Tag Archives: business model

Who wants to actually slaughter a cow?

The Butcher and the Value Proposition

Every time I hear people working in digital in Australia complaining about potential clients not wanting to pay for their services, or not truly valuing their services, I sigh…. They somewhat viciously call these people, the non payers, the Parasite Economy.   But instead;  rather than blaming others,  perhaps they should be thinking about their own value proposition!

Because I strongly disagree with them.  In my argument I like to use the analogy of the Butcher. Because A. I reckon the Butcher is a great analogy and B. It tends to upset the intellectual elite who embrace innovation and reject without thinking the “patently absurd notion” that they could learn anything from Butchers.

Evolving the Butchers Value Proposition and Business Model

But here’s the thing, the Butcher’s value proposition and business model is mature, clear and valued.

The value proposition is simple; people want to get some meat locally, but they don’t want to actually butcher a cow (yuck!) or have to store an entire dead cow (difficult).

The winning business model is to put a shop on the high street without competitors, front load your cabinets to look bountiful and be hygienic.

But when you pick at the surface, things get a bit interesting. Butchers have evolved their business model over thousands of years. You can be sure that along the way entrepreneurs have tried out different variations on the offering, and found they failed to deliver as much value as selling meat in a butchers shop. Do any of the below ring a bell?

  • Selling you cows for slaughter – checkthe value proposition of the butcher
  • Slaughtering you cow at your request – check
  • Providing you a slaughtering room to do the deed yourself – ?
  • Providing and sharpening butchers knives – check
  • Providing a large cool room for you to store your dead cow – check
  • Bringing meat cuts to you to buy, door to door – check

You see almost all these offerings are plucked from different parts of the value chain, but the local butcher operates the part where his value is maximised and easy to understand. He converts larger pieces of meat into a variety of meal size portions makes them available for you locally. It sounds simple, but it took thousands of years to evolve to this.

How can you not learn from this evolution of a business, or find it fascinating?
Its quite apparent that when people complain of potential customers not valuing their service, the truth is not that there is no value, but the market hasn’t yet determined where the simplest and greatest value is.

Perhaps if you look at your offering through this lens, you can evolve your offering to something that’s easier and more lucrative. Note – nobody asks the Butcher for free food as it will be good exposure for them as there is no Parasite Economy for Butchers!

And when he innovates?

Butchers know that when competing, you get the greatest acceptance and valuing of innovation when it is a small referenceable change rather than a complete paradigm shift. Which is why you see new and different sausage mixes being on sale – rather than lab grown meat in the cabinets!

Getting Paid Twice

Goran RoosHow do you make $2 profit from every $1 sale? That was the guts of a fabulous speech by Goran Roos last night at the Churchill Club. Its hard to put Goran in a box, but he is a management consultant, entrepreneur, Professor, Chair of the Finnish version of the CSIRO and currently on loan to the South Australian Government as a thinker in residence.

Some great examples he raised around becoming more profitable were:

Mills & Boon – Who in the 60’s ended up making $1.25 profit for every dollar of revenue they made selling books. The key to this was selling (80,000 copies of) a writers manual to potential authors. This level of profitability ended once Mills & Boon changed hands.

Costco – Who use their membership fees to cover their fixed costs. They then make their real profit not on the low-margin goods they sell, but in their banking as they receive immediate payment from customers, but pay suppliers at around 270 days. Effectively they are a bank!

Pearson Publishing – Every article gets written both as a summary and an in-depth piece. The journalists become subject matter experts and write books, give speeches and provide training. So the one piece of creativity ends up having 5 or 6 different revenue streams attached to it. Interesting to compare them to the L.A. times that reacted to reduced revenues (due to the internet) by cutting editorial staff, which led to a quality reduction and eventually a death spiral.

Ryanair – Although you can technically fly for free with Ryanair if you purchase your tickets early enough and obey all their rules, Ryanair has generally become the most profitable airline in Europe. They will charge you penalties if you book late, haven’t printed out your boarding pass, want to check luggage, want to make a change, or want food and drinks on board. They charge airports to deliver passengers/customers and have advertising everywhere. Their costs are cut to the bone using second hand equipment, using staff from countries with high unemployment rates and even making staff bring their own pens if they feel they need to use one.

So increasing profits is not so much about cost cutting, which normally ends up severely damaging, if not killing, a business after a short-lived improvement in profitability, but doing two things.

1. Asking for an unreasonable outcome, such as $2 profit from every $1 sale. This sets creative juices flowing and makes your team think outside the box.

2. Looking to access new profit pools, rather than try to increase your share of existing ones. This means that you can have your profits exceed the values of your core sales.

So it appears that the key to increasing your profits is really understanding who your customers are, who all your potential customers are, and how to turn your suppliers into customers. I loved hearing that not only did Ryanir do great deals with their food suppliers, they also charged their suppliers a fee for exclusivity.

Event Report – The Monetisation of Social Networks

From the Churchill Club Event of 11-Jun-09

So I had a panel answer a number of questions around monetising social networks, including:

  • Are there profitable social networks or “are we just hanging on till we get bought”
  • What are the winner and loser models
  • What are the KPI’s
  • Can you switch horses during the race?
  • What’s next?

The Panelists were:
Martin Hosking – Chairman of Red Bubble
Lisa Watts – CEO of Artshub
Peter Daams – Cofounder &  MD of Travellerspoint

With myself as the moderator.

Lesson 1 Understand your community

Most people will only ever belong to a couple of communities at one time as true membership requires passion, and you can’t be passionate about lots of things at the same time. (eg family, career, hobby – pick two only)

The internet is not the community, its simply a method of virtually connecting a real world community.

If you can dominate a niche and act like an industry association, membership of your social network will be a given.

