BUSINESS MODELS

Several Models
• RAZOR BLADE
• FREEMIUM
• TWO SIDED MARKET
• LONG TAIL
• DATA AS A PRODUCT OR SERVICE
• PROFESSIONAL SERVICES
• SUBSCRIPTIONS

• PAY PER USE

• ADVERTISING SUPPORTED
• E-RETAIL
• SAAS

RAZOR BLADE
 RAZOR BLADE(also known as bait and
hook model)
• Product Innovation leading to Business Model
Innovation
• It works well
1) when there is a bargain offer upfront…seems
cheaper than competitors..but overall cost is
high..coffee machines for free..but per coffee
may be high
2) Customers value proprietary system..greater
value..otherwise will go for cheaper

 ..2
3) Habit generates a steady revenue stream

Challenges to the Razor Blade Model

1) Winner takes most…market leader more
margins..more R& D and will to stay at the top
2) Environmental cost

 The business model mechanisms to test:

Mechanism to test Metrics to measure

What is the right price to draw

Conversion to customer
customers into that first purchase?

How do customers know when to

“refresh” the razor blade? How do Engagement metrics for digital
they respond to marketing channels, response to first message
messages once they’ve become for upgrades
customers?

How loyal is our customer, and is Life time value, average revenue
this out of lazy habit or choice? per user



Freemium
 FREEMIUM(IN Internet..free and
premium services)
• Key features free and premium features or
specific features for a charge.
• Works Well when
1) Incremental Costs approach zero
2) Services designed to have a network effect
Example Linkedin
Challenges to this model :
1) Conversion from free to paid

2) Competitors attack with free

 The business model mechanisms to test

Mechanism to test Metrics to measure

Which combination of features to

customers value at a premium? Conversion rate to paid: The rate at
Does the customer understand the which free users convert to paid
offer and why the paid service costs users
money?

Which combination of features drive

the network effect? Do users
Free user growth rate, referral rate
understand how and when to invite
other users?




 ..2
What is the value of each paid Lifetime value, average revenue per
customer? userWhat is the cost to acquire a
customer?

While free users drive the bulk of new Cost of Customer Acquisition
users, paid forms of marketing can help
to expand to new segments and smooth
growth.

Two Sided Businesses

 Two Sided Market(FACEBOOK)
• Services designed to create a network effect
• Like a freemium model, a two-sided marketplace works well when its design
allows it to add increasing numbers of users in order to create a network effect
—that is, the effect created when a product (like telephones) or a service (like
a social network) becomes more valuable as more and more people use it.
• The more users there are on one side of the marketplace, the greater the value
of the services they receive from the other side, and vice versa. For example –
Facebook was somewhat valuable to advertisers when they had mostly every
college student join the social network. But now that everyone’s mom,
grandmother, and high school friend is on Facebook – the social network is
exponentially more valuable to advertisers.
• When the platform grows, so do the returns, as users pay more for access to
the marketplace. In standard industrial-era businesses, greater scale leads to
diminishing returns. You get the opposite effect in Two-Sided Marketplaces:
greater scale makes it easier to get and keep customers, and thus profits
increase as the network grows.

• Value for both sides clear from the start

• Two-sided marketplaces fail quickly if the value proposition for one
side doesn’t clearly match a need on the other side. In Airbnb’s first
high-growth marketplace, New York City, both sides of its customer
pool were in deep pain and even willing to bend the law to relieve
that pain. On one side, the cost of renting an apartment is
astronomical; on the other, so are hotel prices, whose average can
sometimes balloon above $500 a night in busy weeks. The initial
value proposition was clear to both sides, and Airbnb addressed
problems of trust with, on the one hand, well-shot, high-resolution,
what-you-see-is-what-you-get photographs for room renters and, on
the other, pre-vetted credit cards and generous insurance policies
against potential damage for those renting rooms out.

