Monday, April 22, 2013

Startup Revenue Models

How do early stage companies make money? Even if you have a disruptive technology somebody needs to pay for the product/services or you might have to find other ways to make money. For example, online technology companies that don't sell a product directly to the consumers cannot only depend on ad revenues. The reason is simple - at an early stage the SEO mechanics + traffic volumes do not work in your favor or rather do not give you enough traction to monetize. Many companies build the platform first and then figure how to make money (Facebook). All conventional revenue models have two basic tenets:
  1. You need customers. 
  2. Somebody needs to pay for your product/services. 
Basically, you need to earn more than the cost of acquiring your customer. One needs to find ways to monetize the value your product brings to the customers. Besides the central question of who pays?, you need to think about value proposition, customer need, product/market fit and the scalability nature of the opportunity. I looked at a few successful companies who are doing it differently. Most of the below information is from public sources like Twitter, Quora, company websites.

LevelUp - mobile payments
LevelUp provides the hardware to run the payments free of charge and have 0% processing fees for payment processing (upside for clients/businesses). LevelUp calls this Interchange Zero. Generally, credit card companies charge merchants between 1-3% fees.  LevelUp makes money by charging for customer acquisition campaigns or for rewards to existing customers. Running a campaign costs $0.40 for $1 of credit redeemed by a customer.

PatientsLikeMe - health sharing website for patients
They sell/share all patient data to companies (primarily pharma) other than identifiable information. They explain on the website how they make money? Essentially, it is projects involving market research and health economics and outcomes research since PatientsLikeMe has the platform + ability to record data and outcomes from patients for particular diseases/drugs/treatments in real world settings.

Kinvey - backend as a service
Kinvey charges users per API request. Clients pay for the app backend services when they get active users, actual usage, or data for the app.

Backupify - backup and recovery for online apps
Pricing segmentation where the levels are based number of users, number of domains, per month etc. The free tools aren't that useful.

Runkeeper - running app
The fitness training app operates on a freemium model with the Elite version allowing live broadcasting and advanced reporting. The company is moving towards a consumer health platform with the Health Graph API to bring multiple health apps, medical devices and sensors under one roof. This could trigger a lot of opportunities on the data analytics side to provide value to consumers.

Wayfair - diversified e-commerce
It operates like any other e-commerce company. From a content/ ad perspective, the company tries to personalize the experience for the brand while optimizing the traffic to conversion rate. They have a dedicated social media team which works with advertising. Also since the company was bootstrapped for the most part initially, the pressure to take risks and decisions was different.

Nanigans - facebook performance advertising
They license the Ad Engine on a self-service basis or the company manages your campaigns. The tiered pricing is based on the volume of Facebook ad spend ($30K/month minimum). The website says that the company provides access to all the data at audience, creative and campaign levels.

The revenue part is one of the most important elements of the business model. For emerging companies, a good and differentiated customer value proposition improves the likelihood of success and the clarity in the business model needs to be defined. As Bob Higgins (Highland Capital Partners) said: "I think historically where we [venture capitalists] fail is when we back technology. Where we succeed is when we back new business models."

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