Subscription Revenues; On-Demand Expenses

Note: Businesses should look at moving towards a model for recurring inflows while they should making their expenses as variable as possible.

Business Model – Return & Re-Use

This is a business model wherein the startup encourages users to return and sell unused items for an incentive. These items are then refurbished and sold off.

RATIONALE

Users have old and unused stuff which they want to sell off. A company operating with this business model can help these users get value for their items. At the same time, the company can add value to the items and sell them off for a profit, thereby ensuring a win-win for everyone.

STARTUP EXAMPLE

The Amazon Trade-In program buys hundreds of items from customers, across categories such as video games, DVDs, books etc. In exchange, these customers are given an Amazon Gift Card which can be availed on the website. The items must be in acceptable condition and Amazon verifies the product before purchasing any item. Amazon then makes it available for resale.

Business Model – Franchise

Franchising refers to giving the right of a firm’s brand and business practices to other companies for a prescribed period of time, in exchange for a monetary return. The firm giving the right is called the Franchisor and the one receiving it is called the Franchisee.

RATIONALE

Franchisors is a growth model through which firms need not invest time and money in setting up and replicating their business models in different geographies. They simply need to identify potential companies to franchise to. They pass on the brand and other business practices and need to ensure that these are upheld over time by the Franchisees.

STARTUP EXAMPLE

McDonald’sCorporation – The most successful restaurant chain in the world today which has used Franchising to expand across the world. The firm passes on it’s business practices and ensures that Franchisees uphold them through audits. Today it is spread in 118 countries and has over 35,000 restaurants being run under the brand.

Business Model – Just in Time

Just in Time refers to a business model where the business produces/sources based on the confirmed order by a customer, i.e. production happens ‘just in time’.

RATIONALE

Challenging the traditional and more accepted production strategy of designing a few models and pushing them to the customer, the JIT model is able to produce based on customer requirement. This customer pull based model is able to offer better customization to the customer, thereby enhancing customer experience and satisfaction. The basic rationale is – Not all customers are the same, so not all of them should be sold the same product.

STARTUP EXAMPLE

Dell – Dell is the company which has used the JIT model and has combined it with some marketing hacks to create the most dynamic and robust businesses we see today in the PC space. Dell has been able to cut down costs due to low inventory levels and a direct selling strategy, and has passed on these savings to the end customer.

Business Model – Online Aggregation

Aggregation refers to a business model where the startup gets information like deals and prices from all over the web and displays it on a single platform.

RATIONALE

With so much information being available on the internet, it has become very difficult for users to be able to browse through all the information and get the best out of it. Aggregators assist users in doing so. Users can see all the information on one platform and can compare the various options before finalizing on one.

STARTUP EXAMPLE

Kayak – Kayak searches the web for all offers on airfare, hotels, transportation etc. and aggregates all the information onto it’s platform for users to browse through. Users can search through several options and find the best deal for themselves.

How do I Create a Revenue Model for my Startup?

A model through which your startup will earn money is called a Revenue Model. The Revenue model forms an important part of your Business Model. Bad revenue models can result in startup failure.

While creating a Revenue Model, the following should be kept in mind.

Who to Generate Revenue from: An entrepreneur needs to assess who the main beneficiary of the business is and the revenue should ideally be generated from it.

When Revenue is Collected: Analyse when you want to collect revenue. For example a hiring agent can charge a company upfront on signing up or each time someone is employed in that company. Bad collection timing can affect the efficacy of the model. For example, in Bitequest, we used to collect revenue for every customer we sent to a restaurant. Revenue was collected post sending customers and was collected at the end of the month. Because of this, a lot restaurants tended to delay/default on the payments. Our cash flow took a beating.

How Much to Charge: This can be based on current market data or based on some logic or reasoning. Charging low will mean a loss of revenue and charging high may not be able to attract paying customers.

Getting this mix right will make your Revenue Model robust and the chances of your startup generating revenues higher.

The Business of Networking

Networking has become a popular business model to adopt for new startups in the past decade or so. With the advent of big startups such as Facebook, Twitter, Linkedin etc., networking has established itself as a popular model to look for budding entrepreneurs.

