New Revenue Model for Internet businesses

In past 2 decades, Internet has changed the way companies have traditionally generated revenue. New businesses were spawned, new business models were formed and new industries were born.

Initially, corporations started selling goods online, bypassing the middlemen and reaching out to the consumers directly. Example: Amazon. This was the early wave of Internet based e-commerce.

In next phase, web advertising became the mantra for web portals. Example: Hotmail, AOL, and Yahoo. In past 15 years, Internet expanded at a very fast pace and therefore Search became the centerpiece of Advertising. And therefore Targeted Advertising became the norm. Example: Google.

In the past 7 years, Internet evolved into a more social platform. It became permeated into the daily fabric of our lives. Facebook and Twitter are experimenting into the recommendations based revenue models.

Internet became omnipresent and therefore, people started using it for entertainment. This led to the growth of Virtual Goods model. Example: Zynga. During the last decade, developing and maintaining internet products/services became more efficient and therefore Freemium and SAAS models evolved. Example: Salesforce

Since 2008, Daily Deals models evolved that connected the Social Graph with Local Commerce. Example: Groupon & LivingSocial.

Moving forward, few new revenue models are coming up. In the absence of a defined name, I would call them online-offline revenue models.

Online-Offline model:

As the name explains, this is the association of Online platforms with Offline (Local commerce) businesses. Online platforms are very scalable and therefore have lower marginal acquisition costs compared to their Offline counterparts. On the other hand, high fixed cost for Offline businesses makes them look out for alternate options to acquire new customers. This is like a marriage made-in-heaven.

In this process, the internet company generates revenue from Local businesses by acquiring customers for them. Groupon could fall into the same category but that model has its own caveats. Same could be said for Foursquare. Some companies are doing it quite effectively: Example: Redfin. Since this revenue model depends on the Offline businesses, we can expect to see specialized verticals. Example: Redfin is in the Real Estate business. Kiip is in the retail business.

There is a scope for creating more online-offline revenue models in other verticals. For example: Healthcare, or Retail. The premise of the model remains the same: Internet company acquires customers (with low acquisition cost) and generates revenue by driving them to Local commerce (offline).

Simply acquiring customers on Internet and driving them to Local businesses is not enough because switching cost for consumers is low and the barriers to entry (for new entrants) is also low (Groupon problem).  The challenge would be to create a model that can increase the switching cost as well as increase the barriers to entry for potential competitors.

Soul of a Social Network

Unlike other hosting services where we can host our photos, music, data, or other things, hosting friends list ( on a social networks) is a bit different. Photos, Music, and Data are “objects”.  Friends are not objects. They are real people with emotions and thoughts. They can identify good from bad and have feelings about certain things or certain way of doing things. This makes hosting of friend list different than hosting any other “possessions”.

A social network not only has to provide competing services but also has to appear very genuine in its interaction with its users. It should give a perception of being an active “listener” and not causing “harm” to the social fabric. More importantly, it should not appear to be piling on the private information of people and profit from it. People, in general, understand that the Social Networking company has to make money to provide the service to them. But if they feel that the company is just bent upon extracting money off of their personal profiles, there would be a sense of disenchantment among the users.

Recent euphoria about G+ validates this theory. G+ seems to be more open than Facebook and for a large portion of users, it appears to be closer-to-heart than Facebook. It violates privacy almost as equally as Facebook does. But still people are happy to give it a pass. Difference being that G+ appears to be listening to what people are talking about. Hordes of Google Product managers + Engineers are openly soliciting feedback in public stream. I myself had a hangout experience with G+ product Managers where I shared my opinions and gave some inputs. Whether or not these suggestions are accepted is another thing…but atleast Google plus appears to be making an effort to be closer to people’s hearts. And thats what counts when you want to host their friends list and be a provider of their social fabric.

Soft Power of Google

Last few weeks were very hectic in the Social Media world. Google came out with Google plus, and then the tech bloggers started evaluating it. Overall theme: Google+ beats Facebook in the Look & Feel as well as in the Features, but it will be a steep climb for Google to fetch users from Facebook.

