition Canvas
Lean Startup Canvas

Each of those tools will help you to build a different kind of business. For instance, in a start-up phase, the business model canvas and the lean startup canvas are the most suited.

In a phase of scale-up, the lean startup is better suited than the business, model canvas. Instead, if you’re trying to blitzscale your business, the Blitzscaling Canvas will be your best companion.

In conclusion, if you’re looking for a way to better understand your business in the present or how to design a business model that can help you grow, the business model frameworks are the most suited, than the business plan.

In some cases, though a business plan might also work for that purpose, especially the one-page business plan.

Key takeaway and resources

A business plan is a tool that is most suited to shot external stakeholders where your business is headed and why they should finance or invest in its future.

The business model instead is a framework that helps you assess how your business works from several angles and the kind of actions you can take in the now.

Below you can find all the resources you need to build a one-page business plan and business model suited for any purpose:

How to Write a One-Page Business Plan

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Published on December 11, 2018 12:51

December 9, 2018

How To Scale Your Business With A Subscription Business Model

With the subscription business model, customers or members pay a set amount each week, month or year, and in return, they get a service in exchange.

Today the subscription business model has become the standard for many tech companies.

From Netflix to Spotify and Amazon Prime, the subscription business model allows companies to build a more stable turnover.

In fact, you can easily understand the power of the subscription business model compared to a traditional product or one-time service sale.

Let’s take two scenarios. In the first, you launch a product that sells at $200 to 100 people. In the end, you have $20,000.

Let’s take the case in which you sell a service for $100 to 100 people. In this case, you made $10,000.

Yet, the coming month or year, you’ll not start from zero but a predictable revenue. That is why many businesses are adopting the subscription business model.

Also, today the way of consuming things, in general, has changed. We’ll see in this article, why the subscription business model is taking over entire industries.

We’ll also evaluate if and when this is an effective business model. Many talks about the subscription business model as something new.

Yet it’s not. This is the way the traditional media industry has worked for centuries.

The subscription business model is as old as the newspaper

As reported via psprint.com:

At first, newspapers were only available to wealthy Americans, those who were literate and could afford to pay for subscriptions in advance. The subscriptions typically cost what a general laborer would make in an entire week of work, so most could not afford them.

That all changed in the 1830s, when advances in printing and papermaking made it possible to sell newspapers for one cent per copy.Increased literacy as well as technological advancementssuch as the telegraph – which made it possible to quickly share news over great distances – and the rotary press contributed to newspaper growth. The “Penny Press” made newspapers affordable to the entire public and spurred an explosion of newspaper publishing across the United States.

Thus the subscription business model isn’t new. However, what’s new about it is where it is getting applied.

For instance, since a few decades back it was hard to think of music as a service (see Spotify) or media that before was consumed at fixed time slots now it gets served at any time with streaming (see Netflix).

Is it the end of ownership?

As Tien Tzuo, chief executive officer and co-founder of Zuora pointed out:

The signs are everywhere — ownership is on the outs. From Spotify’s IPO to Amazon Prime hitting a hundred million memberships to Lyft’s new monthly pass, more and more people are opting for fluid services rather than static products. In fact, our physical world seems to be rapidly diminishing all around us. Companies aren’t buying buildings, they’re renting from WeWork or Servorp. Teenagers aren’t saving up to buy cheap cars, they’re catching rides with their phones. Even the malls are disappearing. The world is switching from capex to opex.

The reason for opting to usage rather than ownership can vary. Some of the major drivers of change are related to the fact that as technology allows us to track and connect people some services that wouldn’t’ have had since a few decades back now do.

Also, as on-demand services have become available, the total cost of ownership has become too burdening.

The total cost of ownership and why cars become expensive in the long run

When you purchase a car, its initial cost is just one part of the expense. Real costs associated with the car will be the whole set of maintenance costs and operating costs to keep the car working.

As pointed out by consumerreports.org “many brands have low ownership costs during year three. Keep in mind that some—including BMW and Mini—have free maintenance for the first few years, making them relatively affordable out of the gate. But costs can skyrocket when the warranty and free maintenance periods are over.”

If you own a car, you know what we’re talking about. When you purchase a car you might have coverage for a few years, but the more the car gets older, the more expenses you’ll have. At the point in which maintenance expenses skyrocket.

The same issue applies to home ownership. If we take an estimate from caniretireyet.com you can see many of the hidden costs of homeownership:

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In short, in the example above for a house valued at around $100k, we have several costs on a monthly basis which amount at $834.

Thus, if you could rent the same home for a lower price than renting might be the right choice.

One thing is important to point out. In many cases, ownership vs. renting is not about financial considerations alone. In many instances, emotional reasons apply.

At the same time companies like Airbnb are building their success more based on the home as a place to share and around experiences.

