PRODUCT IS NOT EVERYTHING, HOW CAN YOU EARN BILLION OF DOLLARS ON SIMPLE RAZORS?

The solely interesting product isn’t sufficient  today if you want to reach a great numer of people, the more so if you want  the company to make money. It’s especially noticeable in internet businesses. What is also important is to find the way to earn money which means finding a so-called business model.

In 2001, a social network site : copainsdavant.com was founded in France. It allowed people to find old school-friends – something like classmates.com. The network quickly gained huge popularity in France. 49% of the French Internet users   had an account set up on there, while only 37% of them had one on Facebook. 13 million unique users used the social network monthly.

After 3 years of activity, the founders started  looking  for ways to earn money. They decided for example to introduce fees for sending massages between users. Unfortunately, it damaged the company’s image – it was a very important function for people, but  they didn’t want to pay for it. At the same time, Facebook started to expand all over Europe with it’s modern design and interesting functions – and everything was for free. In 2007, the owners of the social network admitted that the chosen method  of earning money wasn’t  the best. It was eventually decided to give up the message fees and make money only on advertisements.

As we could notice, the product itself was good – people were using it. But earning money   in such a way  so as not to scare  the users and not to be beaten by Facebook is another case.

Let’s look at Quora service. It was founded in 2009 and it  is a portal  where  somebody asks a question and the others answer it. It sounds very simple, but the idea succeeded. Today  answers are provided by ordinary citizens, but also by celebrities, actors, presidents (incl. Barack Obama), sportsmen and many, many more.

 

Quora Logo

Why do people answer questions on Quora? Somebody asked about that… on Quora 😊. Here are the answers.

In 2016, 100 million of unique users used the network – each month. But during all that time, the portal wasn’t earning any money. The company was using the investors’ money – they got a total of  more than 160 million dollars. There’re plenty of ways to earn money when you have such a big number of users. You can offer them a subscription service for particular content – e.g. Quora is able to automatically choose the best answers from selected  fields and regularly send it to subscribers as a part of a newsletter. Some of the authors of the answers could get some share of the money as well.

It’s possible to earn money  by e.g offering companies  the users who stand  out because of their knowledge in a particular field. The company gets the information about a potential employee, and the user has the chance to get a well paid job.

Maybe these ideas seem too creative – well, you can simply display advertisements on your webpage like Google does on its search engine. And they have eventually chosen this way of earning money.

The first test advertisements  appeared on Quora a year ago. Why so late, 10 years after founding the portal? Quora has been building it’s position for all that time. It’s been gaining users and their trust. I suppose that as they had lots of money from the investors, they didn’t want to risk losing readership. They decided to gain the highest  number of users and generate website value – people asking and answering questions kept on adding to the network’s content.

In 2015, Roelof Both ,  the partner of Sequoia Capital, has shared a  note about Youtube, which was  created at that time. It was written in September, 2005. Roelof Botha considered investing money in the then-new company. As an investor, he obviously expected to get it back with a profit. Here we have a screenshot of a part of the note regarding potential YouTube’s income.

 

Youtube Revenue Model

You’ll read the whole note here. For example, on page 20, there is a description of YouTube’s competition – Dailymotion and Vimeo were listed as direct competitors.

Similarly to the Quora’s case, it was also discussed if  the advertisements would bother the users?: “can the company develop attractive ad products that are not intrusive to the consumer experience?”.

12 years later we can see, that their model worked out – YouTube does well and users are satisfied. They  have chosen the  advertisements which can be skipped after a few seconds. Thanks to that, advertisers are more  focused  on creating ads which  attract attention and  users  watch only those adds that seem interesting for them. And when on other sites I’m forced to watch a 1,5-minute ad, I immediately turn off and I usually go to do something in the kitchen – absolutely lack of sense.

Advertisements as a way of earning money aren’t a rule though. On LinkedIn, there are ads too, but the social network earns mainly on something completely different – e.g. selling premium subscriptions thanks to which the  recruiters can look for potential employees more efficiently.

In a Grinfinity startup which is co-created by me, we have adopted a model in which we earn money on energy savings. Software installed in the company lets us  reduce the electricity bills, and some of  that money  goes to to our pocket. The customer is satisfied because he pays less, and our company finances itself from a share of his savings. This motivates us to develop the product – the more our client saves, the more money we earn.

 

Nespresso

A popular example presented during discussing business models is Nespresso, the Nestlé’s daughter company. Instead of distributing coffee to shops like other companies, they decided to choose another form of selling. They started selling relatively cheap coffeemakers. Of course each client buys only one coffee maker for his house, but these  coffeemakers aren’t what  Nespresso earns money on. They don’t even produce them on their own, they cooperate with other companies. The main revenue comes from selling capsules which are put into these  machines – very expensive comparing to the price of  coffee in ordinary shops. But Nespresso was advertised as an exclusive brand – their shops were opened on Champs-Élysées or Fifth Avenue. Today you can sell everything on the  Internet, but their aim was to create an exclusive image, signed by George Clooney.

This is a business model known as “Razor and Blade”, in which you offer your client a basic product for a low price, and earn money on additional, more expensive products. Printers manufacturers earn money this way (a cheap printer + expensive ink cartridges). The name originated from the  Gilette company  which in 1904 offered a razor for which one could regularly buy blades.

Speaking of shaving, take a look at another example. Can you get an idea for an interesting business with simple razors? California is known for it’s technological startups. But in 2011, Dollar Shave Club company which started selling razors was founded. For a monthly fee, they will regularly sent sets of disposable razors to your house. The prices started from 1$ + shipping costs. The company made an advertisement which momentarily gained huge popularity on the Internet and then it went on  – Unilever bought them for billion of dollars in 2016. Another example of a company in which a similar service was offered in a  different form is e.g. RyanAir. Before its foundation, traditional airline companies such as Lufhansa had had high service standards but  high prices as well. Planes had been flying only between big airports. RyanAir introduced e.g. an innovation in its business model – it significantly reduced the costs of flights, by flying between airports that it was sometimes hard to get out of, but thanks to that it  reduced ticket prices as well. Suddenly, even not rich people could afford  to fly.

How to create a business model? It’s worth to look through examples of already functioning models and consider  if they  can be  used in your company. In the book The Business Model Navigator you will find 55 examples of models that can inspire you to use them in your product.

Alexander Osterwalder in his book Business Model Generation shows you how to  create a model for your company – on one A4 sheet with a so-called Business Model Canvas. When setting up a startup, there is no need to write an extensive, multipartite businessplan. Your aims will probably change quickly – no businessplan will survive the first contact with the client. Osterwalder’s idea is based on the complete company description  using the template of 9 areas containting information about the product, customers, channels, creating demand, revenue model, partners, resources, activities, and costs structure.

 

Business Canvas

The template of a business model is static – it shows the state of a business model at the particular moment. You can  change the template regulary  – even week-to-week. Then it’ll exist in a form of a result card allowing you to monitor progress in looking for a business model.

Business model is a really important element of every company, but  starting a business I wouldn’t exaggerate its value. I think that what is more important is the product and the question if people want to use it. Business model is like a knob in the company which controls  future income – its sources and its amount . Of course it depends on the model if and how much the company earns but I suppose that the most important is the  value that you give to  the customer. If you have it, you’ll find money too.

 

 

Graduated from Poznań University of Technology. For the last seven years he was engaged in scientific projects at Poznań Supercomputing and Networking Center. Founder of Grinfinity, Expansio and Lexpansio startups. Alumni of TOP 500 Innovators programme. In 2011 Intern at Notre Dame University (USA, Indiana). Privately happy husband, dancing contemporary dance.