Last week I showed you a picture of the giant pot of sauce that I made in advance of my brother's wedding and I shared some links about the ingredients for business success. But, ingredients are only the start. You still need to combine those ingredients to make your dish. All the steps you take ultimately make up your recipe. Follow those steps well and you should end up with a delicious meal at the end.
Of course, there are different types of recipes for different dishes and often many versions of the same general recipe that make slightly different dishes (think of all the different ways to roast a chicken or make a stir-fry). In the business world, we can think of a business model in the same way as we do a recipe. Your business model includes everything it takes to make your product and sell it. And, like recipes, there are often variations on common types of business models. Continuing the lessons from my brother's wedding, below are examples of common business models found among the 23(!) vendors that were involved.
Multi-sided platforms connect multiple, independent groups of customers. The value of the platform is found in the interactions that occur through those connections. Benefiting from the network effect, the more users the platform has the more valuable it becomes. Multi-sided platforms are a common business model for internet companies.
Among the wedding vendors, the wedding website company called The Knot makes use of a multi-sided platform model. The Knot's platform connects wedding vendors with couples that are planning weddings. It offers couples extensive resources about planning their wedding, including planning tools, articles about common wedding related topics, and access to two-way communication with other Knot members. For couples, this access is free. The Knot also provides a listing and advertising platform for wedding vendors, allowing them access to couples planning their wedding. Vendors pay a commission to The Knot when couples purchase their products or services through the website.
By connecting couples and wedding vendors, The Knot is able to provide wedding vendors easier access to a much larger pool of potential customers, attracting those customers with free wedding advice. The more customers there are on the site, the more valuable it is to wedding vendors, the more money The Knot makes, and the more advice they are able to provide to couples. A classic win-win situation.
Google is another example of a multi-sided platform, which connects searchers with advertisers by offering the customers a free search engine. Advertisers pay Google to put their advertisements at the top of the search results for relevant searches. The advertisers benefit from highly targeted advertising and Google makes money for connecting them with the searchers they want to reach. The more content that is available and easily searchable through Google, the more people will use it for searches. The more people use it for searches, the more valuable it is to advertisers.
Like the multi-sided platform model, the freemium business model offers a blend of free and paid services. However, this model differs from the multi-sided platform model. The multi-sided model makes different offers to different customers on the platform (e.g. wedding advice for couples and targeted advertising for vendors). In the freemium model, companies offer users a basic service free of charge and charge users for access to a premium version. This model works when the cost of servicing additional users is minimal and the small percentage of users that pay for the premium version cover the costs of providing the platform. The benefit of this approach is that it makes it easier to get new customers hooked when they can use limited functionality for free. Users who outgrow the free offering will often happily upgrade to the paid version.
Interestingly, The Knot is also an example of a freemium business model. In addition to the multi-sided platform for couples and vendors, The Knot also offers couples a wedding website to help them communicate with their guests and manage registries, RSVPs, etc. Couples can register for a free website, but the URL is unwieldy and the website has limited functionality. Couples can upgrade to a premium website to gain access to a customized URL and additional functionality for their website.
Dropbox, which provides a cloud-based file storage and sync platform, is a well known freemium model business. Dropbox is free to use for a relatively small amount of storage. However, if you need more storage or more advanced tools for managing access to files, you can pay for their premium offerings. Because adding more storage to their platform is inexpensive, the customers that pay for the premium service more than cover the cost of providing the service for free.
The Long Tail
The long tail business model focuses on selling a wide array of niche items, each with a low volume of sales. Compared with high-volume sales models, the long tail model benefits from lower inventory costs and attracts customers who value specialty items. The internet has been a key factor in the rise of this model. By decreasing the costs to reach consumers of niche products it has become much more feasible to offer such a wide variety of products.
Among the wedding vendors is a company through which my brother purchased customized, engraved glasses for his groomsmen. The company, Magic Wood Shop, lists their products on Etsy (another multi-sided platform) and offers a wide array of products (e.g. drink glasses, pocket knives, bottle openers, etc.). Each product is personalized to order using laser engraving. Because the same process can be used to make a wide variety of different products, the cost of the machine is spread out and the personalized products can be made economically. Thus, where other companies focus only on accounts that might order hundreds or thousands of an engraved product, Magic Wood Shop is able to serve customers that may only want a single item.
The Long Tail model has also started to transform the book publishing industry with the rise of direct publishing platforms. On these platforms, authors can upload their own work. When a customer orders their work, the platform prints it to order and sends it to the customer. The author then gets a cut of the sale. This "print on demand" ability is usable across all of the works that authors upload and the platform incurs minimal cost until the work is ordered, printed, and delivered. Thus, it can offer a significantly wider selection than a traditional publisher, which tries to anticipate demand and print enough inventory to meet it.
Choosing the Right Model
Choosing the right model for your business can be difficult. It requires carefully considering your customers, your value proposition, and how your customers will want to pay for that value. In an upcoming blog post, I'll introduce you to a tool for organizing your business model on a single page, making it much easier to understand and refine as you test your ideas out.