Analytics are key to a strong startup business model

About Those People

Business models are about getting people to do what you want in
return for something. But not all people are
equal. The plain truth is that not every user is good for
you.

• Some are good—but only in the long term. Evernote’s freemium
  model works partly because users eventually sign up for paying
  accounts, but it can take them two years to do so.

• Some provide, at best, free marketing, and while they may
  never become paying users, they may amplify your message or invite
  someone who will pay.

• Some are downright bad—they distract you, consume resources,
  spam your site, or muddy your analytics.

When you get a wave of visibility, few of the resulting visitors
will actually engage with your product. Many are just driving by. As
Vinicius Vacanti, co-founder and CEO of Yipit, recalls in a blog post
inspired by his company’s 2010 launch:³

Was that our big launch? Why didn’t more people sign up? Why
didn’t people complete the sign-up flow? Why weren’t people coming
back? Now that people covered our startup, how are we supposed to
get more press? Why aren’t our users pushing their actions to
Facebook and Twitter? We got some users to invite their friends but
why aren’t their friends accepting the invite?

The key here is analytics. You need to segment real,
valuable users from drive-by, curious, or detrimental ones. Then you
need to make changes that maximize the real users and weed out the bad
ones. That may be as blunt as demanding a credit card up front—a sure
way to reject curious users who don’t have any intention of committing
or paying. Or it may be a subtler approach, such as not trying to
reactivate disengaged users once they’ve been gone for a while.

If you’re a developer of a game that users play once, or an
e-commerce site stocking rarely purchased items, that’s fine—just get
your money up front. If you’re a SaaS provider with low incremental
costs for additional users, freemium may work, as long as you clearly
separate engaged from casual users. If you expect buyers to purchase
from you often, you need to make them feel loved. You get the
picture.

Segmenting real users from casual ones also depends on how much
effort your users have to put into using the application. Some
products collect information passively: Fitbit logs walking steps;
Siri notices when you’ve arrived somewhere; Writethatname analyzes
your inbox for new contacts. Users don’t have to do much, so it can be
hard to tell if they’ve “checked out.” It’s easier to find disengaged
users if they have to actively use the product.

Consider the aforementioned Fitbit, a tiny life-logging device
that measures steps, from which it calculates calories burned, miles
walked, stairs climbed, and overall activity.

Fitbit users can simply record their steps with a device in
their pocket, they can use it to sync data to the company’s hosted
application, they can visit the portal to see their statistics and
share them with friends, they can manually enter sleep and food data
to augment what’s collected passively, and they can buy the premium
Fitbit offering to help them reach their health goals.

Each of these use models represents a different tier of
engagement, and Fitbit could segment users across these five segments.
And it should: it’s perfectly acceptable for a Fitbit user to only use
the clip-on device to record the number of steps taken per day,
without ever uploading that information, but as a result the company
won’t be able to monetize that user beyond the initial purchase
(through on-site ads, premium subscriptions, or selling aggregate user
data, for example). The value of that user is significantly lower.
Predicting revenues accurately relies on an understanding of how its
different user segments employ the product.

As a startup, you have a wide range of payment and incentive
models from which to choose: freemium, free trial, pay up-front,
discount, ad-funded, and so on. Your choice needs to match the kind of
segmentation you’re doing, the time it takes for a user to become a
paying customer, how easy it is to use your service, and how costly an additional
drive-by user is to the business.

Not all customers are good. Don’t fall victim to customer
counting. Instead, optimize for good customers
and segment your activities based on the kinds of customer those
activities attract.

The Business Model Flipbook

A product is more than the thing you buy. It’s the mix of
service, branding, fame, street cred, support, packaging, and myriad
other factors you pay for. When you purchase an iPhone, you’re also
getting a tiny piece of Steve Jobs’s persona.

In the same way, a business model is a combination of things.
It’s what you sell, how you deliver it, how you acquire customers, and
how you make money from them.

Many people blur these dimensions of a business model. We’re
guilty of it, too. Freemium isn’t a business model—it’s a marketing
tactic. SaaS isn’t a business model—it’s a way of delivering software.
The ads on a media site aren’t a business model—they’re a way of
collecting revenue.

