I’ve been meaning to write up the presentation I gave at BizCamp Dublin for some time so when Kevin Noonan asked to borrow one of the slides it gave me the incentive that I needed to start typing.

One of the great aspects of the Internet is how easy and inexpensive it has made setting up a business. In a lot of ways it is similar to the software industry; there is effectively no capital investment needed (you don’t need to build a factory) and there is close to a zero cost of sale (each additional sale adds nothing to your overall costs).

What is unique to Internet businesses is that they can frequently dispense with the cost of distribution. Even software companies have massive sales and marketing costs that are either borne by themselves or by a distributor. A web based business presents the opportunity of dramatically lowering or eliminating these costs.

This means setting up a web based business is cheap – cheaper in fact than it has ever been to set up a business. We all moan and complain about how difficult it is to get start up capital, but think how difficult it would be if you needed tens of millions to build a factory before you even made a single sale!

The web is also democratizing business, and it still has a long way to go, but for the first time almost anyone can think about setting up an international business without major backers.

This is a good thing but it doesn’t come without its own share of risks. If you were building a factory on the basis of tens of millions investment there would be a team of ‘grey suits’ analysing you business plans and doing the due diligence to make sure you weren’t sinking their money into a sure-fire loser.

Seeing as web start-ups don’t have this level of investment, this level of due diligence is absent. This is a problem because you are still investing the most valuable asset you have – your own time.

Think about it. If you are thirty years old now and are thinking about starting an online business, realize that you will only be thirty once; you never get to relive that year. You owe it to yourself to ensure that you have done the necessary checks and balances to help ensure you aren’t pissing your life away.

Four Business Questions

There are four questions I always ask whenever I look at a new business. Good answers to these questions help me figure out if there is a viable business there.

  1. Who will pay? Are you delivering value and are you delivering it to someone that can pay? There is no point in building super cars for teenage boys – sure you’re delivering value but they can’t pay. Seems obvious but this is something that a lot of start-ups have problems with. One of the reasons for this is the proliferation of Silicon Valley web starts up that have no obvious route to monetization. A full 10% of the Webware top 100 companies have no revenue model. This may be a viable model for companies that are awash with start up capital, but it is not a reasonable approach for small start-ups on the edge of Europe.
  2. How much will they pay? A lot of business plans make the assumption that the value their products deliver is equal to the benefits they bring when compared to the customer taking no action. This is not true. The value of a product equals the difference between the benefits of your product versus the customer’s next best option. For example, if you are providing a financial planning application the value that you provide is not the value of financial planning. Before you came along businesses still did financial plans. The value that you offer is something different. It is the time that you save or the improvements in the plans or the cost reduction in the price of what you offer versus what they currently use.
  3. How will they pay? This is not so much the payment mechanism as the structure of payments. This should ideally model the way in which the customers derives value as closely as possible. For example in RevaHealth.com we provide health clinics with patient enquiries which they subsequently convert into patients. If we closely tied the revenue model to the value that we provide we would charge our customers a commission on each patient enquiry that converted into an actual patient.
  4. Can revenues be reconciled to costs? If you can’t reconcile revenue to costs then you don’t have a business. This isn’t just a matter of making sure that revenues exceed costs, it is also a matter of making sure that revenues come in quickly enough to cover costs. If we examine the above example where we would ideally charge our customers on a commission basis, it turns out that revenue would take 6 months on average to come in and would prove very difficult to collect. We wouldn’t have a viable business using this model.

Five Web Business Types

I categorize most web businesses into one of five core types. I am sure that there are more but this gives me a basic model that fits just about everything that I have come across.

Five Online Business Types

Five Online Business Types

  • Merchant – This is the simplest model. You buy something and then sell it on for a higher price. Examples are Amazon, iTunes, Woot, etc.
  • Operating A Market – You bring buyers and sellers together into a market place and enable transactions to take place. The different here between operating a market and being a merchant is that you enable the transaction but are not actually party to the transition. Good examples of online market places are amazon.com, eBay, Google AdSense and Etsy.
  • Application Provider – Here you typically provide software as a service. Good examples are Basecamp, Gmail, Mint and Zoho.
  • Utility – You provide an Internet service that in isolation provides no value; however, when combined with other applications you provide measurable benefits. PayPal is a great example – by itself it has limited value, but when combined with market places and merchants it provides great value. Other examples include; Amazon Web Services, Open DNS, YouSendtIt, OpenID and AlertSite.
  • Publisher or Broadcaster – You could be dealing with commercial content or end user content; it really doesn’t make much of a difference. Essentially the role of a publisher or broadcaster is to distribute content. Examples include last.fm, craigslist, flickr, youtube, etc.

Five Revenue Models

There are five basic revenue models I can think of that cover these five business types.

Five Online Revenue Models

Five Online Revenue Models

  • Mark up – This is old school business. Simply charge more for something than it costs you to buy. This model is particularly suited to online merchants like amazon.com.
  • Commission – Charge a percentage or fee on each transaction. This is the obvious model if you are setting up an online market place. eBay would be a classic example.
  • Subscription – Charge a recurring fee. There is great flexibility to the subscription model and if you are going to monetize your business through subscriptions it behoves you to spend time working out the ideal structure. Business types that commonly take advantage of the subscription model are application providers and utilities.
  • Pay per use – Charge every time someone uses your service. Utilities tend to uniquely take advantage of this model.
  • 3rd party sponsorship – This normally takes the form of advertising but can also be acting as an affiliate. This is particularly suitable for publishers & broadcasters due to their large audience base. It can be effectively used by application providers as well in certain niches.

This is only the first half of my talk at BizCamp Dublin. Watch out for the second half with a more in depth look at how things like customer churn and on-site advertising can affect your business. In the meantime, we’d love to hear your business model stories, good and bad!