Business models and luxury vs need

Emma Butin discusses the need for startups to have a business model early on, and breaks down the nature of defining a product as a need or as a luxury

Photo Credit: Flickr, CC-by-That Hartford Guy

Photo Credit: Flickr, CC-by-That Hartford Guy

A business model is designed to understand your viable sources of income. There is a notion that once we release a product that is used or will be used by millions of people, a business model could later be developed. While that may hold true, it is a good idea to get an early start on a viable business model, primarily because it releases some of the tension that comes when an entrepreneur is overly dependent on their investors.

Just a suggestion for now: stop referring to your startup as a ‘startup’ and begin to refer to it as a ‘business’ instead. I say this because the word ‘startup’ has somewhat of a non-committed ring to it. It carries with it the impression that investments are its primary source of income and financing. The word ‘business’ gives us a different and more self-reliant impression, turning your product into a full-time working company.

Consider that once a seed investment is obtained, the next level of investment is normally obtained to grow your business. Thus, it is imperative to think about early on (even during the product validation period) what viable options you have to implement revenue creation mechanisms. The ramifications of finding the right business model, even if your product isn’t generating income during the first years, will directly impact your investment strategies. (More on investment strategies in the coming chapters).

Most importantly, look at finding the right business model to serve as your platform for innovation.

Prior to choosing a model, it is essential to consider whether the product you introduce will be marked as a product that saves, leverages or optimizes a certain activity – let’s call this a ‘Necessary product’ – (and please don’t use the word optimizes in your consumer ads), or whether it will be seen as a fun, luxury, improvement product – let’s call this a ‘Luxury’ product. While not all products fall into this dichotomy, for simplicity purposes I would like to explore these two paths that emerge when using this methodology.

If your product falls within the category of the Necessary Product, then make its advantages very clear. Showing hard facts of improvement/savings with and without the product is highly recommended because it provides consumers with clear comparative analysis. By doing that, your will be shortening the decision making process of your target market.

Some examples:

Onavo – saves you money on data usage. In its demo, the company presents hard core facts. The message is clear and conscience; it doesn’t leave much room for deliberation.

Moreover, pricing for such a Necessary Product could be easily set due to the clear boundaries within which it falls.

If your product falls into the Luxury category, then it most likely has emotional appeal. Leverage that! Our emotions have no clear boundaries and are very individual. Therefore, pricing for such a product may vary greatly.

For example: Do you remember that individual from China who bought that virtual sword for $16,000 – just for the chance to get ahead in some video game. Logic or pure emotion?

Exploring your options, you may choose to take your Necessary Product and market it as a Luxury one, or as a necessary luxury. For example: Soluto appeals to us as an ‘anti frustration software’.

The bottom line is that an early start of setting the right stage and determining which path to go is the basis of understanding your market size and the potential revenue generation your product can expect.

Once we understand that, we can explore different existing revenue-generating mechanisms and add an edge to them. The following is an overview of some basic models on which and edge can be built. Hopefully they’ll serve as a good starting point for you to start coming up with your own ideas.

The Trivial: an ad platform

Once a good model works, we tend to be herd-like in nature. This happened with the ‘ad platform’ model. The results are that the market is overly saturated with ads and ad- platforms, thus resulting in lower prices and very high competition for good spots. If you’re serious about such a model, give it an edge. For example: Shaker – developed whole scenery for their ads. Another example is Interlude. It provides advertisers with a schticky story-telling mechanism.

The Freemium/Premium Model

Plenty has been written about this model. Essentially it boils down to having the right balance between free and non-free. There are many products out there for which the freemium version satisfies our needs just fine, and for other products we may find ourselves paying instant hard cash.

Some examples:

The simple: Scribed is a site that provides useful information (pictures/presentations/books) – all which can be found online for free use. The demand here appears when we find useful materials which we would like to download and use. Then a few simple premium packages kick in.

The extreme: Farmville (Zynga) – the urge to get ahead/win turned freemium users, not only to paying customers, but some went as far as to create a market of employing others to keep on playing for them.

There are numerous examples and case studies that are recommended to review prior to initiating such a model. One recommended read for this model is the book “Free” by Chris Anderson. The author provides us with a deep understanding of market change and presents the reader with many good examples to learn from.

A brief note on 2 more:

Data Collection  

Data collection is a long term strategy for which a proper infrastructure should be ready, primarily because the market is heavily saturated here as well. If you choose this path, prepare ahead by understanding your market thoroughly. Read up on trends, determine the specific data you’re collecting and the reason for it.

Tweet As you go

Essentially started as a mechanism to develop and spread various models, whereby a consumer may benefit from a product as long as the word spreads.

I would like to leave you with some food for thought: a Pay-it-Forward model. It’s different from the model above since the consumer does not obtain an immediate benefit but rather only as it gains traction later on. What do you make of it?

 

Emma Butin

Emma Butin is a technologically challenged geek. She loves everything that that is served in a no brainer effort. Emma’s obsession is to take big ideas and compile them into one button. That’s why she is working with start-ups right from their early stages distilling products to one button. In 2008 Emma Founded Kryon System, an international award winning software company with patent pending technology. In June 2013 Emma released her first book (in Hebrew) "About Economics and Love.” Today, Butin also teaches “strategic entrepreneurship in hi-tech” at the IDC Herzliya and engages in speaking around the world.

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