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Thursday, March 23, 2006

Business Models & Tiered Services

While in a conversation with a serial entrepreneur , I asked him the question when he narrated a new idea for a venture – where’s the revenue model here – he said forget it – build the traffic- we can figure out the revenue model. Of course, I was flabbergasted – but in this new age world, that is anyway the norm. Fred Wilson writes about his preferred business model - "Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base".He adds that the best examples of this business model are when the customer implicitly understands why the paid service has to cost money. More storage costs for photos or virtual storage are good examples. Termination costs on other carriers networks in the Skype model are another. When it is just additional features that don't carry an incremental cost to offer, it may be harder to convert free users to paid users. But if your free service is loved and you do a good job articulating the value that comes with the paid service, you can convert to paying users with good results

While these principles may appeal to be a common denominator of ingredients meant for success, I think true success would go beyond these basic things – the combination of ideas, process, innovation, execution efficiency, branding, timing etc. all such things matter a lot.If we are to look at the major market segments and see how these can marry online technologies - while various options come on top of the mind – in reality, if you study closely, only such entities which have scored well on most of the above factors have tasted success. Seem from a growth perspective, this model’s handicap would become apparent –
I. when everyone follows It .
II. When the market sees no differentiated value for like services

Creating tiered services may also be difficult to maintain – like the to be discontinued yahoo plus! service saga shows. Nichified early adopters may see an intital edge , but in this dynamic world where acquisiions are becoming more normal. The success of the enterprise needs a more delicious recipe. The answer is clearly ability to ass differentiated value to customers, offered through innovative means.

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