July 25, 2012 Luca Salzano by Luca Salzano
Marketing Manager, SMB @Facebook - Co-founder @Novertur
in Entrepreneurship

"“Free” doesn’t mean anything without a clear value proposition.""

The quest for sustainable business models

Two weeks ago, Henrik Dillman, CEO of the information brokers’ start-up Mancx, revealed the difference between American entrepreneurship and European investors’ requirements regarding business models. In an interview for FastCompany , the entrepreneur justified Mancx’s relocation in San Francisco praising the US entrepreneurship’s spirit. However, this enthusiasm was moderated by the acknowledgement that defining upstream business models (a European perspective) is relevant, while Americans insist mainly on the priority of huge user-base development with “free access” as a founding concept. In the end, according to Dillman, “quality does come with a cost”… a cost defined by clear business model design, and leading Mancx to charge its service. At the very moment when LinkedIn’s business model is thrown in the open and when Facebook is living a crucial exercise with its first report on ads ROI since in went public, business models come back in the heart of start-up foundation, making Osterwalder and Pigneur’s best-seller – Business Model Generation – more relevant than ever before. Comments from TRSM…

 

Apparently, there are two paradigms in the way to develop entrepreneurship and start-ups: The American “build-a-user-base and monetize” and the European “monetize and build-a-user-base” perspectives. The first one can typically be explained with the example of Facebook. When Mark Zuckerberg created the famous social networking platform he had no concrete idea of what it was going to become and how it was going to make money. But he launched it and, while gathering a fantastic crowd of users, started thinking of how this crowd could generate wealth and website’s survival, starting the famous quest for monetization. The European way, as stated by Swedish CEO Dillman, is the one where early stage investors want to see effective and sustainable business models. Thus, when willing to raise funds, entrepreneurs need to provide not only a product, but also the sustainable business model supporting its production, commercialization and revenue stream in the long run.

 

In late June this year, Forbes titled “The Anti-Facebook” explaining how LinkedIn was “turning your resume into a cash-machine”. This example of successful monetization was a tremendous mockery towards Facebook, given the problems the social network encounters in the stock market and the fundamental need it has to prove the sustainability of its business model. Indeed, this later is essentially based on advertising (85% of revenues), which requires a high-frequency of use to generate value and which, therefore, represents a rather risky business. It is not true for LinkedIn, which is making most of its money out of data inserted on the platform and available also when users are not online. Indeed, the main revenue stream of the professional network is the “little black book” the company is building up and selling to recruiters through LinkedIn Recruiters who provide access to a fantastic database of potential employees and guides corporates to relevant matches. Next to that, LinkedIn makes money out of its Freemium system of subscription and, of course, of advertising. As ironically stated by George Anders (author of the related Forbes’ article), “ask yourself which model [of Facebook or LinkedIn] seems more sustainable”.

 

This questioning and the noise around Facebook’s disappointing share price since it made its initial public offering, brings us to the central concept of Business Model, or the way “how an organization creates, delivers, and captures value”(Osterwalder & Pigneur, 2010, p.14). In this “European” way described by Dillman, building strong sustainable business model is a condition of access to capital. At the center of this concept lays the value proposition, or the value offered to a segment of customer with the related product or service. This regards the product itself. From here on, the challenge is to determine what I need to do in backstage in order to create this value (what it costs me) and what I need to do in the front stage in order to deliver this value to the customers, maintain it, and get money out of it (what gives high yields). This is where LinkedIn excels today, with a business model that appears very sustainable in the long run, and where Facebook fails, with a business model too dependent on advertising and a value proposition that is very dependent on traffic and related measurement and tracking tools. As the withdrawal of General Motors in advertising explicates it, tracking and measurement tools allowing to assess the real value and return-on-investment in advertising on the platform are lacking. This explains why the company will live a decisive Thursday this week, when it will have to show the real ROI it offers to advertisers (see in The New York Times).

 

What does it mean from a corporate point of view? Well, it means two things. Firstly, “Free” doesn’t mean anything without a clear value proposition. In order to use a social media the proper way, you must know and be sure of what it can really offer you. Even when it is free. Because, of course, every minute you spend on a social media you do not spend it doing another task or, worst, you do simply not spend it on another more efficient social media. Secondly, for entrepreneurs, it means that the European way of building strong business model upstream is not necessarily wrong and that it can lead you to higher yields quickly but also, to higher customer satisfaction. When Spotify announced his users that in the end, after a non-explicit full free trial period, the software wasn’t entirely free (in fact, you have a limited hours of free music available), most of the users’ satisfaction decreased impressively. This is, according to us, a monetization fail. It shows that entrepreneurs hadn’t figure out before what could be necessary and valuable to pay for and what was not.

 

Of course, recent examples tend to demonstrate that strong business models are not necessary. The horizontal expansion trend of big technological firms makes seemingly obsolete the need for sustainable business models from inception (take as example here the cases of Instagram with Facebook, Tweetdeck with Twitter, Yammer with Microsoft, or the attempts of Apple toward Dropbox). In our opinion, companies gain tremendous value with concrete business models, reducing risks, and offering more opportunity of independence. But in order to outperform competitors and gain sustainability, these business models not only have to drive value proposition to high yields but, also, must offer the ability to adapt to the value proposition fluctuations without risking penalizing the user…

 


References

 

Osterwalder A. & Pigneur Y. (2010), Business Model Generation, John Wiley & Sons.

Anders G. (2012), How LinkedIn has turned your resume into a cash machine, Forbes, Tech, online, 27-06-2012, http://www.forbes.com/sites/georgeanders/2012/06/27/how-linkedin-strategy/

Zax D. (2012), Q: What’s Info-Finding Site Mancx’s Big Idea? A: Charging Money For Facts, FastCompany, online, 11-07-2012, http://www.fastcompany.com/1842462/mancxs-big-business-idea-charging-money

Sengupta S. (2012), Facebook Efforts on Advertising Face a Day of Judgment, The New York Times online, 22-06-2012, http://www.nytimes.com/2012/07/23/technology/facebook-advertising-efforts-face-a-day-of-judgment.html?_r=3&smid=fb-share

Luca Salzano

Luca Salzano

Marketer and Internet entrepreneur with a true passion for strategy, marketing and new media, Luca is the co-founder of Novertur and TRSM. He tackles topics covering internet business and international trade. Luca is also interested in leadership and society's digitization.

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