• Challenges to the Two-Sided-Marketplace Model

• You can’t just turn on a marketplace
• The opening stages of a two-sided marketplace are challenging, because
the service it offers isn’t valuable until it has acquired a large enough base
of loyal users on both sides. Value increases as the platform grows to match
the demand on each side.
• Kickstarter and companies like it have launched their marketplaces by
heavily curating the first projects they offered for crowdfunding—they
didn’t just open up their marketplaces and wait for the projects to show
up. Typically they began with projects limited in type and appeal—in
Kickstarter’s case, small documentaries, digital art, and other forms of
interactive media. The tightly connected social networks of digital-art
supporters became the first crowd of project funders, and with a few
successes under its belt, Kickstarter then carefully opened up to other
types of projects. This curation process has continued throughout the
company’s history of growth.

• Two businesses in one

• Building a marketplace is like building two
companies simultaneously, each one
dependent on the other. Finding the path to
growth means carefully balancing features and
offers on each side and constantly
experimenting to get the balance just right.

The business model mechanisms to test:

Mechanism to test Metrics to measure

What makes supply and demand Total gross marketplace volume –
grow on each side of the network the total dollar value of
marketplace? transactions over a time period.

(1) Trading liquidity: the percent of

listings that participate in
What is the likelihood that a user
transactions within a given time
will find a match on the
period. (2) Matching efficiency: the
marketplace?
time it takes for a user searching
the network to find a listing.

Trust metrics, percent of users

Do the users trust the buyers and
reporting high net promoter scores
sellers?
on both sides of the marketplace

Is the cost of customer acquisition

Is the marketplace increasing in
decreasing greater than the growth
scale and growing in dominance?
in customer lifetime value?
Long Tail
 Long Tail

• Long tail is a phrase popularized by Chris Anderson,

former editor of Wired Magazine, in 2004. Anderson
compared Long Tail to the blockbuster or hit-driven
business models of media and retail companies. Long
tail sellers change the shape of demand from
“blockbuster” or “superstars” to selling large numbers
of unique, niche items.
• As an Amazon employee said at the time, “We sold
more books today that didn’t sell at all yesterday than
we sold today of all the books that did sell yesterday.”



• There has been much debate in the academic

and business community about the validity of
long tail as a bona fide business model, and
the term is no longer popular for newly minted
startups imagining their potential
value. However, it is worth understanding the
basic assumptions which laid the foundation
for early thinking in the value of internet
distribution.
• Lower costs to store, distribute, and merchandize
Long tail is made possible by the lower cost of storing/stocking and
near unlimited potential for distributing products. Centralized
warehouses are substantially less expensive than retail chains with
local stores. Winners achieve better distribution, logistics, inventory
management, warehousing, and ultimately have more data to
determine how to price and scale.
• Lower merchandising costs
Web and mobile storefronts have the ability to display huge amounts
of inventory. By reducing the search costs for the average customer,
and the cost to display inventory, long tail models increase the
collective share of hard-to-find products.

 Recommendation engines

• Both Amazon and Netflix are famous for their “and

you may also like” recommendation tools.
• The long tail theory: the recommendation engine
would shift demand to the long tail of the demand
curve, away from the hits on popular books, media,
and products that drive traditional retail demand
and toward niche undiscovered products. There is a
counter theory, based on the use of collaborative
filters that may exhibit a preference for a popular
product, shifting demand back to hits or popular
titles.



• Crowd contribution
• The way users find what they are looking for is often by a crowd of
volunteers, contributing connections and collaborating directly with
a company to create and organize information. Google is essentially
creating a long tail of web search with the direct involvement of
everyone that uses Google, contributes linked content on the web.
• Data intelligence informs product development
• Netflix and Amazon are famous for using the customer preference
data collected over time to deliver not just a marketplace of
products, but original content such as House of Cards and the last
season ofArrested Development. Based on deep customer
intelligence, Amazon has already launched its own private label
brand, Elements, to sell diaper products, and most
recently announced future food products.