Online vs. physical? That might be the wrong dichotomy

As remarked on Zuora:

Retailers are mistakenly seeing the issue as e-commerce versus brick and mortar, but that’s not the problem,” says Tien Tzuo, chief executive of enterprise-software firm Zuora. “Online, in-store, it shouldn’t matter, it should all be blended: Consumers can shop wherever they want–it’s the retailers that build one-on-one relationship customers that will win.

Thus, it’s not about the channel it’s about the relationship. Tzuo remarked, “Amazon isn’t successful just because it’s an e-commerce site, but because it knows how to think like its customers.”

In other words, what makes Amazon strategy effective it isn’t the fact that it has online stores.

Instead, it uses data to make the user experience as personalized as possible. When you go to an Amazon store, the way books are organized isn’t random.

Why subscription model might actually be easier for consumers

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Source: neilpatel.com

What makes the subscription model so successful today it isn’t only about ownership vs. usage.

That is also about how things get consumed. In an ownership model, the interaction between the provider and the consumer is entirely different compared to a model where the provider needs to establish a relationship with the “member.”

Where a provider that sells a product won’t need to know its customers.

The subscription business model to be successful requires an ongoing relationship with continuous feedback from member to the service provider.

This is also the reason why companies like Spotify and Netflix spend billions on producing TV Series and Music.

In short, to avoid the members to churn from their accounts any time soon they need to keep providing great experiences on a regular basis.

Also, as companies like Netflix gain a better and better understanding of their members (through the data fed to its algorithms), waiting for the next big hit coming from the Hollywood Studios might be too risky.

Instead, with all that data, Netflix can produce series that its members will find more compelling and stick to their premium plan longer.

That is also why as of the end of 2017, Netflix reported over $17 billion in streaming content obligations “primarily due to multi-year commitments associated with the continued expansion of our exclusive and original programming.”

Building and maintaining a relationship it’s quite expensive. Let’s dive a bit into the numbers of the subscription economy.

The Subscription Economy

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Source: mckinsey.com

According to McKinsey report, top five subscription business models include companies like Amazon Subscribe & Save, Dollar Shave Club, Ipsy, Blu Apron, and Birchbox:

Amazon Subscribe & Save

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Dollar Shave Club

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Ipsy

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Blue Apron

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Birchbox

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As pointed out by McKinsey report:

Both men and women, buying for themselves or for others, use many of the leaders, but women are more likely to subscribe to beauty and apparel services, including Stitch Fix (apparel), AdoreMe (lingerie), and ShoeDazzle (shoes). Men, by contrast, are much more likely to gravitate to razors (Harry’s is the third-most-popular service for men but the seventh overall), video-gaming gear and collectibles (Loot Crate), and meal-kit or food-delivery services (Home Chef and Instacart’s subscription delivery option, in addition to Blue Apron and HelloFresh).

The interesting part of the Subscription Economy is that any kind of product can be transformed into an experience, thus a service that can become a subscription business model.

In fact, in some cases, the subscription business model depends upon creating a surprise box.

In other cases building up a subscription business model is really up to your creativity. Don’t believe me? See the next example.

Take a snack box mix it up and you get Gaze mini-snack subscription box

Graze is a mini-snack subscription box that sends a customized selection of treats weekly, bi-weekly, or monthly.

The process is simple:

Create your account and tell them what you like
Graze tailors your box and delivers it for free
Once receive your snacks you can rate them so that Graze will learn your preferences

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One thing you might notice. This isn’t a one-time relationship but a continuous process.

A feedback loop, between Graze and its members. After a few iterations Graze will know the tastes of the members so well that with no effort at all Graze will be able to deliver the best experience ever.

Three models of subscriptions

Although subscription business models can have unlimited applications. They can be categorized into three main groups.

Replenishment subscription

In the Replenishment subscription model, consumers get an automated purchase process of commodity items.

Think of razors or diapers that can be bought with one click.

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You might think that the Amazon Dash Button is about making a transaction frictionless (in fact it is).

Yet this is only part of the story. Dash Buttons can be used by the “exclusive” Amazon Prime Members.

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Thus, this is just one of the many strategies Amazon is employing to get more subscribers.

Also, all the data provided via those buttons will be a precious asset for Amazon in the long run!

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You get toilet paper effortlessly. Yet Amazon receives valuable data about you, anywhere at any time.

Curation subscription

Just like we saw in the Graze business model above. That is based on “curation.”

Graze does a great job in personalizing the experience from time to time, until it gets better over time:

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For a curation subscription to be sustainable, it has to surprise and delight with highly personalized experiences.

Access subscription

The Amazon Dash Button above can also be included in the access subscription.

Here you pay a monthly fee to obtain lower prices or members-only perks.

Getting the dash button is itself a “perk” exclusively granted to Amazon Prime customers.

