How Does The Best Business Model Look Like?
When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” — Warren Buffett
For most of the company's history, Microsoft has earned considerable profits from the direct sales business model. Customers of Microsoft's products were also the people who purchased them and paid Microsoft directly. Sometimes the costs were collected with other purchases, but they were always there (a Dell laptop with Windows was more expensive than a Dell laptop without Windows), And guess what?
You got exactly what you paid for: there was no try before you buy. buy one get one, rent to own, timeshare, or any other clever permutation. It was a straightforward, direct transaction between the customer and Microsoft.
Leveraging the scale and reach of the Internet, Google brilliantly turned the advertising engine onto new product categories that had historically always relied on direct sales: email (Gmail), telephone ( Google Voice), operating system (Android), and more. Take in-car navigation as an example. With Google Maps on your phone, an entire industry evaporated within a year as consumers completely stopped directly paying for maps and directions in their cars because Google now offered it for free. Soon, it looked like everything could be ad-supported from helpdesk software to coffee to airline snacks and more.
Stuck with Ads
You are watching an important video and suddenly ads pop up on your screen, Why? If I am being generous, it is because ads are a nuisance. You are not trying to view an ad and then skip it anyway. You are striving for something to learn, watch then the ads become a distraction, an interruption, or a roadblock to that task.
Well, that's just...suck
Besides the ads problem for customers, ads also present a critical limitation to businesses relying on them to make money. Whether you are an avid, passionate user of a service or an infrequent, casual user, the ad neither knows nor does it care. Advertisers are simply looking for a pair of eyes and paying the business the same in all cases for those eyes, which leaves valuable money on the table for companies. That is the setback to being indirect and abstracted away from the customer. Your best user and average user are effective the same thing to an advertiser
Your best customers are best.
Google and Facebook, made $135 billion in revenue last year off of ads. Ad-supported businesses utilized a user behavior advantage over direct sales businesses (why pay for something when advertisers will pay for it on your behalf?) What if instead, you had a business model that could maximize users in the process? Sounds good right? Not only does such a modern exist, but it is being used by many companies to great success. I called this strategy shared-value transactions.
To better understand shared-value transactions, let's use free mobile games as an example. Free mobile games are incredibly popular because it is free, of course, and tremendously profitable.
How? Because of in-app purchases. Users can optionally pay inside the game to enhance their gameplay. Less than 2% of free mobile game players end up making in-app purchases. And of these users who pay, the top 10% of them drive an astonishing 50% of all revenue for games.
Because their very best users are delivering 1,000 times more value to their business than their average user.
Sharing Is Caring
Your best users, who have the highest understanding and appreciation of your service, buy the maximum amount of product from you directly because of the value you bring them. But this isn’t just about pricing segmentation where a business lumps customers into separate groups and charges them multiple prices. A key to shared-value transactions is that you then use a portion of the spend from your best customers to indirectly fund products for your average users, thus sharing value and improving the customer experience across your entire user base.
Again,
A company’s best customers are many many times more valuable than their average customers.
If you are searching business model that allows you to take full advantage of that variation, unlock economic value for everyone: yourself, your current best customers, and all the rest of your customers who one day could grow into your future best customers. Direct and indirect purchasing work together.
Selling Shoe
Amazon now takes part of the enormous revenue generated from their best shoppers online across the world and uses the money to indirectly fund services that average Amazon users benefit from too, like unlimited digital photo storage, same-day delivery, free ebooks, and of course a premium streaming video catalog. Amazon can afford to give these benefits who only spend $100 a year with them because shared-value purchases can then be shared with their average customers which leads to creating more powerful customers.
The current eight largest internet leaders -- Apple, Amazon, Microsoft, Google, Alibaba, Tencent , and Netflix - represent almost $5 trillion dollars in net worth. Theser are the direct sales. Facebook and Google have mastered ad supported everything. Amazon, Alibaba (power marketplace buyers and sellers), and Tencent (power gamers) are leading the pack at shared - value transactions, with their deep e-commerce expertise.
But those business model lines are not set in stone.
Amazon has a multi-billion dollar ad business.
Facebook and Google sell Oculus and Pixel devices directly to consumers.
Still, there’s a lot more that both Facebook and Google could do to take advantage of shared-value transaction principles.
The management teams running Facebook, Google, Amazon, Microsoft, etc. are all unquestionably brilliant. And none of they run a business with bad economicsTheirir businesses have some of the best economics in the history of business.
Perhaps the only thing greater than what these businesses have already accomplished is what they aspire to accomplish going forward. There seems to be nothing off limits for these industry giants, which means more competition is inevitable, particularly with each other. I believe that shared-value transactions powered by commerce will be the most lethal weapon of choice in determining whose business reputation will remain intact.