• Challenges to the Long Tail Business Model

• Long Tail may not actually be for business
• Long Tail first came onto the internet culture seen in an influential post by Clay Shirky, Powerlaws,
Weblogs, and Inequality, who studied why certain weblogs (the original term for blogs) had a power
law distribution. Anderson expanded the theory to explore implications for culture, and for business,
and coined the term Long Tail.
• A number of academic long tail specialists cropped up in the mid-2000s to test this theory, and most
point to a more complicated conclusion that a true long tail business is rare, and less universal. The
topic was interesting to cultural critics for Long Tail’s implications for cultural changes, and business
school professors predicting the future of internet business.
• A Harvard Business School professor Anita Elberse published a study showing that the Web actually
intensifies blockbuster hits. Chris Anderson disputed her findings, citing that she had used
percentages, whereas Anderson used absolute numbers. Ultimately Elberse’s analysis may be more
relevant to business people, and how they make decisions.
• In final analysis – the idea of long tail as a business model has changed with Amazon’s domination of
online retail. Upstarts and incumbents must plan any long tail benefits in anticipation of a potential
Amazon response, as the company seeks to dominate every possible category. A key question to
validate early on when testing a long tail theory: does the company benefit from a wider distribution
of inventory, both in terms of inventory and search costs.

Challenges to the Long Tail Business Model

• Long Tail may not actually be for business

Long Tail first came onto the internet culture seen in an influential post by Clay Shirky, Powerlaws,
Weblogs, and Inequality, who studied why certain weblogs (the original term for blogs) had a power
law distribution. Anderson expanded the theory to explore implications for culture, and for business,
and coined the term Long Tail.
• A number of academic long tail specialists cropped up in the mid-2000s to test this theory, and most
point to a more complicated conclusion that a true long tail business is rare, and less universal. The
topic was interesting to cultural critics for Long Tail’s implications for cultural changes, and business
school professors predicting the future of internet business.
• A Harvard Business School professor Anita Elberse published a study showing that the Web actually
intensifies blockbuster hits. Chris Anderson disputed her findings, citing that she had used
percentages, whereas Anderson used absolute numbers. Ultimately Elberse’s analysis may be more
relevant to business people, and how they make decisions.
• In final analysis – the idea of long tail as a business model has changed with Amazon’s domination of
online retail. Upstarts and incumbents must plan any long tail benefits in anticipation of a potential
Amazon response, as the company seeks to dominate every possible category. A key question to
validate early on when testing a long tail theory: does the company benefit from a wider distribution
of inventory, both in terms of inventory and search costs.



• Data as a Product or Service
• One of the fastest growing business model
categories is the explosion of data-driven business
models, defined as a company that would not be
able to exist without its core underlying data asset.
We’ll be documenting multiple data-driven business
models here and begin with the simplest to
understand: when data is collected and then sold
directly to a consumer or business customer.

• When it works well:

• Fills critical data and data quality gaps
• Business data used to be generated primarily from inside of a company, and
from interaction directly with customers. Data sources were static,
structured, and small enough to be stored or digitally warehoused inside of
a company (often in physical servers).
• Now most data lives outside of a company’s walls, the data is big (big
data!), which means there is too much, too fast, with too much variety to
be stored in house. Consumers, sensors, and machines – most of them
outside the walls of the enterprise – are now generating most of the data in
the world. The data has different value and different uses, and the data
should do the work of data preparation: fill data gaps, filter, clean,
aggregate, and simplify data access for the customer.
• Companies can generate their own dataset and sell access (Factual), build
one of the most effective access points and sell access (Bloomberg), or help
customer add external data to their datasets (Zephyr Health or Socrata).

• Feed a data chain that drives revenue growth or cost reduction

• Ultimately the data should feed into a core business function
that drives revenues up and/or costs down. The more the data
service can feed a system that clearly delivers better top line
revenue, the more valuable the offer and the business.
• Advances in data storing, aggregation, processing and machine
learning create new opportunities for data not just to feed into
a report of past activity, but to predict future outcomes. Data
is now a powerful source of strategic advantage and may even
be repackaged by a customer to provide an additional data-as-
a-service.

• Builds moats around the data

• As software and hardware are commoditized,
deriving value from meaningful datasets remains a
core source of competitive advantage. While many
leading software-driven companies open source
their management, infrastructure and monitoring
tools; they tend to keep their data as a primary
asset. Because it is difficult to copy a dataset
without a large user base, companies focus on
building a moat around the data.