Another example might be Apple Music. Rather than buying a single song you can get a membership and listen to any:

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Other subscription business model examples

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Source: medium.com/the-graph/subscription-economy
Netflix

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The Netflix business model is a powerful example of a subscription-based model. Indeed, Netflix has used its monthly fee to boost its recurring revenues. The subscription revenue model is also what allows Netflix to make substantial investments in content compared to traditional mass media, where each deal needs to be secured again:

[image error]Netflix is the subscription service that is changing the way we consume traditional media. From series like Stranger Things, Narcos and Black Mirror Netflix have been able to become a titan of the media industry, with more than a hundred and fifty thousand members across the globe.

Spotify

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Spotify is another powerful example of a subscription business model. The company has been able to create a massive base of users worldwide in a relatively short period. Spotify benefits from classic two-sided network effects.

When more users join the platform, the platform itself becomes more valuable for artists that decide to launch their music over the platform. And the more artists decide to feature their content exclusively on Spotify, the more the platform becomes valuable to more subscribers.

[image error]Spotify is a two-sided marketplace where artists and music fans encounter on a single platform. Founded in 2008 with the belief that music should be universally accessible with a seamless experience based on streaming audio and video. It generated over €4 billion in 2017, of which almost 90% based on premium memberships and 10% based on a free service which is ad-supported. The company recorded an operating loss of €378 million in 2017.

Slack

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Amazon Prime

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Those companies financial success depends upon their ability to keep their members to churn.

Beware of members churn

Getting a fixed amount of money in the bank account each month is the dream of any company.

Yet, having members stick might be the hardest task. Why do members churn? Hubspot mentions five main reasons:

Lack of (or Zero) Engagement
Poor Product-Market Fit
Product Bugginess
Difficult User Experience
Lack of Proactive Support

To make sure your subscription business model is sustainable in the long run you want to keep a careful eye on some key metrics.

The key metrics to measure whether your subscription business is successful over time

Running a successful subscription business model is about balancing things up.

Just like having your revenues cover your expenses, in a subscription business model your customer acquisition costs have to be lower compared to the lifetime value for your customers.

Thus, the following metrics are critical:

Subscriber acquisition cost

The subscriber acquisition cost comprises aggregate costs, such as marketing, sales commissions, installation for acquiring one subscriber.

Monthly recurring revenue (MRR)

This is the magic number many subscription-based startups need to look at to grow their business in the long run. This is the amount of fixed revenue retained every month.

This metric is pretty simple to compute: multiply net users per month by the subscription fee. A growing MRR is critical for the healthy growth of your subscription business model.

Churn rate

This is computed by multiplying net users left per month by the subscription fee. Keeping the churn rate in check is critical.

Monthly recurring costs (MRC)

The monthly recurring costs are the cost incurred to earn the recurring monthly revenue.

For instance, if you offer a software as a service, you will have server costs and support costs for those accounts.

They do bring you money each month, but also costs.

Lifetime value (LTV)

The Lifetime Value is the total revenue earned per subscriber.

Monthly active users (MAU)

Another key metric, especially used by tech companies which survival depends upon the continuous interactions of its users with the platform is the monthly active users. Spotify is an example:

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Does a freemium work with the subscription business model?

The freemium business model has become omniscient in the tech startup world. Thus, many associate it with the subscription business model.

In reality, the freemium makes sense when the cost structure allows it. I suggest you dive into this article:

What Is a Freemium? The Freemium Business Model Explained

What subscription models can you apply to your business?

According to The Automatic Customer, there are seven models you can apply to your business.

Membership website model
All-you-can-eat content model
Private club model
Front-of-the-line model
Consumables model
Surprise box model
Simplifier model
Network model
Peace-of-mind model

Key takeaway

The subscription business model has become by itself an economy. In fact, if you look more carefully and dive deeper you’ll find examples of subscription business models anywhere.

The subscription business model is the financial dream for many companies because you can create a constant stream of revenues each month from your business.

However, maintaining that revenue stream is also quite costly. We saw how companies like Netflix and Spotify spend billions in content just to have their members stick.

A subscription business model requires community building, continuous engagement and a feedback loop to keep personalizing the experience of the members.

How To Use A Freemium Business Model To Scale Up Your Business

The freemium business model is based on a service that the majority of users get for free, while a small percentage of users convert into paying customers. Those paying customers become the basis for the long-term financial success of the company.

While the free users keep guaranteeing a viral growth, more effective branding and a fluid sales funnel that – in theory – allows the company to scale up without a complex salesforce.

Freemium business model origin story

On March 2006, venture capitalist Fred Wilson wrote an article entitled “My Favorite Business Model” which said:

Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.

He mentioned examples of this successful business model like Skype, Flickr, and a few others.