Later in the book we’re going to outline six sample businesses.
But before we do that, we want to talk about how we came up with them.
Think of one of the flipbooks you had as a kid—the kind where you
could combine different body parts on each page to make different
characters.

You can build business models this way, but instead of heads,
torsos, and feet, you have several aspects of a business: the
acquisition channel, selling tactic, revenue source, product type, and
delivery model.

• The acquisition channel
  is how people find out about you.

• The selling tactic is how
  you convince visitors to become users or users to become
  customers. Generally, you either ask for money or you provide some
  kind of scarcity or exclusivity—such as a time limit, a capacity
  limit, the removal of ads, additional functionality, or the desire
  to keep things to themselves—to convince them to act.

• The revenue source is
  simply how you make money. Money can come from your customers
  directly (through a payment) or indirectly (through advertising,
  referrals, analysis of their behavior, content creation, and so
  on). It can include transactions, subscriptions, consumption-based
  billing charges, ad revenue, resale of data, donations, and much
  more.

• The product type is what
  value your business offers in return for the revenue.

• The delivery
  model is how you get your product to the
  customer.

Figure 1-1
shows these five aspects, with a variety of models and examples for
each one. Remember that this is only a set of examples—most businesses
will rely on several acquisition channels, or experiment with
different revenue models, or try various sales tactics.

Lots to Choose From

There is an abundance of “pages” you can put into the
flipbook. The team at Startup Compass, a startup dedicated to
helping companies make better business decisions with data,
identifies 12 revenue models: advertising, consulting, data, lead
generation, licensing fee, listing fee, ownership/hardware, rental,
sponsorship, subscription, transaction fee, and virtual goods.
Venture capitalist Fred Wilson has a document listing a vast number
of web and mobile revenue models, many of which are
variants on six basic ones we’ll list later in the book.⁴

Startup Compass also suggests some “fundamental” financial
models that combine several pages from the flipbook: search, gaming,
social network, new media, marketplace, video, commerce, rental,
subscription, audio, lead generation, hardware, and payments.

You can use these “pages” to create a back-of-the-napkin
business model. For example, Figure 1-2 shows a sample
business model flipbook for Dropbox.

There’s another advantage of stating business models in a
flipbook structure like this: it encourages lateral thinking. Each
turn of a “page” is a pivot: what would it mean to offer Dropbox as
a physical delivery? Or to charge up front for it? Or to rely on
paid advertising?

Six Business Models

In the coming chapters, we’re going to look at six business
models. Each model is a blend of these aspects, and we’ve tried to mix
them up enough to give you a taste of some common examples. But just
like a kid’s flipbook, there’s a huge variety: from the aforementioned
list, there are over 6,000 permutations, and our list of aspects isn’t
by any means exhaustive.

As if that weren’t confusing enough, you can employ
several at once: Amazon is a transactional, physical-delivery, SEM
(search engine marketing), simple-purchase retailer, but it’s also
running sub-businesses such as user-generated content in the form of
product reviews. So unlike those relatively simple children’s books,
your business can quite easily be a many-headed monster.

In the face of this complexity, we’ve decided to keep our six
business models simple. We’ll talk about several aspects of those
businesses, and the metrics that matter most to companies of each
sort. Think of it as opening the business model flipbook to a
particular “page”—one in which you see elements of your own
business.

• If you’re running an e-commerce business where you sell
  things to customers, turn to not available.

• If you’re delivering SaaS to users, turn to not available.

• If you’re building a mobile application and using in-app
  purchases to generate revenue, head to not available.

• If you’re creating content and making money from
  advertising, you’ll find details on media sites in not available.

• If your primary focus is getting your users to generate
  content on your platform the way Twitter, Facebook, or reddit do,
  turn to not available.

• If you’re building a two-sided marketplace where buyers and
  sellers can come together, check out not available.

Most businesses fall into one of these categories. Some won’t,
but they have close parallels in the real world. A restaurant is
transactional, like e-commerce; an accounting business offers a
recurring service, like a SaaS company, and so on. Hopefully, you’ll
find a model that’s close enough for you to learn important lessons
about analytics and apply them to your business, as we review the
stages of growth in not available and beyond.