To start off, what is Networking about? Networking is basically connecting people around something in particular.

Social Networks: These networks help people connect to other people for friendship and to enhance their social networks. Popular examples are Facebook, Orkut etc.

Professional Networks: Here people can connect to others for work and to enhance their professional networks. Linkedin is the prime example.

Interest Based Networks: Here people connect to each other with a particular interest in mind. Some examples include startup networking to raise investment, people networking to get married, find love and so on. Some examples include Angel-list, Tinder etc.

So why has Networking become so big? Networking’s success as a business is dependent on one tendency of humans – ‘Humans want to connect’. Connections create value and hence, a combination of a tendency with value creation has to be sustainable.

Now, how do these guys make money? The Networking service for users is free in most website.

Some typical revenue models are mentioned below.

Advertisements: This is the most common and significant revenue model for a lot of businesses. Promoting your account or content through banner ads, featured listings etc. is done by users of the network. A lot of businesses use these sites to connect to existing and potential customers and hence they are the ones who tend to advertise the most.

Freemium: Basic services are free. For enhancing your account features, you need to pay. For example in some matrimony portals, you can view up to a certain number of listings free. For viewing more, you need to pay.

Affiliate: These websites have the database. Brands wanting to market to this database pay these websites a charge for sending out their emailers etc.

Subscription: Some websites, to keep the network closely knit and very relevant, charges subscription from users. The thought process is that only those users will pay up who are genuinely interested and can add value, thereby acting as a filter.

Networking has emerged as a strong business model and in this era of constant innovation, knowledge and competition, the benefits of networking are bound to grow.

Tips on Starting a School

A K-12 school is a venture which seems all hunky dory from the outside and has interested entrepreneurs young and old, fresh or experienced, here in India. Having worked in a School in Gurgaon, I feel the situation is not as glorified as it is made out to be. I would like to share my thoughts on starting and running a school.

Starting and running a School is a lot about doing the following things well.

Setting a Vision: A clear vision needs to be set at the onset itself. We need to define the purpose of our school and what it aims to be.

Making a Solid Plan: We need to clearly identify our target market. We should know what type of parents we are targeting (as the real ’customers’ are parents and not students), what they expect and how we intend to match these expectations. Our fee and facilities should be set in accordance with the above.

Doing the Paperwork: Most schools in India are run under a Trust/Society. We need get the same registered and getting the necessary affiliation from the Board of choice.

Buying Land & Giving the Building Contract: Since this is the bulk of the investment, finding and analyzing different options is a must. Know which location would be better for your target market. Hiring a good Architect and Builder are key to getting a good facility up.

Hire a Good Team: The Principal is generally the CEO of the school. Hiring a good Principal and then building a great team around him/her is of prime importance. Since most founders do not possess teaching skills, the team is what drives a good school.

Make a Marketing Plan: Try to be specific in marketing to your TG. This will help lower your spends and give you a better return.

Starting a school has some advantages as a business opportunity.

Recession Less: Schools tend to grow at a regular pace, notwithstanding economic conditions around. Parents do not tend to compromise on their children’s education.

Self Sustaining: Once set and running, schools can sustain themselves and do not require much participation from the management on a regular basis.

Despite these, I do feel there are some downsides as well.

Low Returns on Investment: Since the capital expenditure is very high in starting a school, the returns are relatively low as compared to other businesses. Also the gestation period tends to be high.

Lower Growth Rates: Some reasons for this are that admissions happen only once a year and capex needs to be done to take in new students above the capacity. With regards to greenfield expansions, some models such as Franchising have proven to be a boon for schools looking to scale. 

The AAS (as a service) Model

I really like this model. It basically means that a system/product is developed centrally and a user can buy a right to use it rather than having to buy it.

There are some obvious benefits to this.

Cheaper for Users: Since they do not have to buy the product, it proves cheaper.

Easier to Maintain: Since the product is hosted at one place, enhancement and maintenance is easier to do and the cycle times are lower.