According to Fred Wilson, the advantages of a Freemium business model were multiples, but he made clear that it had to be as frictionless as possible:

A customer is only a click away and if you can convert them without forcing them into a price/value decision you can build a customer base fairly rapidly and efficiently. It is important that you require as little as possible in the initial customer acquisition process. Asking for a credit card even though you won’t charge anything to it is not a good idea. Even forced registration is a bad idea. You’ll want to do some of this sort of thing once you’ve acquired the customer but not in the initial interaction.

The main aim was to “eliminate all barriers to the initial customer acquisition.” He didn’t have yet a name for this kind of revenue model.

The Freemium business model started with a comment

At the end of his article, Fred Wilson had clear in mind what the Freemium business model looked like. However, he didn’t have a name for it.

That is why he invited people to comment and to come up with a proper name for this business model. A commenter, Jarid Lukin suggested the name Freemium model.

Thus, a service and product wholly free and frictionless, where most users don’t pay, and a small base of users pay for a product that has premium features.

Over the years Fred Wilson kept emphasizing the importance of free. Today the freemium business model has taken over also the gaming industry. But it has also become the most debated business model in the software industry.

On the power of free

Building a free product and make it available to anyone and then expect to make money isn’t the right strategy.

Instead, the “free” within the freemium, if appropriately used, can be a lever for quick success.

As Fred Wilson pointed out in October 2008 “freemium is far from dead, in fact, it may be the business model de rigueur.”

What did he mean? He recounted in a later article:

Facebook is a perfect example of freeconomics at work. A woman who works for a major media company was in my office recently. She quoted her CEO as saying “why doesn’t Facebook just charge a monthly subscription fee, they’d be making money hand over fist?”. Well I believe that if Facebook did that, they’d be vulnerable to other networks offering a free service. And certainly not every one of those 200mm users are going to cough up a monthly subscription. But by offering a friction free service, they have built a powerful and growing network that they are now starting to monetize in various ways and that they will monetize even further in additional ways. And they are super hard to compete with because they are free.

Freemium isn’t new

As pointed out on broadstuff.com:

The new Free! plan is in fact Freemium – where a small number of people subsidise the majority, who get it for free. But “Freemium” models have existed since antiquity, they work in some situations, don’t work in others. This is also likely to be true for Digital goods. The issue lies in the price sensitivity

This point is critical, as freemium is not a size fits all monetization strategy (yes the “free” in it is meant to make money).

In fact, that also depends on the cost structure of the company offering the service. Also, freemium seems to work well in conjunction with advertising spending.

Think of the most popular services and apps we use today, like Facebook and Google. Those are freemium services.

In fact, as millions of users are accessing them for free and with the least friction possible. Thousands of businesses are paying and financing those services through advertising.

This is also the power of the hidden revenue business model. In other cases, free needs to be offset with different monetization strategy, just like the razor and blade monetizations strategy. Where you get something for free, but then a complementary service associated is costly.

Key metrics for the freemium

To make the freemium business model work it is critical to look closely at a few key metrics. Some of those metrics are matured from the gaming industry but are also used by traditional freemium business models:

The average cost of serving a free user
The rates at which free users convert to premium (paying) customers
DAU (Daily Active Users) is used to show the number of people who engage with the product, service on a daily basis. For other platforms, other metrics like monthly active users might be more appropriate
ARPU: Average Revenue Per User
ARPDAU: Average Revenue Per Daily Active Use
ARPPU: Average Revenue Per Paying User
LTV: Lifetime Value
Daily Sessions: The number of play sessions a user engages each day.
CPA: Cost Per Acquisition or Cost

Freemium is not a size fits all business model

In 2015 a SaaS company, Baremetrics, started to experiment with the Freemium, business model. In short, they created a version of the product the was entirely free.

That product version allowed users to switch to the premium if they wanted to add specific features or capabilities.

As the story went, the conversion rates on the freemium business model turned out to be also quite good compared to the traditional subscription-based business model.

In fact, in 11 weeks over a thousand accounts were created. The math on those new accounts wasn’t exciting, but it worked. As explained on Baremetrics blog:

So, of the 1,000 accounts, 461 were actually eligible to even think about becoming a paying customer.

Of the 461 eligible paying customers, 53 actually upgraded.

53 as a % of 461 = 11.5%

Considering a 3-5% conversion rates on B2B the rates from the freemium seemed to be promising, until…
Beware of the cost structure

As pointed out by Baremetrics on the experiment they run with the freemium:

Quickly, we started coming up against a lot of performance and database issues. Within a few weeks our “free” customers were outnumbering our “paying” customers and the amount of data were both storing and processing had doubled.

