How will your startup make money?
Facebook, Twitter, SnapChat, all IPOed— became public companies, with billion-dollar valuations, without being profitable. In other words, these companies made LESS money than they were spending at the time they went public, became publicly traded companies.
So, why do you need to project a PROFIT MODEL at this early stage of development?
Facebook’s stock price was lower than it opened for over a year, until they devised a PROFIT MODEL that brought in more than they were spending. Twitter, and others with PROFIT MODELS that did not project a healthy net profit at launch, to date, have yet to find their footing, and their stock continues to decline in value.
Revenue models generally change over time as a business grows, but establishing a realistic revenue stream before launch insures all stakeholders in your new venture are working towards the same goal of actualizing an offering of value, for profit.
Devising a PROFIT MODEL is the last component of PRODUCTIZATION process. Only after we’ve figured out WHAT our offering IS, WHO will find value in it, and defined what makes it better than competitors, now, and down the line, can we assess what our product or service is likely worth.
Your PROFIT MODEL at LAUNCH should encourage user engagement— get sign-ups or purchases with initial low or no cost options, such as a Freeium or Premium SaaS model. The LAUNCH PROFIT MODEL is generally to collect market share, not necessarily money. However, as your company grows, hopefully gains a loyal following, even a modest one, a year or five down the line, it may be time to reconsider your initial PROFIT MODEL, and implement another, with a higher monetary return.
These are traditional PROFIT MODELS that we’re all familiar with. We’ll get into SaaS, Software-as-a-Service, PROFIT MODELS next.
SLIDE RETAIL VS WHOLESALE
We begin with one of the oldest revenue models— Retail and Wholesale. Whether selling products and services directly from a store, known as a ‘brick and mortar’ location, or online through the internet, Retail is considered Business-to-Consumer sales. Consumers, clients, USERS, whatever we call them, Retail sells to individuals, like you and me.
Wholesale business models sells to businesses, corporations, government entities. Wholesale generally sells large quantities of a product, or specialized services that can be repackaged and sold by others.
SLIDE TYPICAL PM
Retail and Wholesale PROFIT MODELS generally set a specified price for their offerings. Online purchases are severely hurting Brick and Mortar location sales. We’d rather buy our consumer goods online these days, then wait in line at a store we have to drive to, and likely pay for parking. Online sales are projected to cut deeper and deeper into Brick and Mortar sales, so think twice about only selling your offering from a specific location. If at all possible, sell through online venues as well, even if it’s simply to pre-order for pick-up.
Value Added Resellers (VAR), for wholesale or retail products, like Google Plus, or Overstock are e-storefronts that provide services like secure transactions on their high-traffic platforms, for a percent of the money from each purchase of your offering. If you price your widget at $100, and sold one through a typical VAR, like Amazon, you’d only receive, in some cases, half that amount for the sale. The VAR keeps the other half of the money for supplying the platform to complete the sales transaction.
VARs are also found in professional services. Technology consultants that set-up integrated systems, to B2C companies like the Geek Squad, that install software, troubleshoot, and customize your personal computer are considered VAR PROFIT MODELS. We’ll review effectively utilizing VARs to sell your offering in Workshop 2, Video17_ONLINE MARKETING.
Human Services may be delivered live, and/or online, and include consultants, from real estate brokers to doctors, accountants, psychologists, or they can be peer-to-peer services like AirBnB, or my factitious app, PHP Advocates. A Service PROFIT MODEL is usually a specified or agreed upon price for the service, visit, or project, or a monthly or annual fee.
Exchange of Services means you trade your skill set—time and expertise, even money to complete the job if necessary, for the skill set of a professional that you need, with no monetary compensation for either party. Historically, Exchange of Service was utilized often, however, trading services is rare these days. It doesn’t hurt to ask, though. Need help with a professional service you can’t afford? Put an ad on Craigslist or LinkedIn to look for pros willing to do an EOS.
Non-Proft is a tax-free PROFIT MODEL. These organizations issue no stock, and they are not publicly traded. They have no private owners, and show no profits. This does NOT mean no one is making money. In fact, some of the highest salaries are awarded to executives of Non-Profit’s. University professors, priests to U.S. Senators enjoy excellent salaries and exceptional benefits packages. Non-profit simply means all the profits, through donations or direct payments, like with education, are invested back into the operation of the organization, so at the end of each fiscal year they show no profit.
Your startup must fall under select guidelines to qualify for Non-Profit status. So, if you’re looking to create a tax-free business— start a charity, or a religion, or a school, or perhaps a new political party.
A good percentage of today’s innovators are developing SaaS products, or Software-as-a-Service applications. What this means is, there is no hardware to buy or construct, no materials needed, because there aren’t any. With SaaS apps, you’re not selling anything physical. You’re basically selling air, a service on the internet.
Developing a SaaS application and selling it directly, as with online gaming, or building a startup around gaming, like Xbox, is smart business. Software is cheap to reproduce and distribute. It’s quickly scalable (or should be), since nothing needs to be physically produced, so it’s easier to fulfill increased demand by users.
So, how do people make money selling air? Peer-to-peer applications like Lift, or Airbnb, or popular YouTube blogs and vlogs, to social feeds like Facebook, to sales platforms like Amazon, these are some typical PROFIT MODELS for SaaS applications.
