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The co-founder of Twitter, Jack Dorsey, in a TV interview, remarked that the right approach to establish an Internet company is to apply its information technology and adapt it to some consumer need. I do believe that part of that process is to identify those transactions that accumulate cash flows without being a major dint to consumer wallets. For example, Google earns millions of dollars every month by charging pennies, an amount so little to advertisers, but makes it up in terms of volume. That is the basic Internet business model.
In a recent business development for a consumer product, I had to develop a business model for a physical device representing a one time purchase. Yet, I kept researching on how I could apply the Internet model on what would have been a single transaction – the sale of the physical device. Instead, I racked my brain to identify some additional service or product that would generate cash flows. So every time that the device generated information, what would be appropriate Internet business model that generates growing cash flows after the initial transaction?
Let’s look at Pokemon Go as an example. The first transaction is downloading the app. In this case the initial transaction is cash free. But as more and more people interface with this app, in what manner can the app generate cash flow? The key to this strategy is create large volume of users. Just recently, the Pokemon Go rolled out in Japan and this app was downloaded over 10 million times. There you have the first step in building an Internet business model: focus in building large quantity of users — and fast. Then, the app will sell various extras at such reasonable pricing. Even if the platform priced an additional product at $0.99 in one month, the app can generate no less than $10 million — a huge payday. But is this strategy so new?
I am reminded of the single edge shaving razors used decades ago by virtually all mature males to maintain a clean face. Those razors were sharpened frequently and maintained for years. With a fixed price of less than $20, it represented a long term investment to a clean shaved face. However, someone thought of the disposable razor model. Practically give away the razor body, and sell the disposable razor. And does this sound familiar? Just last week, the 5 years old Dollar Shaving Club, with decent marketing, had been acquired for about $1 billion. This company has a slight variation of established shaving razor companies like Gillete. But the Dollar Shaving Club model had been attractive enough to acquire a company that received less than $100 million in financing.
In the telecom world, cellphones also pursued this model: by providing reduced costs for its phones, while generating its lion share of revenues through the voice and data services. The wireless companies own towers and switching operations that are generally fixed and the incremental costs for additional calls become marginally attractive and profitable.
In today’s World, you find the valuations for these new digital models hitting the stratosphere. Why? The underlying costs to transmit information are fractions of a penny. Between 2 wireless carriers, the interconnection price is less than a penny. With data storage costs dropping, setting up racks to store information also cannot cost more than a penny per transaction. And once an app is developed, usually at several hundred thousand dollars, you amortize the total costs to all transactions, that also cost only pennies.
Therefore, today’s businesses must take into account, as someone characterized it, of the “Uberization” of business: software platform, digital transactions, emphasizing volume over pricing, and speed to market in any strategy. And, like Google, the company must use the data to continue to respond to consumer needs. And expand the services in such a fashion that maximizes long term revenues.
So in terms of my actual application to a particular, real world device, I could not ignore any digital strategy, as I believe that long term survival of any consumer product demands that a digital strategy must be included in ecommerce. Now that provided a diverse revenue stream model that allowed the company flexibility to control its costs and continue to innovate with new consumer data. And created a more profitable model dependent on data products, not simply the device. So what are data products? actionable information, a digital service – Google search engine, or a Pokemon icon. Again, the key is to use the Internet platform, identify data products, and apply speed to market. Otherwise, the strategy will fail.