Archive for November 29th, 2007
Innovator’s Dilemmas: Revenue vs. Value? (2)
In yesterday’s post I focused on insights related valuations. I’m now switching tracks to discus revenue matters.
Many of today’s innovations continue to operate under traditional business models expecting consumers to pay for a given product or service, thus generating a revenue stream in the process. In any case, most innovators find it challenging to figure out what business and pricing models best apply. In my next post on this subject I will write about value based strategies.
Some innovative products involve business model innovation to open up new markets. This important in the case of leading edge technologies launched in advance to customer demand. Market timing matters, quite a few innovators rely on the so-called ‘first mover’s advantage’ to capture market share and grow revenues. Early entrants educate markets and develop thought leadership in the process, often setting the stage for the industry they compete in. The ‘diffusion of innovations’ is another subject I’m thinking of covering in my next post.
As far as business model innovation, the following is a quick draft which I hope I will be able to update and improve over time. Your comments and insights are more than welcome.
Open source model: free products. The core product is actually developed and supported by an army of passionate volunteers who join a ’cause’ or by corporations releasing the rights to their intellectual property. Some companies join open source projects with a ‘loss leader’ approach: this means giving something away expecting to stimulate and engage customers to buy some other more profitable value added products. In some other cases, private enterprises going out of business provide intellectual property for non-for-profit organizations for them to further develop. Most open source projects accept cash donations, sponsors and grants.
Freemium model: basic free service. Quite a few of today’s online services can be first enjoyed for free. As the service becomes ’sticky’, meaning you experience repeated usage and personalization, consumers are presented with value added features involving a premium or a subscription. As an example, after blogging for free for about a year, just yesterday, I made my first payment to WordPress to upgrade my account, adding 5GB of storage capacity. Some products offer free licenses for individuals (personal use) while charging fees for groups (enterprise use).
Ad supported model: free. Online advertising networks can deliver highly targeted advertising generating a revenue stream which subsidizes the cost of providing the actual service to the end user. As the service is offered for free, provided people’s interest in it, viral marketing helps growing the user base. While this translates into a larger audience for advertisers to reach, this is very different from mass market advertising. Information provided by users when signing up for the service as well as tracking of usage patterns yield a fair amount of personal and contextual information. Analytics, statistical analysis to predict and improve service delivery, is a critical success factor for the delivery of non-intrusive, personalized, contextual and relevant online advertising. Revenue sharing models include pay-per-view and pay-per-click, these being just two examples.
Beta testing: free. Initially, beta testing was about engaging users to try a new product in advance to its commercial release. This trial period would provide valuable insights on needed improvements and feature prioritization before formally launching the product. These days, beta testing has also become part of companies’ marketing strategy to attract early adopters. As a matter of fact, quite a few products continue to be positioned as ‘beta versions’ for extraordinarily long periods of time, even years. Anyone signing up for a beta version is likely to agree to terms and conditions which significantly lower any kind of liabilities involving the manufacturer or the provider of the service.
Utility business model: pay as you go. Metered services are based usage metrics (server CPU usage, bandwidth, etc.). This leverages the public service model as a reference (e.g. water, electricity, gas). A schedule of rates applies to different usage levels, which can sometimes be complemented with a minimum subscription charge. My recollection is that both IBM and Sun Microsystems have developed scalable ‘utility computing’ services to allow for on demand delivery of infrastructure and applications. So, fixed costs get amortized across a a number of users, lowering the cost for innovative companies to get online services up & running.
Long tail model: product discovery. In the past, profitable economies of scale were built upon selling successful products, the so-called ‘best-sellers’. In today’s digital environment, that is not necessarily the case. Quite a few of online stores deliver a large amount of rear items to an equally large number of buyers, which, collectively, turns out to amount for far more revenue than that of the the ‘best-sellers’. By now, all of us are familiar with Amazon’s recommendations engine and bundled promotions suggesting we purchase less well known items of interest. This blog is also an example of long tail dynamics. Everyday, my ‘most viewed’ posts (the top 10 listed below) end up being a small percentage of the total hits (page views).
Information-intermediary model. You have already noticed the recurrent reference about data about consumers, their habits, preferences. Recently, Facebook made the news again as they happen to be extending consumer data to track their areas of influence (e.g. social networks and communities of interest), all of which is of great value to those working on strategic marketing, advertising and campaign management. The so-called ‘infomediaries’ help hook up advertisers, sellers and buyers. Think of the value for ‘experiential marketing’ activities, connecting consumers with brands in a personalized and relevant fashion.
The intent behind outlining different models is to assist with business decisions, revenue forecasts and company valuations. The resulting business model can be any variation, adaptation, combination of the above, or any other for that matter. At some point, things need to come together to make business sense, assisting entrepreneurs rise capital for innovative solutions and VCs to better asses the value of their investments.
- Revenue vs. Value? (1)
- Do you really need to be disruptive?
- Who is the innovator?
- How do you demo innovative technologies?
- Do you really need business modeling?
- Innovators’ dilemmas
- Is innovation just about problem solving?
J. de Francisco 
Chicago, IL. 29 November 07 
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“The Top 10″ at the time of uploading this article: [1] Free Web 2.0 Meeting Tools: Vyew, Yugma, Dimdim, Zoho. [2] More Online Collaboration Tools. [3] Innovator’s Dilemmas: Revenue vs. Value?. [4] The Top 10 Best R&D Companies In The World. [5] Transforming Your Old Laptop Into An “Internet Communicator” (2). [6] “Visual Futurist: The Art & Life Of Syd Mead”. [7] Sci-Fi Based Scenarios: The City Of The Future. [8] 3M’s Innovation Recipe. [9] Design Concepts: Future Car. [10] USA: “Amazon’s Kindle & Sprint”; EU: “Polymer Vision & TIM”.