This, in turn, created an adverse effect on the revenues:

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Source: baremetrics.com
In short, the freemium resulted in higher server costs and the loss of active paying customers, rather than an increase in revenues.
Free isn’t free after all

With the advent of free services like Google, Facebook and many other tech giants that have become part of our daily routine the assumption that everything needs to be free has become pervasive.

In some cases, free isn’t free after all — the reason a company opts for the freemium it isn’t because it wants to benefit the public.

But rather because it expects higher revenue growth and scalability from it. Thus a free service has to generate higher revenues to make sense. That’s why it has to come with built-in “psychological traps” that make users become paying customers.

That doesn’t mean that other subscription-based products or services are “less evil.” But the nature of free is meant to create addiction and leverage on the lack of breaks.

For instance, the Facebook newsfeed is thought with the logic of a slot machine, where the more you get, the more you want. For freemium models to work, they need to bring in a continuous flow of users that keep using them indefinitely.

Also paid services leverage on the same psychological traps. Those paid services have breaks based on the fact that those services aren’t free. Thus, the business can keep growing even though users aren’t necessarily trapped into it.

Is your one big enough to pay the bills?

On September 2009 MailChimp went freemium. Its user base went in one year to 450,000 users. Ever since MailChimp has grown into a successful company.

As pointed out one year after the experimentation with the freemium business model, a critical question to ask is “whether or not your “one” is big enough to pay your bills yet.”

MailChimp didn’t start as a freemium. When they launched the company back in 2001, they didn’t even have a free trial.

They didn’t have an idea of what the freemium was. They only started to consider that freemium business model as a viable option when they realized that that paying customer was able to keep them going with other nine unpaying customers.

As remarked by MailChimp:

We’d never consider freemium until our “1” was big enough. Enough to pay for 70 employees, their health benefits, stash some cash for the future, etc.

Are you using the freemium just to get VC money?

In the Silicon Valley archetype “users” have become the most important asset a company seems to need to be eligible to get billion dollars of capital.

However, this system – I argue – is broken because it draws on the myth that once you have users then monetizing them is easy.

However, for anyone that has ever tried to grow a startup you know that monetization is the hardest part.

It might seem a trivial concept for small business owners that to build a sustainable business you need to balance things up so that your revenues will exceed your expenses.

The so-called “profit” seems to be a thing of the past. Thus, they use a large users base to get VC money to keep growing revenues without focusing on profits.

Cases like ConvertKit are a great example of why generating profits is critical for your business. Many counterargue by mentioning cases like Google and Facebook.

Yet they forget that Google and Facebook were extremely profitable not long after they launched their services. At the time of this writing, companies like Snapchat are struggling just because they never managed to become profitable.

A final remark on how to do the Freemium right

I want to close this article with the extract from MailChimp Freemium business model. The reason being, MailChimp has been one of the most effective companies in applying the freemium, and this is the greatest lesson learned:

I think there are too many startups out there who are interested in going freemium because that big “10” number is so attractive. This is dangerous when they don’t even have the “1” yet. How will they pay their bills while they figure out how to “monetize?” Answer: they will need to borrow that money. Does your VC have the patience for the long term, while you try to figure out how to “monetize” and build up that measely “1” number? Answer: No — no they don’t. Build up that “1” before you chase the “10.” After you’ve got your “1” all set, use VCs to help you chase after that “10” (if you must). That’s my personal opinion. Disclaimer: I’m wrong about 99% of the time.

Freemium business model: Dropbox case study
[image error]Dropbox generated over 90% of its revenue via its self-serve channels to convert users in paying customers through in-product prompts and notifications, time-limited free trials of paid subscription plans, email campaigns, and lifecycle marketing. Dropbox generated over $1.1 billion revenue in 2017, with an average revenue per paying user of $111, $305 million in free cash flow and 11 million paying users

Dropbox is a classic example of a startup that managed to grow at a massive scale thanks to its freemium model:

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The free basic account has a storage of 2GB. The free plan also allowed Dropbox to benefit from massive network effects. The more people joined in to get the free storage, the more people they invited. To speed up the organic growth of its user base, Dropbox also built incentives that allowed users to get more free space if they invited more users to join!

Why the freemium is your most powerful marketing tool

The primary advantage of a freemium business model is the fact it can be used as a powerful marketing tool. Indeed, if you offer a great product or service for free, the chances are that you won’t need much salesforce to bring you to more paying customers.

Instead, you’ll have to experiment on conversion marketing tactics to allow free members to become paying users quickly and at a sustainable rate. This is a critical difference between marketing vs. sales and why your free service will become your best companion to scale up growth!

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Key takeaways

Today the web has used us to think that everything needs to be free. This comes from the belief that the cost of products and services have gone down to almost zero. That might be true up to a certain extent.

In fact, for many software companies offering a free service means having unbearing operating expenses related to server costs. Thus, a free service that doesn’t convert enough free users into paying customers won’t succeed in the long run.