• Challenges to the Data as a Product/Service Model

• Diminishing returns for once valuable proprietary datasets
• Data collection and supply is not a new business. Experian and Axciom are
public companies that have been amassing large data stores to sell to
companies, and these firms are infamous for the decisions they inform: ad
targeting, mortgage rates, credit card terms, insurance premiums, and
employment offers.
• But the rise in the huge volume of new data sources and varieties
diminishes the value of data collected in these proprietary data gatherers.
Additionally, new entrants experiment with new business models –
Facebook is a generator of unique descriptive data on every engaged user,
and provides highly sophisticated ad buying services to customers for free,
as an insight, targeting, and advertising efficacy tool. As business model
innovation continues at an accelerated rate, expect traditional business
metrics and the dominant logic of the industry to shift.

The business model mechanisms to test:

Mechanism to test Metrics to measure

Explore/Exploit: size of user base

drives the underlying value of the
User growth vs. revenue growth vs.
data, and some companies seek to
competition
monetize the data asset too quickly
and directly, limiting upside growth

Saas core metrics: data-as-a-service

is similar to most software-as-a-
Churn, Customer lifetime value,
service businesses, and can be
cost of customer acquisitoin
measured against the primary core
metrics of Saas

Operations scalability: measuring Cost management of infrastructure,

scenarios that reveal non linear bandwidth, cost of data sources
scaling issues outside of the company
• Professional Services
• If you’ve considered selling your expertise, or
making money from selling the expertise of your
organization, the professional services business
model is a place to start. Accountants, advertising
agencies, public relations experts, executive
recruiters, lawyers, business and technology
consultants make money through one primary
model: charging money for the time spent by their
professional staff to deliver expertise.

• When it Works Well:

• Organized around the type of problem to be solved
• “The required shape of the organization (the relative mix of juniors, manager, and
seniors) … should be determined by the skill requirements of its work,” -David
Maister. Maister is a consultant for consultants, and describes the different shapes a
professional services firm must take in order to deliver to different types of client need.
• “Brains” Firms: Clients that require creative and innovative approaches to new, unknown
problems, with unknown solutions, tend to seek out “brains for hire.” Most boutique
brand agencies and smaller specialty legal and strategy consulting firms fit this
description. Clients expect senior staff who investigate a new question each time, and
deliver a customized, non repeatable solution.
• “Procedure” Firms: At the other end of the spectrum or clients that seek a procedure: to
solve for a well-recognized and familiar type of problem. For example: hiring Accenture
to implement a business intelligence system, or Deloitte to implement an Electronic
Health Records system digital transformation.Procedure firms excel if they deliver more
quickly, efficiently, and with a high likelihood of project completion and uptake. “You
never get fired for hiring IBM” as the saying goes.

• Staff leverage ratios:

• The concept of the leverage model drives all professional services
firms – the ratio of senior to mid level to junior staff.
• Brains firms are flatter organizations, often smaller and highly
specialized, and they excel when they provide differentiated thought
leadership and are known as the “smartest people in the industry” to
solve a problem. There are only senior staff who are creative and
innovative in their approach, and any junior staff serves in an
apprentice capacity. These firms can been deeply profitable by
charging high bill rates per hour.
• Procedure firms are hierarchical, with many more associates to mid-
level engagement managers, and partners at the top. Tasks can be
routinized and delegated ahead of time and stored in a knowledge
and training system. Staff ratios of juniors to seniors drives the
ultimate profitability of these firms

• Challenges to the Professional Services Model:

• Limits to growth
• The first greatest challenge is scale, and growth. Consultancies have inherent limits to growth. They cannot hire and train and
grow at the exponential rates as seen in internet services firms. Firms that grow too quickly tend to skimp on training and
knowledge management, and firm expertise and client experience tend to suffer.
• Also the “up or out” model can be tough for new young associates at professional services firms, who are hired as “grinders”
managed by “minders” who all report into the “finders” or partners that are responsible for rain making. In well run firms,
staff development is a sophisticated endeavor and younger associates typically realize on their own that they will pursue a
career outside of the firm.
• The firm “counsels out” these employees and these staff then become potential clients. Yet the experience if not well
managed can be a struggle for those that do not see a clear path to partnership, such as in “top heavy” law firms that are still
struggling to recover from pre-recession highs.
• Technology transformation
• Each wave of massive technology shifts has challenged the authority and cost effectiveness of every type of professional
services firms, from strategy consultants to lawyers to design consultancies.
• For law firms and accounting firms, the technology-driven routinization of work at the bottom of the associate pyramid has
challenged the high bill rates and cost structure that clients are willing to pay.
• At the high end of professional services, clients question the technology prowess of consultancies. The sheer success of
companies like Uber, Tesla and Airbnb show that rapid innovation and high scale revenue growth is more likely to occur inside
a startup than within a professional services firms. High growth Silicon Valley companies have built world class engineering
and design teams in house, also challenging the need for technology and design consultancies in the industry.