I would put things in a different perspective. Its not that Google will win this contest…its that Facebook might (or will) loose it.  Advanced usability features of Google plus will make a difference, but the biggest difference will be made by Facebook’s shortcomings.

Soft Power: Google vs Facebook

Google wields a huge soft-power over its bigger Social Networking rival. Analyzing the sentiments in blogs and comments, it is quite evident that there is a general sense of “enjoyment” or “happiness” in the tech community. It appears that people just want someone to pose a challenge to Facebook’s increasing dominance.

Maybe it is Facebook’s blatant breach of Privacy, its apathy towards developers, its philosophy that users revolt but eventually concede to the changes. Or maybe its Facebook’s open PR attempt to malign Google. Maybe people are just awestruck or a little bit envious by the meteoric rise of Facebook. I can not pin-point exactly what it is that people do not like about Facebook but it is still (and will remain for a long time) the biggest Social Network in the world.

Maybe people did not have a choice..and now that they feel that there might be an alternative to Facebook, they feel overjoyed. Its kindof like the Arab spring where people are joyous that they have an option to get an alternative rather than listen to a dictatorial regime.

Its not that Google is everything good and Facebook is everything evil. Google also breaches on People’s privacy quite openly. But most people do not feel “happy” or “over-joyous” over the success of bing (search engine from Microsoft).

So why are people so happy about Google Plus and not about bing? Difference is Google’s soft-power that has a comforting and soothing effect on people. Something that Facebook and Microsoft do not have in their DNA.

Google Plus

Reading about Google+ a lot. It seems that it solves some of the basic problems that I discussed in my last blog post about Twitter.

Interesting to see how G+ will do with the masses. Techies live in a different world…so I am keeping my fingers crossed for the mass release.

Lets make Twitter better

Twitter is one of the fastest way to get news and latest updates. It was launched 3-4 years ago and has gained a big traction since then. However, the service can be improved to give a better end-user experience:

Current Issues :

Although Twitter is widely used, it has some major inherent issues:

1. Managing tweets become very difficult. Even if a user follows 20-30 users, it becomes almost difficult to keep track of the information. This is partly because of over-information.

2. As a user, if I tweet something, my tweet goes to everyone who is following me. Usually I tweet about technology, Indian politics, World Economy, and Normal fun things. There is no way for my followers to get just World Economy tweets from me and not get Normal Fun stuff. Yes, they can search about some topic, but there is no inherent stream of topics (from me and others) that they would like to get and keep track of.

3. Duplication is a major problem on Twitter. Same story gets tweeted again and again by members and it appears in Search and in followed stream again and again. This is one more reason why there is so much of noise on Twitter.

4. Twitter is heavily targeted for tech people. @ and # are some of the things that make my head spin (I am a techie)..forget the normal person. System needs to be simple to use and easy to understand.

5. 140 character limit was good when a lot of conversation was happening on SMS. That is not the limitation today. Media (pictures, audio, video) should be included in a service like twitter.

6. Spam: Twitter is full of spam. A lot of fake ids are lurking around with biased or wrong information. If I want to get genuine information about Steve jobs ideas on Technology, there are many accounts and it becomes difficult to judge who is genuine and who is fake. New service must have tight control over spam and fake ids.

7. On Twitter, users are not “authentic”. There are a lot of clones that lead to spam. Also, its easier (or more intuitive) to have conversation with either “celebrities” or with close friends who we know in person. Current structure of Twitter fails in having conversation with “close friends”.

Solution (For some Issues) :

1. Provide relevant content in the stream. Remove spam.

*Spam means any content that is not relevant to the user at that point of time.

2. Enable users to have conversation related to the “meaningful” content. Note: Facebook does a good job of conversation but that is around “emotional” content rather than “intellectual or meaningful” content.

3. Enable users to find other users that have similar “background” or “interests”. Facebook does it but only for friends from school/work. Twitter does this for “interests” but lacks teeth.

