Wednesday, March 9, 2011

Lesson #8: Startups Require Flexibility to Optimize Business Model

Posted By: George Deeb - 3/09/2011


& Comment

The #1 reason nine out of 10 starts ups fail is the fact they did not pivot fast enough, or stayed too focused or impassioned on their original failing model.  For most successful startups, their final business model was the end product of numerous iterations and evolutions from where they first started.  It is critical you constantly tinker with your model until you get it right.

Here are a few notable examples to emphasize this point.  YouTube who gained success as a video portal site, started off as a failing video dating site.  Groupon who gained success as a deal of the day site, started off as a failing fund raising site.  Trip Advisor who gained success as a hotel reviews site, first started off as a failing search engine technology for the travel industry.  Similar pivots happened at Twitter, Paypal, Pandora and numerous other "home run" startups, before they hit it big.  That is not to say that 100% of all startups require a pivot to succeed, as there are numerous examples of companies that did just fine with their original model (e.g., Amazon, eBay, LinkedIn, Facebook, Yelp).  But, the point is, identify your pitfalls and failures early enough, while there is still time to evolve the business before it is too late.

I will use iExplore, the online adventure travel business I ran for 10 years, to further exemplify this point.  iExplore's original revenue model was being an online travel agency of 5,000 adventure tours from 200 third party suppliers, earning a 15% commission on any tours we booked through our call center.  We learned there were a few problems with that model: (1) 15% commissions are not a lot of money to drive a very profitable business without tremendous scale; (2) there were too many suppliers to drive enough volume to any one to become important to them;  and (3) the huge product selection was too intimidating for the user; all the customer knew was they wanted to go on a safari to Africa, and they could not easily differentiate between the 100 safaris we offered on our site going to unknown places like Kenya, Tanzania, South Africa, Botswana, Namibia and Zimbabwe.

So, iExplore's first pivot was to dramatically cut back the trip and supplier offering, cutting to 2,000 trips and 20 key suppliers.  That made the customer experience more easy to navigate, while at the same time, started pushing more volume to a select group of preferred vendors.  This latter point was critical to driving our commissions up from 15% to 20%, the commissions paid by suppliers to their highest volume travel agencies.

iExplore second and third pivots happened in the wake of 9/11/01, when revenues were very hard to come by and the company was bleeding cash as consumers stopped traveling.  The second pivot was to evolve the travel business even further.  Instead of being a 20% travel agency, if we changed the nature of how we secured our suppliers, we could become a 35% margin tour operator, competing directly with many of the suppliers we had worked with to date.  So, instead of working with the U.S. based tour operators like Abercrombie & Kent, Backroads or Mountain Travel Sobek, we established relationships with the actual ground operations companies based in 70 cities across the globe (e.g., the same ground operators our suppliers were using), and a launched a line of 300 iExplore branded tours.

Normally a move like that could have been suicidal, abruptly competing with our suppliers.  But, in iExplore's case, the iExplore website had grown to over 1MM unique visitors per month and had built up a well known brand name in the space (compared to the traffic at our suppliers in the 50K per month range).  So, we felt we could comfortably make that pivot without impacting the business.  And, frankly, we had no choice in the wake of 9/11/01, as we needed a major model shift to stop the cash bleed.

iExplore's third pivot was its most important.  It transitioned the business from basically a break even travel business, to a wildly profitable economic model.  That involved entering the online ad sales business, as a secondary and complementary revenue stream to our travel revenues.  When we studied the traffic from our 1MM visitors a month, only 10% were in the trip finder where we sold trips and drove revenues.  The other 90% were looking at tour book content and engaging in the travel community.  So, we tested placing online advertising on that 90% of our traffic.  Once we were sure there was no negative consumer impact to our travel business,  we rolled it out more aggressively.  The resulting impact was a 30% lift in revenues, with a 75% contribution margin revenue stream (compared to 10% contribution margins on our travel business), fueling the bottom line profits to new heights.  That was the Eureka! moment for the business, and put the company in position to be sold in 2007 (eight years after launching the business).

Had iExplore stayed an online travel agency, it would have never survived 9/11/01.  Had Groupon stayed a fund raising site, or YouTube an online dating site, neither of those businesses would have become the huge successes they ultimately did.  So, constantly tinker with your business and take off your blinders for ultimate success (or survival).  Good luck!

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