Easier Customisation: Most products developed are module wise, which makes it easier for the seller to customize the product for a user based on it’s requirements.

If you look at the overall picture, it makes sense to not waste time and resources in duplication.Creating, hosting and maintaining centrally creates economic value.

Online Book Rentals

Reading has always been done with 2 primary motives, for recreation and for getting knowledge. Though I am seeing the reading culture dip around me (this is just my experience and not based on any facts), I still feel that this model might make sense even today.

Setting up an online book rental service, where customers can rent books online which gets delivered to their homes, can be done in 2 ways.

Hyperlocal Way – Here the fulfillment of orders is done by tying up with local libraries and picking up the book from the closest one and delivering it to the customer.

Benefits: No capital for inventory, faster fulfillment of orders, can be replicated for other products (a ‘Grofers for Rentals’)

Concerns: Profitability is a concern, limited variety for customers, Scalability

Inventory Model – Stock of books is kept at own warehouse and orders are fulfilled from there.

Benefits: Control over supply chain, Better margins, Scalable

Concerns: Capital investment, More wear and tear due to courier involvement

Other than the operations, we also need to look at which revenue model to use.

Monthly Subscription – Users are charged a monthly fee for borrowing x number of books per month.

Individual Rentals – Charging per book rented out.

Book reading is still passion for many. However, I am not sure about the size of the market to build a startup in. Do your research before starting up in this space.

B2B Business

B2B is defined as a Business selling 2 other Businesses. Here the customers are businesses and the dynamics of this business model is quite different from the B2C (business to individual consumer) model.

The reasons for the B2B business model being different are many.

Businesses are more Informed and less Impulsive than Individuals – When a business buys a product/service, it tends to put in more research and get more information before actually making the purchase.

Sales Lead Times are higher – Since the customer takes more time to decide, the lead times for the sale are higher.

Lower Volumes – Since the number of businesses is much less than the number of people.

Bigger Ticket Sizes

More Manually Driven – Sellers need to offer more manual intervention before concluding a sale. A physical meeting is important for a buyer as it builds trust.

B2B is a model which has not received as much interest as the B2C counterparts. Some reasons for this maybe the following.

Scaling is difficult – Since manual involvement is generally required to conclude a sale, scaling is more difficult and requires a sales force.

Higher Customer Acquisition

Despite these limitations, the B2B opportunity is huge and presents an opportunity for budding entrepreneurs to find a gap in it. 

Business Model: Online Grocery Shopping

Online grocery has been one sector which has done very well in the last few years. It basically involves selling all grocery products online. It offers customers a wider variety of products to choose from along with the convenience of getting them delivered at your doorstep. With new hyper-local entrants entering this space, the delivery times have also reduced drastically.

Online grocery as a segment is very attractive owing to the following reasons.

Big Market Size: Everyone buys groceries.

Repeat Purchase: Groceries are bought regularly after a certain period of time.

Unaffected Growth: Groceries are and will continue to be bought with slight variations in value even during times of low economic growth in a country.

Having said all this, the vastness of this sector brings with it certain challenges.

Very Competitive: We tend to see a lot of players in this sector such as the big eommerce players, hyper-local ecommerce as well as offline players like the big modern trade stores, the local kirana stores  etc.

Low Margins: Margins are very limited and hence profitability tends to be a big concern for startups operating in this space.

New players looking at entering this space need to assess the above factors and analyse how they will compete with the existing players. Maybe not on the product front, there is a lot of scope for innovation in services around the supply chain such as delivery, order booking, customer experience, returns and so on.

How Do Websites Offering Free Services Make Money?

Most free web services plan to make money by the following:

Advertising model - Know as much as possible about the user and bring targeted ads. 

Freemium model - sell a free product and plan to convert some of them to a paid plan.

Limited period promotion - Start with the free product for a promotional initial period and plan to charge it later. For instance, 37 Signals provides free 30 day trial offer for most products and then charge if you use later. This is a tough thing to master these days.

Sponsorship model - If your service indirectly helps the government and/or major organizations you could ask them to sponsor your service.