Opportunity for a new player in Local Commerce

Groupon, the king of Local Commerce,  has taken the world by storm. Within 2 years the company is worth more than $6 billions. And they might be on verge of IPO sometime next year. Local commerce accounts for the biggest chunk of user spending all over the world. Here is an analysis about the current market scenario and the opportunities that it opens for new players who want to enter this nascent industry:

Benefits – Retailers

Groupon provides following benefits to retailers:

1. It brings customers to the store/shop.

2. Retailers pay only when the customers come in (performance based marketing)

3. There is a “minimum threshold” for the number of groupons to be sold. This provides incentive to retailers because it increases their footfalls.

4. “Free marketing” for retailers: They do not have to pay “cash” to do the marketing. Groupon does it on their behalf. Although retailers pay in the form of “service” but they prefer to do that because that’s what most small retailers are more comfortable with.

Benefits – Customers

Groupon provides following benefits to customers:

1. It offers them deep discounts (around 50%) to use the retailers’ services.

2. It introduces good /exciting unheard services to the users.

3. It is very simple to use.

4. Daily deals via email keeps things simple and exciting.

Groupon’s success Factors:

1. First mover’s advantage

2. It creates a sense of urgency with buyers because the deal will close in one day.

3. It is simple to use

4. Brand value

5. Users find the anticipation of a new deal exciting. “What’s the Groupon of today?”

Issues – Retailers:

1. Most retailers are not used to handling a sudden rush of customers in their premises. Groupon provides them walk-ins that are multiple times their usual walk-ins. This puts a lot of pressure on the operations of the business. It affects their customers service also, impacting the regular customers as well as the groupon customers.

2. Retailers give deep discounts to get new customers in hope that these customers will become their permanent customers. Unfortunately, most groupon customers are “price-sensitive” customers who usually do not return to the retailer after their “groupon” discount is over. In short: This acquisition strategy does not work because the customers are not “acquired”.

Issues – Customers:

1. Customers want to use groupon (upto 50% discount) and also want to get good service. Usually these 2 do not happen together. This is because of 2 main reasons: a) When a retailer is promoted on groupon, their customer service suffers (due to above said reason), and this impacts the groupon custoemer. b) Retailers sometimes do not “treat” groupon customers with 100% customer service and attention because they know that these customers are “disounted” customers and therefore most likely not “return customers”.

Summary:

1. “Acquisition” strategy should acquire customers. Groupon provides new walk-ins into the stores, but it is not able to “acquire” customers for retailers. In the end, retailers end up paying deep discounts without getting new regular customers for this business.

2. A new solution is required that would “acquire” customers for Local Retailers. This is a nascent market and any new comer who focuses on converting a new customer into a regular customer will have an edge.

 

~ Ciao

 

Current Socialgraph has limitations

Many Internet experts are saying that  ”Socialgraph” is very powerful and will be the base of a new set of innovative applications in future. My theory is that the connections on the Internet (aka Facebook) are good but they have their own limitations.

Here are 3 characteristics of Facebook stream and socialgraph as we see it today:

Not very useful: Facebook  filters (organizes) content based on Socialgraph and then puts it on stream. My personal observation is that the content that I get on Facebook stream has very little value. They are mostly “b’day wishes from friends-to-friends, photo tagging, and hilarious comments”. They are funny and good-to-have but are NOT very important.

Real-to-Virtual Mapping: Theory behind Socialgraph is that a person’s qualities (personality) can be characterized by his/her friends and their interactions. This theory is correct and works well in normal situations. However, when we talk about interactions on Facebook, 2 important things are missing: a) My friends on Facebook are NOT my “friends”. They are acquaintances. b) My interactions with them is limited to mostly 3 things as said above.

Interactions: Interactions on Facebook are mostly “positive”. In real life, we interact with positive and negative comments/behavior. Unless, we replicate “real life communication” within Social graph, it will be very difficult to deduce anything substantial out of it.

These observations point me to think that either Socialgraph is not powerful enough or Facebook is not making good use of it.

Looking at the money and resources that Facebook has, I tend to believe that they are doing their best in making SocialGraph useful. Maybe the current  Graph itself has limitations and needs to be extended.

~ ciao