"Doing business on the Internet requires people to rethink fundamental business ideas. Therefore, a creative mind is much more valuable than one good at following procedures. It's important that people check their existing knowledge at the door . . . and continue to learn and adapt to how business has radically changed." Joe Kraus, co-founder, Excite.
The Internet is transforming the dynamics of existing industries by developing new ways of conducting business. These new ways of doing business are unlike anything we have seen in the non-Internet world. Last week, Enable added a new P - Perception - to the standard 4 P's of marketing because the Internet has changed the way products and services are marketed. As the marketing plan makes up a substantial portion of a company's business model, you must also make sure that these new perceptions are incorporated in your own model.
As the above quote indicates, if you are an Internet based company, you must rethink your business model from scratch - keeping in mind that it must be flexible, dynamic, and maybe radical.
What Is a Business Model?
In the non-Internet world, a business model is a system that enables a company to grow and make money on a sustainable basis. Companies need a business model to provide a common language, to act as a road map, and to ensure that they focus on sustainable growth. A standard business model has three main components:
- Markets and Customers
- Products and Services
- Channels of Distribution
Issues to focus on in devising the business model include the whole product definition, cost to your company, costs to your customer, and value and pricing. You must incorporate the following into your business model:
- Distribution Strategy
- Marketing Strategy
- Sales cycle
- Implementation Cycle
- Strategic Partners
In short, your business model must explain exactly how the company will make money.
Internet Business Models - Almost Anything Goes
When you think of Internet based business models, making money is not the first thing that comes to mind. The Internet is not like the brick and mortar world - and your business model must take this into serious consideration. The Internet utilizes business models that are completely new and truly revolutionary. Getting subscribers and "stickiness (the capability to retain users) is more important than making money.
The following is an overview of some Internet business models being used today:
Be There and Do That - First
At the moment, if you are first on the Net, a 100% market share is yours for the taking - albeit for only a very short time. If you are first to sell organic baby food online, then you have access to 100% of the online market for organic baby food. However, the key to this model is to be first, and then never look back. Etoys beat Toys R Us to the Internet, and it is staying ahead by constantly changing its business model. Toys R Us is forced to constantly play catch-up. In order to be first, companies are now starting to be highly specialized and are focusing on niche markets like Baby Boomers and videos for children.
Optometry Economics - Attracting Eyeballs to Your Site
Companies like Buy.com seem to be operating their business without even thinking about profits. They give products away for free, or sell them at or even below cost. The rationale behind this is that Buy.com believes that customers will never be as cheap to acquire as they are now. These companies intend to make money by attracting tens of millions of eyeballs to their sites and then using these numbers to get advertisers to pay huge sums of money for the right to advertise to these incredibly large audiences. Knowing that you can buy something for less than cost, or that you can get a PC for free, should bring you to the site to at least check it out.
Companies like Buy.com claim that they are selling advertising spots like sponsorships for $25,000 and charging $3,000-$5,000 for disguised ads that are listed as special product offerings. They are also selling standard banner ads.
Buy.com also expects to add revenue streams like extended warranties and systems integration. Many companies, including Buy.com, believe that selling at a loss can still be cheaper than buying expensive portal advertising.
Grabbing Market Share - Cheap For Now
Buy.com and others, including etoys and Amazon.com, are using a business model of first attracting customers via heavy marketing, then providing them with a truly special experience (shopping for toys can be fun)' and then waiting for them to spread the word to all of their friends. While most people think that you must work incredibly fast - in Internet time, companies like etoys, buy.com and others are actually showing a lot of patience with this strategy. Word of mouth takes time and has more impact as the number of new people using the Net increases.
This strategy is based on the fact that to date, less than half of the adult population in the US are on the Web and only 8% shop online. The word of mouth impact for these 8% is minor. However, as more and more new online shoppers join the Internet, word of mouth becomes significant.
The theory is that, because the Internet is at its incubation stage, now is the time to grab new consumers as they come online, before someone else does. "Virgin" entrants are relatively cheap to acquire. If you catch them first, then your competition must pay a lot more to try and counter the word of mouth advertising and steal them away from you.
In the not too distant future, the market will consolidate and there will be far fewer "virgin" customers that can be gobbled up. When this happens, the established players will benefit from their previous investment in market share and from the word of mouth effect. They will only have to spend minimally to maintain brand - while the others will have to spend significantly more.
In short, while some Internet models might not make sense today, if we look ahead there may actually be something to them. The caveat for these companies is that they must hope that investors will continue to throw money at them, on the basis of their subscribers and stickiness.
Enable will keep you posted.
Next week we will discuss community and client/server based business models, as well as models that must overcome the chicken and the egg syndrome.