 The business model mechanisms to test:


The primary metric a professional services firm: utilization – the percentage of time the staff is employed doing firm-related work.
Some firms ask every employee to submit a weekly timesheet describing their time spent down to the hour, or in law firms down to
the 15 minute increment. Other firms get to these metrics by analyzing total revenues for projects and dividing by the time the staff
spends.


Mechanism to test Metrics to measure

Measuring each hour of a staff
member doing work that is billed
(client work) vs. other time
(professional development, sales,
knowledge sharing, administrative
work)
Measuring the hours discretely
devoted to paid client work
Client retention
Client success and referrals
Utilization – the number of working
hours in a given time period x 100 /
the number of available hours
Realization – the number of hours
spent on client work. For a
successful learning organization,
you don’t want this number to be
higher than 90% because you want
your staff sharing knowledge and
developing their strengths.
AKA “Billability”
Percent of current clients that
remain as ongoing clients
Net promoter score – how likely are
you to refer this services firm to a
friend.
What percent of new client leads
come from referrals from existing
clients.

• Subscriptions
• In a subscription business model, customers
sign up for periodic access to a product or
service.
• The explosion of the “subscription economy” is
upon us with everything from flowers to car
sharing to data storage to beauty care products
now being billed to us on a monthly basis.

• When it Works Well:

• Customers understand service and unique offering
• In order to shift consumer behavior to adopt a subscription offering, customers need to clearly
understand and value the material benefits of shifting from fee-for-product or fee-for-service. Blue
Apron promises high quality meals. Birchbox promises new discoveries in beauty
products. ZipCarpromises ease and convenience vs. rental car companies. Netflix promises variety
and unique content like House of Cards only available on their service. Companies seeking a
subscription model hone the offering and value proposition to match a primary niche customer
segment, and validate their product/market fit early on.
• When it Works Well:
• Customers understand service and unique offering
• In order to shift consumer behavior to adopt a subscription offering, customers need to clearly
understand and value the material benefits of shifting from fee-for-product or fee-for-service. Blue
Apron promises high quality meals. Birchbox promises new discoveries in beauty
products. ZipCarpromises ease and convenience vs. rental car companies. Netflix promises variety
and unique content like House of Cards only available on their service. Companies seeking a
subscription model hone the offering and value proposition to match a primary niche customer
segment, and validate their product/market fit early on.

• Find the right pricing fit

• Successful subscription business experiment with costs and bundled
subscription offerings over time, testing and experimenting to get the best
outcome, and then managing the cost to deliver the service in relationship
to the price.
• Recurring revenue – smoothed out demand
• Subscription models are the favorite of venture investors because of the
predictability of revenue streams, and smooth “demand curves” that can
occur once the company figures out how to retain their subscribed
customers. Also the cost of customer acquisition is favorable if you are able
to keep churn low, because you have a built in installed based of customer
that just renew over time. Investors tend to place a higher value on
subscription models vs. one-time downloads or product sales models. The
compound value of multiple subscribers renewing over time translates into
higher predicted future cash flows.

• Challenges to the Subscription Model

• Business model tradeoff: subscription requires strategic focus
• The subscription model can often fail to deliver if it conflicts with the dominant business model of a
company. Newspapers and magazines are primary examples of this trade-off. While the media
industry may have invented the subscription model, they moved on to the larger potential market of
advertising revenue based on circulation.
• Media companies became less interested in developing a core offering for their reading/viewing
audience, and instead focused on gathering a target demographic type of audience who was
valuable to their advertiser. When advertisers started to pull their money out of print media to
digital and other formats, these media properties were unable to calibrate their cost structures and
value proposition to deliver a compelling reason to subscribe. While some hyper niche publications
like The Financial Times and and The Economist have made the transition well, others like The New
York Times have struggled to make a profitable shift.
• Lower cash upfront
• Companies that once sold software licenses or other products who shift to a subscription model
often see short term effects on cash. Intuit recently described the accounting shift as they moved
their business over to a model in which customers pay a smaller amount over time, verses an
upfront payment. For startups, this means that cash flow may not grow at a fast enough pace to
offset the costs of acquiring a new customer.

