What Is Your Output Model?
Don’t Ask Me About My Business Model originally uploaded by FactoryJoe
In the web1.0 world, the predominant business model was one of 2 possibilities:
- Come up with a great idea, hype it, form a company, do an IPO, cash out ASAP.
or
- Come up with a great idea, hype it, deliver something, sell to a big corporation, cash out.
In both cases it was irrelevant whether you actually delivered very much on the hype of your idea, product or service, or whether you could actually demonstrate such business fundamentals as revenue, cost models and cash management.
The important thing was to build perceived value through hyping your company and then find a way to cash out. In many cases there was no real or lasting value to these companies, no tangible assets or property - even very little intellectual property - that was created in all of these transactions.
When value is not based on tangible assets, eventually the value will drop and correct itself. Thus Web1.0 led to Bubble1.0 and the ensuing Burst1.0.
Now we’re having another go at information-based, web-based, idea-based businesses and startups, and we’re supposed to be all the wiser for having gone through Web1.0, Bubble1.0 and Burst1.0. No more building hyped-up value. No more simply planning to be bought by a big company (well, do Google and Yahoo count? OK, then maybe there’s still a little bit of this, but not as much).
Today we actually see web-based businesses focusing on revenue, costs and cash and even a healthy dose of customer service and some attention on customer experience. Very good. We can learn.
Now, the foundational element of the Web2.0 business model is advertising. So much of the web-based activity today is based on revenue generated from ads. It turns out that people who read or view or do things on some websites will be very likely to read, do, see and buy related things on other websites. The more tasteful, contextual online ads were born to enable this type of targeted marketing and revenue sharing between referring sites.
Yes, without AdSense there wouldn’t be a web2.0. However, are contextual ads another form of hyped-up value that lacks tangible assets on which to base that value?
Clearly there is some value somewhere along the chain of contextual advertising. Someone is paying money for the ads, which is presumably resulting in revenue for that advertiser, and presumably that revenue is based on the delivery of a real service or product at some point. But there may be several layers of advertising revenue between you and the real product or service that eventually a consumer (a person or a business) pays real money for.
The problem there is that there is some variable amount of value being added to the system that’s simply based on promotion of the product rather than the product or service itself. There is a risk of these layers of advertising collapsing - not going away but becoming fewer - and eliminating the value of some of the people in the middle of this chain of promotion (ads).
To me, any truly sustainable business model must consist of:
- taking some inputs (resources, materials, knowledge, etc.)
- doing something to those inputs (creating a program, software application, designing a service you can perform, etc.)
- producing some outputs that meets a need or desire that people have in a unique way (performing the service, publishing the software, producing the product, etc.)
- setting up a method of capturing revenue based on the outputs that is greater than the cost of producing the outputs
Sounds reasonable and I think most current so-called web2.0 companies and services would agree with those elements. The concern I have is that if your revenue (#4) is not directly tied to the outputs (#3) then you have at best an unstable business model.
Let’s say you write a blog that has become very popular. You put AdSense units on your blog and people start to click on them. You earn a lot of money because you have so many clicks on those ads.
You have inputs (your knowledge and creativity), you do something with the inputs (come up with ideas to write about), you produce outputs (you write your blog) and you capture revenue (ads on your blog). The ads only work because of what you write - i.e. people come to read your stuff and click on the ads as a by-product. So, it’s not possible to generate revenue if your writing isn’t high quality (as measured by the desire people have to read it).
The problem is, it is possible for your writing to be high quality but for you not to generate revenue. What if the price-per-click model drastically changes one day? What if people get fed up and stop clicking on your nice ads? Your revenue is separated from your outputs by several factors that are out of your control.
Of course there are always elements that every business depends upon that are outside of their control - coffee futures could spike up because of a drought in Brazil, immigration policy could change the available resource pool, etc. etc.
I’m simply agreeing with what Antonio, CEO of Tabblo, has written about regarding the value of an output- and a subscription-based business model, and offering my concern about basing too much revenue in your business model on contextual advertising alone. You always must be able to tie your revenue to the specific value that you’re adding to the people who will ultimately give you your revenue.
You’ll note that I indeed have contextual ads on my blog … however, I’m certainly not earning a living from them or basing any kind of business or income model on them.
What do you think? Am I off track?
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