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.


Understanding growth and opportunities

Often we hear about industries / locations growing at a torrid speed and how young entrepreneurs could benefit from that. Its true that growing markets provide good opportunities, but its crucial to understand what the growth “really” means. And equally important is to identify the core competency that the companies should develop in order to enter the market and strengthen their positions.

Some notes:

1. Competition: Growth, often, comes with a fierce competition among new comers who want to tap it and become the leaders. Analyzing how the competitors are positioning themselves would provide a good look at how your company’s strategy should look like.

2. Customers: Most often, it is advisable to position yourself “closer” to the end customers. Of course before you do that, you should first find out who your actual customers are. Understanding how customers could benefit your products, and then tweaking your message accordingly is one key marketing process that should not be neglected.

3. Target Industry: It is important to find out what “part” of the industry is actually growing. Typically, most companies jump onto the bandwagon without realizing that the growth of Industry does not necessarily mean that all “niches” or all “associated industries” would also grow. Remember, your “niche” is your “whole” industry. It may be different from the “industry” as described by the analysts. Let me cite an example: If the retail industry is growing at 5%, it does not mean that “all” retail segments are growing at 5%. Identify what part of retail you belong to…and how fast that segment is growing. More you segment it, better picture you will be able to see.

4. Growth Life: Understand the cyclic nature of the industry/business you want to venture into. Every industry has a cycle and understanding this cycle will enable companies from misunderstanding a temporary uplift vs the permanent (or long term) growth.

5. Alignment: Identify how your core competency fits into the industry to tap its growth opportunity. Remember, do not jump into industries with higher growth because they look “sexy”. Aligning your core competency with the industry’s requirement is essential for success.

6. Adaptability: Understand what your business does and what your core competencies are. Many businesses do not understand what business they are in. This stops them from swiftly adapting to new Industry success factors. Be nimble and flexible to adapt to changing market dynamics. Eg: Big companies tend to loose sight of this and end up loosing business. Examples include Borders vs Amazon, Blockbuster vs Netflix.


Next innovation in Group buying

Groupon is the undisputed king of group buying wave that has hit the internet recently. A lot o clones have popped up, including some aggregators, and I was thinking about some additional “group buying” ideas.

Lets do a quick SWOT analysis for Groupon:

Strengths: Brand, First-mover-advantage, Good financial backing, scale, good customer satisfaction

Weakness: Low barriers to entry, Low switching cost for users, Limited revenue (1 sale/day/city)

Opportunities: Build barriers to Entry, Make Groups, Develop features to increase the switching cost, Diversify into commenting (like Yelp), Diversify into Local advertising (or branding)

Threats: Multiple competitors, Niche competitors, Yelp could be a competitor (with groupon type feature), Expansion beyond a threshhold is not scalable

I am looking at opportunities, and it leads me to think about a new product/website/feature:

1. Let people start making groups around local businesses

2. If the group reaches a limit, then the local business gives discount (50%)

3. It will be time bound-as well as-number bound (maximum 50)

4. Multiple groups can be formed at the same time.

So, this will be a pull-based mechanism rather than groupon’s push-based sale. It could be quickly implemented as a Facebook app. Lets see how people react to this.

What do you think about this product? If interested, then let me know if you want to discuss more about it. There are some other salient features that will make it a compelling product.


Core Competency and the buzz

Every successful company has a “core competency” that gives it the assets to be unique, strong, and ahead of the curve to beat the competition. Top managers know that “Core competencies can not be copied”. But still, sometimes the buzz around CEOs creates such a big pressure that they overlook the basic rules.

Social Media is the buzzword for the past several years. With Facebook taking the Silicon Valley by storm, a lot of people have started believing that every company should either have “Social” in their products or they are out of touch.


Core Competency: “Ability to connect users with each other in an informal way”


Core Competency: “Ability to distribute/broadcast content/information”


Core Competency: “Ability to find the meaning (context) of content/information”


Core Competency: “Ability to generate content/information”

All core competencies are good…but the business cycle makes importance of competencies go up and down with time. No matter what the business cycle is, the fundamental rule still holds: “Core competency can NOT be copied”. In layman’s terms: “You can not beat him in his own game”.

Let us see what these companies are doing now a days:

Facebook is pretty happy because the current buzz is “social”. They have to be careful because, with business cycle, the importance of their competency will change. Twitter also feels good, but somehow is being pulled into being “social”. Google is holding Search to its heart but is a bit disturbed by the “social” . I hope its not trying to copy Facebook’s core competency, else it will fail. Yahoo tried the “search”..and is now trying “social”..with no success.

So, what should the companies do?

Simple answer: Adhere to these 2 principles of Core Competencies:

1. Do not make a mistake and loose your own core competency. Remember, others can not beat you..but you can still loose (if you mess up).

2. Develop other (new) core competencies that are currently non-existent in the industry. Simply said: “Think beyond social”