The Business Model Mechanisms to Test:

Mechanism to test Metrics to measure

What unique and differentiated
value do we provide that makes our
Qualitative and quantitative : value
offering distinctly better than the
proposition test results,
alternative? Which unique
Total target market size
customer segment finds this value
compelling?
What is the cost to acquire a
Cost of Customer Acquisition
customer?

What is the amount of revenue we Annual returning revenue or ARR or

expect customers to repeat in any Monthly Recurring Revenue MRR
given time period? (looking forward, not backward)

How many customers will not
renew?
Viability threshold: will the
subscription business grow
profitably?
Churn rate, or churn total revenue
value
Rule of Thumb: LTV > 3 x CAC
(lifetime value is greater than 3
times the cost of customer
acquisition

• Pay-per-use
• In a pay-per-use business model, use of a
product or service is metered, and customers
are charged when they use the service. “Pay-
per-view TV” and online journal publications,
custom research firms, who sell access to high
value content on a per use or per download
basis.

• Amazon Web Services revolutionized startup costs

for internet firms by granting access to server
infrastructure on a pay-per-use model. Futurists
envision the rise of internet-connected objects (IoT
or the Internet of Things) will give rise to everything
be available on a per-use basis.
• Pay-per-use differs from outcomes based business
models like “pay-per-click” or add-on business
models like “in app purchases.”

• When it works well

• Simple distribution and billing processes
• Pay-per-use works well when the service can be effectively metered. In the media business, pay-per-
view is enabled the shift from standard broadcast technology to multiple cable channels.
• For enterprise software companies, the shift to cloud-based computing models created the
conditions to “pay-as-you-drink,” a shift from prior business models such as upfront licensing,
installation and maintenance costs. SaaS or Software as a Service is deployed typically as a pay-per-
use model, a subscription model, or a combination of both.
• Billing systems and agreements must be simple to communicated and easy to bill, with customers
authorizing an agreement that charges their account per use. When it works well
• Simple distribution and billing processes
• Pay-per-use works well when the service can be effectively metered. In the media business, pay-per-
view is enabled the shift from standard broadcast technology to multiple cable channels.
• For enterprise software companies, the shift to cloud-based computing models created the
conditions to “pay-as-you-drink,” a shift from prior business models such as upfront licensing,
installation and maintenance costs. SaaS or Software as a Service is deployed typically as a pay-per-
use model, a subscription model, or a combination of both.
• Billing systems and agreements must be simple to communicated and easy to bill, with customers
authorizing an agreement that charges their account per use.

• Ability to manage per use costs

• For software startups, particularly in the SaaS sector, once the initial minimum viable
product is built, companies can scale revenue closer to the scale in costs required to
deliver the service. Some SaaS companies prefer pay-per-use because the value
relationship is made very clear to the customer, and they are able to prioritize feature
and service development based on the customer’s expressed needs.
• Low barriers to customer adoption
• Because of low or no cost startup fees, enterprise customers that typically take six
months to a year to make a decision about enterprise software often leap frog this
decision and simply begin to try the service. Customers then increase their use based on
actual need of the company (vs. paying up front for licensing fees per seat).
• Data-driven customer learning
• Pay-per-use arguably give the company more information about how customers use and
value their products and services. Companies operating on pay-per-use can get greater
feedback to refine their pricing and how they package products and services, to drive
their profitability.

• Challenges to the pay-per-use model

• Unpredictable use and revenue
• Because customers are only paying to use the service when they
consciously think they need the service, revenue is less predictable than a
subscription or licensing model.
• May negatively backfire for frequent use customers
• Pay-as-you-go is initially sold in as a lower expense to a customer, but if bill
amounts are predictable and controllable. If not, then neither the
subscriber or the provider can budget effectively, and consequently the
subscriber pays a premium for bursting capacity.
• Ability to flex without fail
• Customers complain of being burned by pay-per-use models when they fail
to flex up when the demand is required. Customers also run the risk of
capacity shortage or brownout. The company offering pay-per-use must
still operate with the strength of a public utility and be available.