Wikipedia model -  You could get donations from your users. Many wordpress plugins, open source tools and Wikipedia do this. This could be the future of newspapers.

Gillette model - Printers and razors are sold less than cost, as they plan to make high margin from selling a complementary product (cartridge/blades). The printer or blade you purchased will turn worthless if you don't buy the super-high margin complementary products from the manufacturer. On the web, for instance, you could create a cloud based spreadhseet/wordprocessr that is free to edit/create documents, but charged money for exporting it as a file to the local machine. Or you could charge high for the iPhone app that can access the data natively.

Open Source Model - Sell the product for free and plan to make money on support, customization and installation. Most open source software follow this model.

Usage charge model - This is related to the freemium model. Give the product free for low usage, but charge when the user is exceeding the free limits (many storage applications such as Dropbox fall under this). 

Zynga model - Sell products through in-app purchases or to get forward in the game.

Credit card model - In this model, you make your product free for one side (consumers) and use the network effects to make the other side (merchants) pay. Facebook, Yelp and other online marketplaces are now getting on to the model.

Upsell/Cross-sell - Sell a free product & use that to promote a premium product in the same segment. For instance, If you run a finance website, you could give stock quotes free and sell premium analyst reports and financial planning tools.

Build a brand - Use the free service to get brownie points/good press and use the brand image to sell premium products (directly related or not) later.

Affiliate marketing - Signup for affiliate programs related to your service and convert your users to customers of your affiliates.

Sell it to Google - Build a big user base that might attract a big buyer such as Microsoft or Google, who might use the user base to sell their premium products/services.

Make your next venture a success - If none of the previous stuff works, you could run a free venture to build your personal brand/get popular and hope to get funding for your next venture.

(article written by Balaji Viswanathan, Product Manager at a VC Funded Startup)

The Business of E-Commerce

Ecommerce includes any commerce which happens on the internet, be it buying and selling of any products and services. This includes a host of online business industries like online travel, retail, business/consumer services etc. Also the business can be conducted between 2 businesses (B2B), a business and an individual consumer (B2C) or between 2 individuals (C2C).

During my work in Beveragewala, I have seen multiple models of ecommerce existing in the market.

Inventory Model: The seller buys and maintains inventory and sells it online. The benefit is that the seller controls product/service quality and all logistics around it. On the other hand, it also means a higher capital infusion required to buy inventory. Private labels of goods/services, online travel tend to work on this model.

Marketplace Model: The seller simply acts as a platform for commerce between buyers and vendors registered on it. It provides all logistics and payment support around the sales which happen on it’s platform. The benefit is lower capital required as no inventory is maintained. Big ecommerce companies like Amazon, Flipkart etc. tend to work on this model.

Drop Shipment Model: The seller takes an order and passes it onto the vendor. The vendor directly ships the product directly to the buyer. The benefit to the seller is no inventory and logistics required. However, the buyer’s experience, and hence the seller’s brand, is totally dependent on the vendor. This model has not found much acceptance and has been replaced by the Marketplace Model in most cases.

Have a plan!

A business plan, as theoretical as it may sound, is a must have for any entrepreneur. Lack of a proper plan is a very big reason as to why my last startup failed. We often tend to think that a plan is only required to show to an investor when we start looking for investment. This is a big mistake most of us tend to mistake.

One MUST have a plan for the startup from the very first day. We need to comprehensively plan the business for the short and the long terms. A typical plan must include:
- vision and mission of the startup
- product/service clearly defined
- target markets addressed alongwith their sizes
- financial planning with regards to money required and revenue models
- team plan; who we need now and how this will change over time
- my competitors; their strengths, weaknesses and that one solid thing (atleast) which differentiates my business from them
- targets for everything; customer traction, sales, profit margins etc.

I am not saying that actuals will go according to the plan and in fact they almost never do, but it is important for an entrepreneur to know what the reasons for the deviations are and what has to be done from there on. The plan needs to be updated regularly so that, as I have already mentioned in a previous post, the entrepreneur is in control of the venture.