The Baremetrics case has shown it well. There is also another important aspect. For many companies, the freemium has become just a way to get money from VC. MailChimp case study has shown how to do the freemium right.

Until you don’t have the “one” paying customer big enough to pay your bills the freemium might not be the right strategy for you. Unless of course, you have VC money to burn!

Handpicked connected resources:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
How Does PayPal Make Money? The PayPal Mafia Business Model Explained
How Does WhatsApp Make Money? WhatsApp Business Model Explained
How Does Google Make Money? It’s Not Just Advertising!
How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained
Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
The Google of China: Baidu Business Model In A Nutshell
Accenture Business Model In A Nutshell
Salesforce: The Multi-Billion Dollar Subscription-Based CRM
How Does Twitter Make Money? Twitter Business Model In A Nutshell
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
How Does Netflix Make Money? Netflix Business Model Explained

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Published on December 09, 2018 14:33

Proven Business Model Patterns To Scale Up Your Business

April 23rd, 2005, Jawed Karim a German-born young fellow, who had moved to Minnesota with his family thirteen years before, uploaded a video entitled “Me at the zoo:”

Nothing remarkable so far, this wasn’t the first ever video on a video-sharing platform, that started to grow at an exponential rate. By July that platform went from zero to over seven million unique visitors.

Only to become among the most popular sites on earth, which got acquired by another tech giant, Google. This is the story of YouTube and how it grew to a multi-billion dollar business.

The reason I started from YouTube story is that – I argue – the most popular video-sharing platform on earth has all the essential ingredients of business model patterns that were built-in to scale up.

We’ll take into account three primary proven business model patterns that helped many companies to scale up and thrive.

If you’re looking for ways to grow your business exponentially, those might be for you. However, keep in mind that a business model pattern is just one of the ingredient for a successful business model.

Yet these are a good starting point!

Freemium pattern

A freemium patter is primarily a service, given for free either entirely (in this case the service might be ad-supported) or a basic version of it. In the latter case, if you want to have more advanced or unlimited features of the service, you’ll have to pay a fee.

Entire industries have been built on the premise of freemium business models. One element that makes this pattern powerful is its virality element. In short, if you have a great product, that solves an actual need for a set of users. Those users will be able to find it and use it with no friction.

Also, those same users will also spread the word on a massive scale. This element of virality and enhanced word of mouth makes possible to companies running on a freemium pattern to grow exponentially, at least the users’ adoption.

A few successful examples of a company that scaled up thanks to its freemium pattern that triggered virality growth are Spotify, MailChimp, and DropBox.

A marketplace is another business model pattern that can help you build a business at scale. While it isn’t easy to create a marketplace, being successful at it means being able to build a multi-million if not billion organizations.

That’s because the marketplace would benefit from network effects, where the more users joining would make the overall platform more valuable for those joining afterward.

Marketplaces like Airbnb have become extremely popular. One key economic advantage of the marketplace is the fact it can extract financial value from each interaction happening on the platform.

[image error]As a peer to peer network, Airbnb allows individuals to rent from private owners for a fee. Airbnb charges guests a service fee between 5% and 15% of the reservation subtotal; While the commission from hosts is generally 3%. Airbnb also charges hosts who offer experiences a 20% service fee on the total price.
Two-sided platform pattern

If I ask you, what’s the most valuable platform for connecting with professionals? Chances are you’ll think right away about LinkedIn, the professional social network that combines both people looking for jobs and companies looking for qualified candidates.

The key element of building a successful two-sided platform is to start focusing on one of the sides of the equation.

For instance, when LinkedIn started, it soon realized how the profile page had become for many a business card to show to their employees. When that became viral, the company began to enjoy from network effects which made the platform also valuable to employers.

Indeed, in a world made of bits where data is the most valuable asset, having millions of people curating their professional page was a massive enhancer for LinkedIn growth.

As more people joined in, the platform also became valuable for companies willing to invest money in it to find qualified candidates.

On the other side of the platform, professionals were looking for ways to connect more effectively with employers, with advanced features. LinkedIn is a compelling case of a freemium pattern, a two-sided platform that has become valuable for millions of people worldwide!

Key takeaway

Scaling up an organization is among the hardest endeavor, in a world governed by a winners-take it all effect. In this scenario, being able to prepackage a business model made of patterns that proved successful is a good starting point.

Above we saw three proven patterns (freemium, marketplace and two-sided platform) that have proved to work over and over again.

If you’re starting a digital business, you might want to look at the options above!

Tools and resources for your business:

What is SEO Hacking? How to Steal Featured Snippets with These SEO Hacks

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Published on December 09, 2018 13:20

Vertical Integration And How It Works In The Bits World [Google Case Study]

In early 2018, Sundar Pichai, Google‘s CEO, highlighted how AI for humanity is more important and profound than what fire was. To keep using an analogy, the real fuel that keeps the AI fire going is data. Indeed when we go from atoms to bits, the strategic thinking behind an organization changes.