Lesson 2 Before you start Continue reading Event Report – The Monetisation of Social Networks

Lessons from the Adult Entertainment Industry

Fiona Patten and I were both born in 1964. At around 26 I made a major change in my life and moved from Western Australia to Victoria. I had actually planned to move to NSW, but never quite made it there as my intermediate move to Melbourne kept on getting extended. 18 years later with wife, kids, house, and businesses, I realise I never actually planned to move to Melbourne, but I’m really glad I did.

Fiona also made a major change at around 26. She was a fashion designer who started putting on fashion parades at 3 in the morning. Her target audience was sex workers and her mission was to raise funds for people suffering with HIV. And that was the start of her relationship with what’s preferably known as the Adult Entertainment Industry. 18 years later she is now the spokesperson for the industry as CEO of the Eros Association. Fiona didn’t plan to be there either but she’s glad she did.

I figured that Fiona and her industry had learnt vast amounts about doing business on the internet as everyone is always telling me that the porn industry is making money hand over fist. So I decided to have a crack at getting Fiona to spill what she knew about technology trends and business models. I thought it would be great content for a Churchill Club event . So we did it and actually managed to have an enjoyable, educational, judgement free, snigger free evening. I decided to share what I learnt.

The Environment

Her industry is one of the most regulated in Australia. Distributing adult DVD’s is illegal in most states, but a blind eye is normally turned to it by authorities. This causes a massive headache as piracy is rife in their industry (maybe 80% of content purchased). But on a piracy complaint, Police are much more likely to simply arrest the person for selling illegal adult content than pirated content. Since AICO , Adult Industry Copyright Organisation, doesn’t want to damage distribution channels they have to take slow, expensive civil action against each pirate.

The adult entertainment industry never planned to be online, they were pushed there by market forces and problems with distribution channels. But once there, they found they a new level of scalability. They could have websites with 100,000 members paying $30 per month. Unfortunately this is no longer the case and those days (just a couple of years ago) are fondly known as the “good old days of the internet”.

Banks were also loathe to give the industry access to their payment gateways lest they be seen to be supporting porn. Necessity’s being the mother of invention this meant that the Industry ended up developing this own third party payment gateway solutions so that they could take money online. Interestingly third party payment gateways (eg Paypal, Authorize.net etc) now dominates transactions on the internet.

So What’s happening today?

Not all online innovations happened first in the adult entertainment industry though. The rise of Youtube has led to “tube sites” becoming vastly more popular. Delivery of video inside a flash player means that content can be delivered with clever controls, advertising funded sites can be built incredibly quickly and content is harder to pirate. In the last two years or so, 2.5 Million adult tube sites have apparently appeared on the internet.

And like Youtube, user generated content has also become very popular. Unlike Youtube users were much more militant and a 50/50 revenue share model was quickly settled on.

One of the changes that’s happened through delivering content on the internet is that the industry has realised customers are happy to purchase short short clips, 7 minutes is apparently just right for most men :)  .   So the economics of making full length adult movies (around $100K to produce) is becoming more shaky. Interestingly the adult entertainment industry is now looking to music industry models to see what they can learn about unbundling content and collecting royalties.

There is also a fair bit of experimentation with revenue models going on. Content is sold by monthly access, by the clip and by the minute. There are also plenty of successful sites that offer low quality free content with advertising wrapped around it. Delivering content inside a flash player in a web page means there is plenty of real estate for advertising, without having to insert ads into the video.

Many of the stars of the industry (again like the music industry) have Myspace sites. Not only are these stars approachable they are generating significant traffic to the content sales sites.

So what’s on the horizon?

Fiona regularly travels to the US to look at trends in the industry and a number of things caught her eye that she thought she’d pass on.

The pressures of content piracy combined with a market need for only 7 minute clips means that full blown movies may become a thing of the past. The short movie format is much more desirable to customers and much more profitable for the industry

It was quite clear that the increased availability of broadband was leading to content that’s filmed from multiple camera angles that the user can select from on the fly. Fiona commented that the accelerometers in an IPhone could quite easily be used to track how you are viewing content. This means that you could turn your phone to change the camera angle you were viewing. Apparently this is being experimented with already.

Like every mature market, global players are appearing that are buying up content producers. The small guy strategy is to get better at market segmentation. More and more niche interest sites are starting to appear. Its no longer porn. Its becoming short porn, tall porn, green porn for left handers etch.

The gay market is also being recognised as punching above its weight in terms of revenue generation. Apparently the average catalogue has 10% gay items in it, but this generates 30% of the revenue.

The social networking platform Ning has just announced that it will no longer allow adult content groups to run on it. The industry apparently considers this quite exciting as it means video piracy will be reduced (apparently lots of content was shared inside Ning communities) and it will drive these nascent communities that generate their own content, back into the fold where revenues can be derived by the industry.

The downside of all this user generated content, online communities and community acceptance is that more information about what people like in the space is now online and potentially compromising your right to privacy. However it was Scott McNealy (Ex CEO of Sun Microsystems) who said in 2001 “ Privacy is dead, get over it”

Magazines, DVD’s, TV, Film, Computer Games all have different regulations in regards to adult content. There is expected to be some alignment between the regulations in the future. This means that some adult content will start build brands by taking advantage of lots of channels to market. Think Pirates of the Caribbean with its movies, games, dolls and colouring in books. This isn’t possible for the industry today, but clearly will be in the future. (Actually, maybe not the colouring in books).

The final thing that Fiona expected to see in the future was more complex offerings in her industry such as the multi viewpoint clips, and two way broadcasting. She also expected see offerings that combined online and off-line components. The driver for this innovation will be the fight against online piracy.

And on top of all this, it turns out the Adult Entertainment Industry is pretty much recession proof. Makes you think what kinds of innovations are going to flow down to us in the near future.