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.

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Startup in bad economy

What happens to the startup sector when economy goes south? Let us discuss top 3 drivers one by one:
1. Funding: Dries up. Very hard to get money for new ventures. (Negative)
2. Resources: Good opportunity. A lot of high talented people in tech, marketing, operations etc are looking for jobs. Simple rule of demand-supply and you can see the picture. (Positive)
3. Creativity: Necessity is the mother of invention. With that phrase, I would call it positive.

In MBA terms, I would put them as : Finance, Operations, and Innovation. All 3 of them are required to launch a succesful comnpany. With 2 positives and 1 negative (finance), it does not bode well. But..hold on a sec…do we really need a lot of capital to start a new Internet company? Also, bad economy means that operations will become a bit inexpensive as well. So, its not a dire situation.

Overall, it boils down to individuals. Succesful entrepreneurs and VCs would tell you that its the team that matters (not the idea). And in a downward economy, it might matter a bit more. But at the end of the day..it depends on you. If you have that “instinct”..then you will survive. If not, then join the ever increasing club 🙂