For instance, in for a traditional company, one of the long-term success of the organization is based on keeping control of its processes and being able to control the whole supply chain.

While this strategy is expensive, it is also what drives sustainable growth. For instance, traditional companies operating in “slower” sectors (think of Luxottica in the eyewear industry) that managed to gain control over the supply chain also have become the world leader.

In short, the idea is that the closer you get to the consumer (in case you’re a manufacturer) or the closer you get to produce a good or service (if you’re a retailer) the more control you have over the whole supply chain.

This, in turn, will allow you to dominate your industry over time and keep tight control over processes, quality, and operations:

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While this is intuitive in the atoms world. It gets a bit trickier in the bits world. For the sake of understanding how vertical integration and supply chain work in the bits world we’ll look at how Google is going up – or down (depending from where you look) the supply chain of data.

Atoms vs. bits businesses

As the web has become so ingrained in the way we interact with the world and with each other, it is easy to forget between companies that operate purely in the atom world, compared to that opearting in the bits world.

Just to keep a clear distinction a business based on bits is mostly a software business or any organization that makes money primarily by selling digital goods or services, compared to a traditional atoms business.

It is important to remark that bits businesses are not entirely so, as they rely on massive physical infrastructure (think of Google data centers) which allow the company to operate.

However, a bits company mission is to provide goods or services, often at scale. Where in the atoms world, a key ingredient for an organization success is made of raw materials. In the bits world, that raw material is even more critical.

That is the crucial ingredient for their success, and the raw material in the bits world is data.

Google and the supply chain of data

Before understanding vertical integration in the bits world, made primarily of data it is critical to understand how it flows to realize how tech companies are trying to gain control of it.

Often the supply chain of data needs to rely on the physical supply chain and vice versa.

Indeed, when you’re able to get your hardware in the hands of users that is the best it can happen if you run a company which makes money based on data it collects from its users.
Reason being that data is first quality data, and it carries a deep connection to the person using the device. That’s why when Google moves toward hardware it isn’t just like Google is trying to dominate the smartphone market. That move needs to be understood in terms of a supply chain of data.
A manufacturer in the real world starts to integrate its supply chain by getting control over the wholesale side and retail side until it can finally access its consumers.

On the other hand, the interesting part about data is that a consumer is also the producer of data.
Where the data collector goes up in the chain by manufacturing the device sold to consumers, those devices also become the producer of raw data. That raw data gets assembled in multiple ways and sold to another side of the chain, which is the business willing to spend money on advertising.
Related: Google’s Hardware Plan: Make No Mistake That Is Primarily About Data

Google business of collecting data
At its core, Google is a data collecting organization. Indeed, in search, Google is the best collector of users’ data to capture commercial intent sold as advertising.
In recent research made by Professor Douglas C. Schmidt, Professor of Computer Science at Vanderbilt University, and his team it is interesting to see how Google collects way more data in the ecosystem created by it, such as the devices using Android. Just as a quick reference from the research, one of the key findings highlighted:

Google learns a great deal about a user’s personal interests during even a single day of typical internet usage. In an example “day in the life” scenario, where a real user with a new Google account and an Android phone (with new SIM card) goes through her daily routine, Google collected data at numerous activity touchpoints, such as user location, routes taken, items purchased, and music listened to. Surprisingly, Google collected or inferred over two-thirds of the information through passive means. At the end of the day, Google identified user interests with remarkable accuracy.

This ability to identify users’ interests with “remarkable accuracy” comes from Google investments over the years in creating the proper infrastructure that could support its supply chain of data.

As voice search is approaching Google needs to be on top of the data game, and that explains the next run to dominate the voice assistants devices market.

From the search page to the voice assistant

When you type something on Google’s search box, you’re making its search engine better and better. That is the power of network effects. In short, the more users keep using Google, the better its search engine can capture users’ commercial intent.

However, even though Google has a high gross margin, people still have to keep going back to its search pages. As I pointed out in Google TAC strategy, the company managed to keep having billion of users each day going back to it thanks to a massive distribution network, both driven by distribution agreements and its networks (like AdWords and AdSense).

Yet that data is precious it is still coming from third parties. Therefore, Google is investing massive resources to make sure that data can get acquired via its devices so that it can finally have control of the overall chain.

As I pointed out in Google’s hardware plans in January 2018, Google completed the agreement with HTC with the acquisition of the team of engineers and a non-exclusive license of intellectual property from HTC for $1.1 billion in cash.

That move is toward creating a vertically integrated supply chain of data!

