Akshata Malhotra's List: Business Models

• Here are a few of the revenue models that they’re using and how you can apply them to your company.

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  1. Freemium Model

   

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• Description: This business model works by offering a basic service for free, while charging for a premium service with advanced features to paying members.
• Examples of the Freemium Model: UserVoice, Flickr, Vimeo, LinkedIn, and PollDaddy
• The biggest challenge for businesses using the freemium model is figuring how much to give away for free so that users will still need and want to upgrade to a paying plan. If most users can get by with the basic free plan, they won’t have a need to upgrade. For example, I’ll probably never upgrade my LinkedIn account and because I don’t shoot high definition videos, I’ll never need a Premium Vimeo account either.
• 2. Affiliate Model
• Description: This is a model in which a business makes money by driving traffic, leads, or sales to another, affiliated company’s website. Businesses that sell a product, meanwhile, rely on affiliated sites to send them the traffic or leads they need to make sales
• Like businesses that rely on advertising, high traffic sites predictably have a much easier time making money using affiliate links than sites that are just starting out. High traffic means that even low conversion numbers can equal big bucks
• 3. Subscription Model
• Description: Sites using the subscription model require users to pay a fee (generally monthly or yearly) to access a product or service.
• Examples of the Subscription Model: Label 2.0, Scrooge Strategy, Netflix
• 4. Virtual Goods Model
• Description: Users pay for virtual goods, such as weapons, upgrades, points, or gifts, on a website or in a game.
• Examples of the Virtual Goods Model: Acclaim Games, Meez, Weeworld, Facebook Gifts
• Virtual Goods come in all shapes and sizes. Hot or Not was one of the pioneers of virtual good in the online dating industry by allowing users to send virtual roses to other users that cost from $2 to $10. The beauty of virtual goods is that margins are high, since goods essentially only cost as much as the bandwidth required to serve them, which is generally almost zero.
• 5. Advertising Model
• Description: Sites that rely on advertising, sell advertisements against their traffic. In basic terms: the more traffic you have, the more you can charge for ads (additional demographics about your site’s visitors, such as age, gender, location, or interests, also affects the amount you can charge advertisers to place ads on your site).

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• II. Branding Certain Elements within an Application

   

  This business model is rather new, and personally, my favorite. This model centers on branding a certain element within your application.

   

  For instance, LivingSocial is an application where users can make a list of their favorite things. Big brands, like Porsche, may want to get in front of their audience and have users speak about their brand in a viral, social networking space. Therefore, Porsche will pay LivingSocial for each exposure to their audience. By exposure, I mean hitting the newsfeed of the user on Facebook:

• I like to think of this model as a Cost Per Share (CPS).

   

  Using the above example, let’s say you have 1 million impressions of a certain application. For each person that shares Porsche with their friends via Newsfeed, Porsche will pay $5 because these users are loyal and will argue why the Porsche is the best car via comments.

• Of those 1 million daily impressions or exposures to the app, 0.01% (or 100) users are into Porsches and post their Porsche list to their news feed.

   

  With 100 users sharing on their newsfeed per day, at a price of $5 CPS, your app will be making $500 per day, or $15,000 a month.

   

  This is much better than the Banner Ad payouts of $6,000/month; additionally, the user experience isn’t as bland. By this, I mean, the user doesn’t feel like he or she is getting hammered with ads.
• The only cons with using the CPS model is, (i) As of this past week, Facebook is hiding and disabling application news to be blasted on the home feed; thus, this business model could be dead in a couple weeks; (ii) second, the CPS model requires someone who’s creative and persistent on your team. Because social media is so new, and this model is so new, it’s much easier to setup a business model based on banner ads (all you do is sign up with an ad network and place the creative ad code on your site). With CPS models, you must identify specific elements within your application that are valuable, and you must then find big brands (like Coca Cola) to buy it. When you’re a small startup, this is nearly impossible.

• III. Virtual Currency

   

  This business model is astonishing. The concept of virtual currency is profoundly simple, however, the numbers and revenue this churns out is eye-opening (see table below).
• In order to advance in virtual games, you need to invest either (i) Your own Time, or (ii) Your own Money.

• So, now the model looks more like this:

   

  You invest either (i) Your own Time, (ii) Your own Money, or (iii) Alternative Method: Take a survey (in which a small fraction are misleading)
• Be creative with your business model in 2010, be flexible and make sure it aligns itself with the well-being and interest of your users. Good luck!

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• True social networking companies benefit from lower marketing costs, and that is borne out in the financial analysis.  LinkedIn, one such stock swept up in the excitement of social, has a solid business model and strong earnings potential.
• LinkedIn achieved the objective of technology companies:  to disrupt a traditional “bricks and mortar” or old-school business model.  Then, LinkedIn then took disruption one step further up the value chain by bringing a community element to the online marketplace such that users actually want to be there for more than a one-off transaction.  This is the New Higher Order of Technology, where new technology companies are actually disrupting old technology business models…in this case, LinkedIn has just trumped Monster Worldwide.  While Facebook has created the paradigm for social networking, LinkedIn has actually applied it to a business model.  Let’s called it Applied Social Networking.
• LinkedIn’s business model works like this:  everything they do is geared toward providing members, people like you and me, with tools to enhance their business networks.  Since members see an immediate benefit, members are willing to share professional backgrounds and experiences with others, and to be open to new (employment) opportunities.  By attracting the “honey” LinkedIn gets the “bees”; that is, now recruiters have an online database of 150M potential candidates without having to hire its own people to smile, dial and find prospects, while potentially annoying or jeopardizing a candidate and his/her current position.  LinkedIn generates most of its revenue now from Hiring Solutions (mostly recruiters), which has grown from $30Min FY2009 to $260M in FY2011, up over 8x.
• LinkedIn generates revenues from three sources:  Hiring Solutions (basically revenue earned from recruiters), Marketing Solutions (basically revenue earned from advertisers) and Premium Subscriptions (recurring revenue earned mostly from members).   Revenue growth in all areas has been accelerating since 2009, and revenues have been growing even faster the member growth, which implies a strong conversion from free services to paid services.

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• LinkedIn makes money by combining 3 business models:

   
   
  1. Hiring / job placement services
   
  2. Advertising
   
  3. SaaS (freemium style)