The business model mechanisms to test:

Note metrics will be different for non-digital companies who have less data to track:

Mechanism to test Metrics to measure

Similar metrics to subscription
models: how does the customer Awareness, Acquisition, Activation
progress from awareness to close
How many customers does the
business retain each month, how Churn
many exit
Measure detailed monthly
New MRR
recurring revenue to make sure
Upgrades/Downgrades MRR
new MRR outpaces cancelled or
Cancelled MRR
downgraded MRR
Do customers provide a steady
Net promoter score / referral
stream of ongoing referrals

 Advertising-Supported

• An advertising-supported business model depends

on advertising as a primary source of revenue.
While historically ad-supported was merely seen as
a revenue stream (vs. an entire business model),
the options for advertising revenue have multiplied.
Different decisions about which types of advertising
to pursue have consequences for the rest of your
business structure, and your reason for being.
 When Ad-Supported Business Models Work Well:

Large audience
• If your property is able to command a large enough audience, advertising can provide a substantial source of revenue. A
power law dynamic is in effect for digital media – the bigger you get, the more market share you command. The five purely
digital media owners: Google, Facebook, Baidu, Yahoo and Microsoft, generated $71 billion in media revenue, or 68% of all
global digital ad spend in 2014.
• Advertising is sold in different unit types, CPM (cost per thousand) being the most enduring and prevalent. Other mechanisms
for advertising: CPC (cost per click, such as Google), CPA (cost per action, such as Facebook’s engagement metrics or Amazon
affiliate marketing).
Highly targeted audience
• If you have a highly targeted audience, you can almost always find companies that want to pay to reach your readers and
users. This is especially true if your users show a propensity to buy the products that your advertisers want to sell, and why
Vogue still commands high rates.
Utility delivered in advertising
• By providing an audience in search of things, so cleanly and effectively, Google was able to grow majority market share
adopting the pay for performance or cost-per-click model of advertising. Google focused on delivering the highest utility in the
industry, and has never wavered from that goal.
Context within your content
• Advertisers pay more when the ad fits within the way your audience reads, watches, and engages with your content. It’s not
the number and types of different advertising units that creates conditions for success, it’s the appropriateness and
effectiveness of the ad within the context of the medium.
• TV ads and those pre-roll ads that run before that YouTube kitten video fit within the context. You may not love the ad, but
you are in watch mode, you are eating a sandwich at your desk at work, and that is what counts. TV ads still have the highest
ad rates in the business, with online video now frequently commanding higher rates that certain cable properties.



 Challenges to the Ad-Supported Model:

Tradeoff between ad customers and users

The biggest challenge with a primarily ad-supported revenue model is that it forces constant trade offs between the goals of
the advertisers and the goal of the users. Your audience is not at your site or media property to look at your ads, but you have
had to make decisions about how to deliver ads to them in a way that does not compromise their experience.
Chasing clicks at the expense of quality
• A frequent complaint heard at even established media companies is the pressure to chase clicks with listicle article formats,
bait and switch titles, 100 page slideshows, and the ever popular clickholes (best satirized by Clickhole.com).
Serving an arbitrator
• For publishing and content sites that rely on ad exchanges or programmatic advertising, there is a price. These exchanges
charge a cut of the advertising, so while the revenue arrives without the need for a sales person, the publisher is often at the
whim of the exchange. Ad exchanges and programmatic technology can also challenge the user experience. When you have a
page loading problem on a media site, you can see exchanges at work, cranking away, tracking user information across the
web and finding the highest advertising bid to serve to you.
Low barrier to entry, high barrier to early revenue
Anyone can start a publishing site, or launch a video blog (vlog). Few make substantial revenue from these activities, because of the
advertiser needs of scale and audience. Early stage startups are challenged when they propose ad-supported models and
encouraged to launch first, get big, figure out advertising later. Advertising is a long game.
Downward pricing pressure, inventory approaching Infinity
• The number of indexed pages on the web continues to expand, affecting ad rates everywhere. Real time bidding, ad networks
and exchanges, and other automated channels are creating extremely efficient ad spends, which benefits the advertiser, not
the publisher.