Tools and resources for your business:

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Published on December 09, 2018 11:36

December 7, 2018

Blitzscaling Business Model Innovation Canvas In A Nutshell

There isn’t a single way to define a business model, and any tool that helps identify it from a different perspective – I argue – is useful for an entrepreneur building a different kind of business.

In this article, I’ll focus on the Blitzscaling business model canvas. This is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.

Among the three key ingredients to Blitzscaling, there is business model innovation (actually the most critical element).

According to this framework, business model innovation can be achieved based on a few vital components made of four growth factors and two growth limiters.

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A glance at the four key growth factors

The four growth factors are:

market size
distribution
high gross margins
network effects

Market size

How large is the market you’re targeting when Blitzscaling? Is it really reachable?

A big market is a critical ingredient for a Blitzscaling business model. This market has to be large enough and reachable. A large market has to be taken into account based on the context. Indeed, launching and scaling a startup in Silicon Valley is not the same as doing it in Italy or Spain.

In general, as pointed out in the book (Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies) venture capitalists are usually looking for investments that are returning many times over and can achieve a venture scale. This often implies to target a market which often is as large as a billion dollar in annual sales.

Distribution

Are there existing networks you can leverage on? What viral loops can you create to spread your product/service quickly and at scale?

Often, when you are the incumbent in a new space those who already have an established brand and network, are probably your best option to start.

This concept known in growth hacking as other people’s network is the perfect place to start. One classic example is how Airbnb leveraged on Craiglist to gain initial traction.

Another critical ingredient is about virality and how you can instill it in your product. Usually, virality is achieved via a freemium pattern where a product or part of it are given for free to allow a cheaper and quicker distribution.

High gross margins

When you grow your revenues, do you generate larger amounts of cash available to finance growth?

A gross margin or gross profit is merely the revenues left after subtracting the cost of sales (or the costs you have to sustain to generate the sale).

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This metric is fundamental when looking at tech companies as it determines their cost structure and whether they can be financially viable in the long run.

A high gross margin implies that the company will have enough resources to invest even further in the scale of the business. If you look at the Google cost structure and Google business model, you realize how it is engineered to have high gross margins.

Facebook is even a better example with higher gross margins than Google; given the Facebook low cost of traffic acquisition, this social network is a money-making machine. That money is used to keep growing at a fast pace.

Network effects

Is each additional user joining in bringing a positive effect to the whole platform?

A critical element of an innovative business model built on technological products and services is based on the network effect. This principle is simple yet powerful.

For each user that joins and uses a product or service, the value of the same product or service will improve for the other users on the platform.

Growth limiters

The two growth limiters are:

lack of product/market fit
operational scalability

Lack of product/market fit

Is the market satisfied with your product/service? If not what is that it’s missing?

Product/market fit is a well-known concept by anyone who has a minimum of experience in the startup world, and yet that is often misunderstood.

For instance, in general, the product/market fit aims at coming up with a minimum viable product (MVP) that solves a need for a group of people. That MVP will allow an organization to gather more and more feedback about the product and improve it over time.

Another school of thought wants the product/market fit more focus on achieving an EVP (exceptional viable product). In short, according to this way of thinking of product/market fit, you have achieved that once you have an exceptional product that leaves your audience extremely happy.

While this is a great alternative to traditional MVP, probably not the best suited for the Blitzscaling business model canvas, in the Blitzscaling business model canvas, a “good enough” product might do the job. Indeed, that product, together with distribution will allow to scale up.

Operational scalability

Are your operations sustainable at meeting the demand for your product/service? Are you revenues growing faster than your expenses?

When you keep growing at a fast pace, often profitability becomes hard to manage. Indeed, focusing too much attention on growth and revenue, but not having enough margins to cover up for infrastructural cost and human resources might be a big problem and cause of failure for the business.

That is why a business model that doesn’t make sense from the operational standpoint is doomed to collapse overtime!

Key takeaway

There isn’t a single way to define what a business model is. For the sake of this discussion, we took into account the Blitzscaling business model canvas.

In short, this is a one-page framework I put together, inspired by the book Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies which gives an alternative way to define a business model.

More precisely that is – in my own words – a process of massive growth under uncertainty and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.

This business model can be engineered and designed or figured out along the way.

Ideally designing it would be best as it allows to integrate within it four key growth factors (market size, distribution, high gross margins, and network effects) and avoid the two key growth limiters (lack of product/market fit and lack of operational scalability).

Tools and resources for your business:

What is SEO Hacking? How to Steal Featured Snippets with These SEO Hacks

Learn how tech companies business models work and the lessons you can learn to scale up your own company:

How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
The Trillion Dollar Company: Apple Business Model In A Nutshell
How Does Netflix Make Money? Netflix Business Model Explained
How Does Google Make Money? It’s Not Just Advertising!

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Published on December 07, 2018 18:05