Per Transaction PROFIT MODEL is generally an agreed upon price for the service. Every time one of my books is purchased on Amazon, I agree to pay Amazon a percentage of what I make from the sale. Though prices may fluctuate, ride sharing apps to e-learning platforms and their like use Per Transaction agreements.
Per-seat agreements are B2B PROFIT MODELS, and limits the number of users to a specified amount at purchase. You may buy the software directly, but only an agreed upon number of people in your organization may legally use it.
Licensing model aren’t new, but become more complex when selling air. The inventor, or owner of the INTELLECTUAL PROPERTY (IP)— could be a software algorithm, or a formula for a new medication, protects their IP with a patent, a copyright, or trademark. The owner of the IP, then sells a license of the innovation to a second party. This other party is usually a larger company, a corporation with the production, business and marketing knowledge and/or resources to turn the IP software into a FEATURE of a larger application, and then sell it.
There are many Licensing agreements, such as an exclusive license, where the buyer of the software or formula get to be the only company that repackages and distributes it. The original inventors of the image editing software, Photoshop, licensed it to Adobe, who then sold it to Apple, through an exclusive license agreement until the late 1990s.
The PROFIT MODEL for Licensing agreements generally come from two sources—an initial fee for being allowed to use the software at all, and then a royalty stream, meaning every time the commercial version of your software, or with your software in it, is sold, you get a percentage of the profit from its sale or use. The right to use the IP is usually an agreed upon fee, plus royalty, and the basis for the licensing business model.
Licensing agreements are complicated, and should be reviewed by a lawyer working for you, not the attorney of the corporation to which you’re licensing your software. If you are considering a Licensing agreement for your SaaS offering, consult a lawyer.
While Licensing models sound tempting— there ARE risks having someone else handle the production, distribution and sales of your invention. It’s important to evaluate your potential licensees carefully. Make sure the company has a track record of successfully launching products with software like yours. And be aware— a patent is valueless unless you can defend it. The high cost of litigation, suing someone for patent infringement—using your software without permission—is only doable if you can afford to hire legal council.
If you are a software developer, or inventor, with no interest in starting a company, but want to work for yourself, be your own CEO, then consider a Licensing PROFIT MODEL. Design and develop underlying technology that serves a function in another application.
Subscription Agreements are hip, slick and trending right now. Until recently, Adobe Creative Suite was available on disk. You paid for it once, loaded the applications onto your laptop or PC, and used them for years. Same with Microsoft Office. Today, both companies have gone to a Subscription Agreement PROFIT MODEL, which requires users to pay them on a monthly or annual basis, whether we use the software or not that month.
Subscription Agreements serve companies adopting this trending PROFIT MODEL in a variety of ways. It stops people from ripping off their software, as the latest versions are only accessible through the corporation’s cloud. Additionally, the Subscription PROFIT MODEL supplies a continual stream of income to the seller, as long as they can retain the USER. Beyond this, Subscription software often runs on the seller’s servers. In other words, you are using the software on the seller’s cloud, which gives them access to everything you produce with their software.
Google’s algorithms can see and read everything you produce in Google Docs. When you checked “I Agree,” to access Google Docs, you agreed to let Google use the information it collects from reading the documents that you create with their application. They ‘mine’ this data from billions of USERS, and analyze it to find patterns in language usage, and purchase behavior. Even the emojis you choose are used to match words to feelings, to ‘get inside your head,’ and more effectively market to you.
About the only advantage of a Subscription Agreement to the USER, is that bug fixes can be automatically implemented every time the software is accessed. The obvious disadvantage to the USER when we purchase a Subscription agreement— we are now forced to continually pay, whether we are continually using the software, or only use it intermittently.
The Freemium model is widely used in generating conversion through free trial offers. Most all of us love FREE stuff, which is why this model entices new USERS. Freemium works well for SaaS as a LAUNCH PROFIT MODEL, if the software has a user-friendly interface, and is intuitive and easy to use. Offering a trial use of your software for a week, or month, will show your potential target USERS how great your SaaS product is.
The Freemium PROFIT MODEL works well for many other offerings. Giving away the first novel in a series, motivates sales of the sequels. Special promotions, like getting a free pastry at a local bakery, are meant to entice recipients to purchase a coffee with their ‘gift,’ or come back and buy more another time.
Similar to the Freemium model, the Premium Upgrade offers part of the application’s features for free. While free access is continual, to get full functionality of their service costs money, usually a Subscription fee, as with the job site, LinkedIn. The Content Management System (CMS), WordPress offers a Per Transaction cost with each product or service purchased.
Freemium and Premium Upgrade profit models are meant to peak interest, and therefore effective for launching new products and startups that have yet to garner market share. These models are a ‘no-risk’ insurance policy for users get acquainted with your offering, hopefully fall in-love, and look forward to more even if it means they have to buy it.
The models shown here are typical SaaS PROFIT MODELS for purchasing software. Most can be implemented for launch, and even beyond, to insure all stakeholders in your new venture are on the path to profitability.
Once your company or SaaS offering has launched, and is gaining traction, additional profit models may be implemented. Selling air, or a ‘space’ on the internet, like your website, blog or vlog, can be very profitable indeed. Affiliate Marketing is next.