 The Business Model Mechanisms to Test:

Reach: how many people see your content Monthly active users (MAUs)
Advertising cost Average CPM (cost per thousand)
For cost per click and cost per action, how do ads
perform. For CPM, how does the spend contribute to
Ad performance
measurable sales for the advertiser “post campaign
conversions”

Engagement: how many people engage with your Facebook’s engagement score. Medium’s TTR – Total
content, and with your ads Time Read. For video ads: completion rates, skip rates.

Geographic, demographic presence, propensity to

Audience segmentation purchase products/services in a high spending
advertising category
Direct revenue originated from ads on the media
Revenue per Visit
property
RPM – revenue per thousands of impressions of ads =
Revenue per Page
(Total Ad Revenue / # page views) x 1000

Fill rate: how many ads are delivered # Ad requests, # of delivered ads

Bounce rates, timeouts of users leaving your content

Experience tradeoffs
before an ad loads 

 Buy-One Give-One

• TOMS shoes is best known for putting this business

model on the map, followed by Warby Parker and
others. It seems as simple as it sounds: for every
pair of shoes or glasses you purchase as a
consumer, another pair is donated to someone in
need. The model has been copied by many new
entrants and a few large companies as well, and has
received both praise and criticism for the ability of
these firms to also deliver positive social impact.


 When it Works Well:

Tangible product, simple message

• Most companies that have succeeded with Buy-One Give-One are
consumer products such as shoes, jewelry, clothing. These are tangible,
touchable, easy-to-understand products that people wear, to express their
personal values. The authenticity of the company’s mission and simplicity
of the message – buying one, giving one, fuel the natural social
conversations that happen between people, creating a word-of-mouth
marketing effect.
Gross margin affords the ability to donate
• Companies who are successful test their pricing and margin strategy and
commit. Option one: the product is “marked up” – and pricing is set above
competitive offerings, like TOMS. Option two: the company is able to
“afford” a one-for-one model by going direct-to-consumer, and by passing
expensive retail channels, like Warby Parker. Organizations that attempt to
simply reduce their margins and make less money may struggle to sustain
and scale.

 Challenges to the Buy-One Give-One model:

Scaling donations to match rising consumer demand

• If the product is hugely successful, it may be more difficult to find donation distribution channels or
partners who can keep up with rising end-consumer sales. Vision Spring is Warby Parker’s not for
profit partner, who has been running into challenges expanding from Kenya to India. Similarly, Baby
Teresa has been delivering donations of baby clothes to underserved families, but has had a hard
time recruiting volunteers fast enough to keep pace with sales.
Upper limit on feel-good
• When social impact companies and causes tap into a feel-good moment, that moment can pass,
quickly, particularly when the brand is only delivering an emotional benefit, not a core functional
utility.
“Give-One” may reduce demand for local products in the communities served
• The biggest risk to the value proposition – does the “give-one” operation actually improve the
people the company is trying to help? International development experts have noted how charitable
gifts can often undermine the local businesses in the regions they are trying to help – forever
creating a culture of dependency on donations. Western donations can hurt farmers, workers,
traders, repair service, and sellers whose success is critical to reversing poverty.
• Blake Mycoskie, TOMS’ founder, was inspired to start the company when he saw barefoot children in
Argentina, and was criticized early on for failing the community they were trying to serve, TOMS has
since expanded into eyeglasses, coffee, and and handbags, and seem to put more care into finding
non profit partners who better understand local communities.



 

The business model mechanisms to test:

For each product purchased, the company

must be able to afford the ability to “give-
Variable margin contribution to “give”
one” – at different points of scale, what is the
variable margin per product sold.

As the company scales, do unit costs go down

Product break even and profitability analysis
enough to contribute margin for donations?

Rather than simply measuring how many

shoes delivered, work with a local non profit
Co-created social impact metrics
or directly with a community in need to
determine the right metrics to measure

Has the company’s charitable partners

Scalability of “give-one” identified strategies for scale as the “buy-
one” model grows?


 E-Retail

• Businesses use the internet as a

merchandising, marketing, and servicing
channel to sell physical and digital goods
directly to customers. Amazon is the leader in
business to consumer E-Retail, and the
company’s breadth, depth, and market
dominance must be considered for any new
entrant into E-Retail.