Comparing Business Models

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Recently I spent some time contemplating business models that might make sense for someone with online skills, but starting out on their own.  I believe there are 3 main models worth discussing though probably a myriad of variants and hybrids one can derive from them.  In this post, I discuss the structure and dynamics of each applied model, some examples, and the pros and cons of each.


1. SaaS Model
The favorite of any engineer, the Software as a Service (SaaS) model centers around creation of an online platform, and provides service in support of the use of the platform by its users.  For example, an online service costing $40 per month may provide tools that a business might use to enhance their efficiency or effectiveness.

Primarily this business focuses the development of the product and marketing of the product.  Secondarily, customer support is an important part, in case users get stuck or have questions.

Two examples are practice management and online marketing.  Practice Management is interesting because it is applied and vertical specific and thus competition will be relatively low.  Also, the clients would be technical professionals who generally would be able to answer their own questions, thus less need of custom support.  Separately, online marketing tools may be interesting, since they could nicely pair with consulting to create a hybrid business model, in which self-service tools are provided to low-budget customers who could spread the brand, thereby reinforcing the demand for higher end consulting engagements.

Below are a few examples:

SaaS seems like an ideal business model for product-minded founders, but it comes with a downside – up-front cost to develop a product without 100% assurance the market will support it with enough demand to justify the cash layout.  Using proper Lean methodology one can mitigate these risks but not eliminate them. Additionally, the market for these sorts of services is growing so fast that many competitors seem to be raising hundreds of thousands of dollars in funding, to enable them to grow and capture the market quickly.  Unless choosing a completely under-the-radar vertical (ie practice management) it may prove necessary to have sufficient cash in order to make this business viable, in the current stage of market maturity.

The milestones for developing a SaaS company are relatively straight-forward:  first creative a platform, then introduce marketing and customer service, along with constant improvement of the product. Just grow and iterate on that theme.

2. Consulting Model
Consulting focuses on providing strategy and dissemination of information (training) on behalf of clients, rather than implementation, which is typically performed by a creative or IT agency.  The goal here would be to create a consultancy, not an agency.  Nonetheless, without significant reputation or notoriety in the chosen field, it would be necessary to build up that reputation and supplement with related (agency) implementation services along the way.

The ideal model would start with a very focused theme and would provide a technology solution platform at its core, otherwise you’re left to trade on individuals reputation and even if you have that its not scalable, so focus on building reputation and expertise by building a product.  This technology could be made open source to encourage rapid adoption of the technology, thus boosting reputation and visibility of the company.  Then, consulting services could be provided, as well as high-end implementation and managed hosting version of the open source platform.  Magento Commerce is a good example of such a model.  Additionally, as a consultancy, it is important to account for the research and publication that would be happening alongside the billable work, to further build reputation and visibility of the firm; this is essentially how consulting firms are marketed (indirectly), rather than using more direct advertising methods.

Below demonstrates the business model:
There are three notable models of consulting companies observed:  (i) purely conceptual online marketing firms, (ii) hybrid consulting/agency (implementation) firms that offer a technology platform (often open-source) and (iii) local small business firms that offer cookie-cutter “consulting” packages and templated implementation solutions for the small business.  The latter is far less intellectual and relies a lot less on high-end talent. Its offerings are a lot more “productized” and theoretically is a lot more scalable. It is also a lot more commoditize-able however, thus it only partly can be described as a consulting company.

To build a consulting company, the focus at first should be upon agency-style implementation work and publication, though both should be highly related to the thesis of the eventual consulting firm.  Development of the core technology platform also happens toward the end of that stage.  Later, once cashflow is more comfortable and a reputation begins to form, strategy and training coupled with the technology platform that is now available can be layered in.  Finally, speaking engagements and other high profile “thought leadership” prevails.  At that stage, implementation is no longer something to focus on (another internal or external team would manage those details).  One can then focus on building the business and marketing it through thought leadership activities (speaking, publishing, books, training, etc).

3. eCommerce Model
The ecommerce model is relatively simple – sell things online.   The advantage of this model is that the daily activities generally more about marketing than product development (SEO, PPC, CRO, LPO), which will keep you honest with the bottom line. Other activities such as fulfillment are pretty straightforward and easy to execute.  Another advantage is that according to Online Retailer, online shopping continues to grow at double-digit Y-O-Y rates.  The big downside however, is that online shopping is becoming increasingly supply-side saturated, and competition has made obvious marketing channels such as Google’s PPC almost unprofitable for mainstream products, unless you have extremely good sourcing worked out.

In the case of the unique product, now you’re talking about product development, similar to if you just created a SaaS business – in which case, wouldn’t that better match an engineer’s existing sourcing skills, than importing physical products from China?  One could also argue against the wisdom of building a business around necessity to import from low-cost countries, knowing the dollar value will fall sharply in coming years, as well that suppliers in low-cost countries can easily access your marketing channels and compete directly at some point , if you don’t have proper channel exclusivity arrangements.

There seem to be just two primary models for e-commerce – you’re either a product aggregator (selling lots of other people’s products) or you’re a product source (creating your own unique product).  Companies like WineGuppy seem easier to start but are increasingly at odds with large companies like Amazon and  Source providers such as Kinerase are better for a small player since they cannot compete on volume (and volume sourcing discounts), but what product to create? Not to mention that you’re not looking at the same high-sunk cost paradox discussed with a SaaS model.

A risk-mitigated approach to building an ecommerce business is fairly straight-forward and easy to accomplish in 3-6 months:  Start with simple affiliate marketing to identify the most unsaturated product verticals.  Once a vertical has been decided upon, select a couple drop-ship partners to dig deeper into which specific products are moving well in that vertical.  Next, start to source directly your own products to replace those that are moving the best and feature those products, keeping the drop-ship as a product base.

This approach of drop-shipping large quantities of products but focusing on a smaller subset that you source directly is the “Target” model; its what many large department stores do.  And of course, if you can establish this base, you’ve created a platform with large amounts of targeted traffic that you can leverage to introduce new original products.  In fact, it doesn’t even matter if you are terribly profitable off of the drop-ship base, since you’re just using it as an opportunity to introduce your other products with higher margins, to more prospective customers. This finally then combines the aggregator and product source models, if you can grow to that point.

A unique aspect of the ecommerce model compared to the other two is that technology becomes increasingly a mere commodity in the business as it grows.  The focus of the business increasingly shifts to merchandising and optimization of the Return on Ad Spend (ROAS).

Some additional comparison data: