Tag Archives: revenue

Revenue Model Innovation

Over a decade ago, I made the acquaintance of CIO of a major Bank, and asked him to become involved in my small IT services business which was growing like a rocket; 0-$2M revenue in year one. He declined, and said that “he didn’t find our business model scalable”. After the rejection I thought “how ridiculous, look at our growth!”

But since that moment, I have been thinking on and off about business models, trying to discern patterns and to have a conceptual framework to work within so that I could design better business models. I feel this is one of the core competencies of the entrepreneur.

Eventually, one of my understandings was that sitting between your product with all its features & benefits and your customer, was your revenue model. And according to Alexander Osterwalder and Yves Pigneur there are only 7 types of revenue models:

Asset Sales – Transferring ownership, normally as a one off transaction. Like a chocolate bar or car.

Usage Fee – The more a service is used, the more a customer pays. Like a hotel room or courier.

Subscription Fee – An access fee to a service. Like a telephone network.

Leasing – Granting the exclusive right to use a product. Like renting a trailer.

Licensing – Permission to use intellectual property in exchange for a fee. Like producing Disneymerchandise.

Brokerage – Charging a fee to be an intermediary. Like credit cards and stock brokers.

Advertising – Charging a fee for advertising a product or service. Like Television or event sponsorships.

The insight I had was that despite the industry, service or product, a good revenue model has two attributes that are common.

1. It creates an Annuity Stream

A system were you have to put energy into every sale you make is not much fun and its difficult to generate substantial returns. Engineering firms are forever chasing their next project. A much better solution is to sell once and then see the money rolling in month after month, known as an annuity stream. As your revenue grows, so does your profit margin as your direct costs decrease. By selling this way, you can also forecast the future and have increased confidence when decision making.

2. It maximises the price you can achieve

The two simplest questions to ask a business about pricing is “are you really covering all your costs?” and “Are you leaving money on the table?”. Its too easy for a new business not to factor in deferred costs such as maintenance or employee leave into its pricing, and finds out at the end of its first year, that it wasn’t actually profitable. Its also too easy to find out your customers would have paid much, much more for your service when you thought giving it a margin of 100% was being greedy. Pricing is always an incredibly complex issue, however all models generally fall into one of two camps. Its based on static variables such as list prices and quantity discounts, or its the cleverer  dynamic, based on market conditions such as you see with auctions and yield pricing. If you think of the dollars as a continuum, with cost to supply on one end, value to the customer on the other – your goal is to get your price as close as you can to the customers value without it being a barrier to sale, so you maximise your return. This requires experimentation and insight into your costs and his values.

So the trick here is to get creative with your existing revenue model and make it work harder for you, creating annuity streams and maximising price, without alienating your customer base. This is part of creating a Revenue Model that is scalable. How you do this, I’m not certain of just yet, which is why I am running a Churchill Club event on it. When I find out, I will be able to create the scalable model the CIO indicated I should have before he joined me, but then ironically, I probably wouldn’t have needed him.

Superprofits from the Arcade

Crane GameI just spent a week down on the Mornington Peninsula with the kids over school holidays. I tried to keep my mind on Kite flying and mucking about at the beach, but I came a across a small business that I found just fascinating in how they generated their revenues.

On first glance it appeared to be a games arcade with lots of video games and machines that you thump, prod or throw balls in. I was surprised to find that they didn’t have much food or drink for sale, but they did have lots of prizes in cases you could win.

It may sound weird but at the end of half an hour or so, I suddenly had an epiphany about their business model. They weren’t selling arcade games, they were selling primitive plastic gifts at outrageous margins.

Consider this:

  1. We purchased tokens from a machine, to put in the arcade games. Roughly $1 per token with a volume discount (eg. 6 tokens for $5).
  2. When you finished the game (or even part way through) the arcade game started spitting out a string of tickets, the length depending on your score.
  3. At the end of playing all the games, you gathered up all your tickets and fed them into another machine, which spat out a receipt with the number of points you had earned.
  4. You swapped the the receipt for a prize (eg 10 points got you a sticker book, 40 points got you a tiny plastic pool table).

All these steps (and opportunity for mechanical problems) seemed a bit strange to me which got my antenna up. I then did some quick mental calculations and realised that the prizes you could “win” were overpriced roughly 10 fold, but it was difficult to notice because we were so abstracted from the original cash spend. For instance:

  • A $15 metal car was worked out to $250.
  • Tiny Sticker Book worth a dollar worked out to $10.
  • and a single lolly worth 50c was $1.

The business model innovation of turning the purchase into an experience and abstracting the cash spend from the purchase, allowed them to generate super profits in a traditionally highly competitive commodity market. Makes me wonder what lessons I can find here for improving margins in my business?

5 Olympic Sized Opportunities

Having recently done a bit of work with people from the City of London, I have suddenly, but probably not strangely, become aware of the next Olympics due in July 2012 in London. Its also come to my attention that a number of Australian firms, that aren’t what you’d exactly call “sport” or “building” companies, have been picking up some good “games” business in areas as diverse as digital content and environmental consulting.

New opportunities always get me excited, so I thought I’d have a look around, and pass on what I found. At just over 2 years out, it appears that there are still a vast number of opportunities and a number of great resources Australian SMEs can access.

1. If you just want general information on the next Olympics you should go straight to the source at www.london2012.com

2. If you are looking for a job with LOCOG , London Organising Committee of the Olympic Games and Paralympic Games, have a look at locogrecruitment.london2012.com There is a huge variety of jobs being recruited for; in areas as varied as medical, marketing, ICT, transport, event management, legal, security and more.

3. If you plan on attending the games as a tourist, but intend on doing some business whilst you are visiting, Austrade has some great resources focussed around their Business Club Australia which will provide many networking opportunities.

4. If you are interested in bidding for opportunities arising from the games (and there are still 35,000 or so contracts to be let) have a look at www.competefor.com which details every opportunity in the Olympic supply chain, plus a whole lot more . Australian companies are winning work and this free website allows you to be notified of any and all Expressions of Interest and Tenders coming up in your desired area.

5. For those committed to doing business with the LOCOG, there are some great event opportunities coming up. I would specifically recommend the Connect to London programme put on by Think London, this two day event will be a tour of all the facilities plus presentations and meetings with all the major players.

Definitely got me out of the arm chair, quite looking forward to the games now.

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.