Lesson #108: How to Determine Your Revenue Model

One of the first questions a potential investor is going to ask you is "how do you plan to make money".  It is critical you have a well-thought-through plan here for the long term, even if revenues will be minimal in the short term.  As you will read herein, revenue models can vary based on: (i) your industry; (ii) your product or service within that industry; and (iii) what your direct competitors are doing.   Today's lessons will address these three areas, as well as (iv) assessing whether your revenue plan passes the sanity check for your business and prospective investors.
Every industry has a certain revenue model history and expectation from customers.  For example, the retail industry sets a retail price on their products, that includes enough gross profit margin to cover the cost of the product itself and the other proportional costs of running the business.  The publishing industry drives revenues from subscription fees for their content, or from advertisers wanting to get in front of their large base of readers.  Technology companies sell their products either under installed license contracts (big upfront payment), or as a hosted software-as-a-service (small monthly payments).  So, research what is normal in your industry, as it will be easiest to sell through to prospective customers. 

That said, there is no rule you cannot think out of the box, if you have a new way to approach the business that customers will appreciate.  Think about iTunes and how they revolutionized the purchase of music.  Before the internet and companies like iTunes, you would need to go to a retail music store like Tower Records and buy an entire CD for $14.99 (if they had it in stock).  With iTunes, not only were you guaranteed they had it in stock, but you could simply buy the one track you wanted for $0.99, from the convenience of your home.  It revolutionized the music buying experience for consumers.  But, at the same time, the model really hurt the music labels, that were seeing a fraction of revenues from music sales than they were seeing in the past, forcing them to change their models to drive more revenues from live concert tours than ever before.

Secondly, within any one industry, there can be many variable revenue models to consider.  Let's look at the travel industry, as an example.  A tour operator adds a 35% gross margin to the net cost of their tours.  A travel agent takes a 15% commission for selling a tour operator's tour.  A travel website sells advertising on its website at a $10CPM.  A travel magazine sells an annual subscription for $19.99.  A travel related mobile app is downloaded for $0.99.  A travel reservation system could be licensed to tour operators for $25,000 per year.  I think you get the point, they can be many variations here.  So, pick the one that makes best sense for your business.

Thirdly, the most important piece of the puzzle is figuring out how your competitors drive revenues, and using them as a benchmark.  This includes not setting your prices in excess of your competitors, for similar services (please re-read Lesson #20 on Setting Your Product and Pricing Strategy for more details here).  It also includes not swimming upstream, by trying to sell through a new model, which may be better in the long run, but too hard to get your arms around in the short run, compared to your competitors models. 

As an example, let's say you are trying to sell a coupon book for $500, that will lead to $2,500 in savings from the coupons therein over the course of a year.  Someone that is interested in coupons, most likely isn't going to afford the $500 asking price to start, regardless of the underlying coupon value.  And, even if they can afford the $500, a consumer may be skeptical they will actually use enough coupons therein to cover their upfront cost.  In this case, maybe it is better to market $100 books for $500 worth of savings, much more digestible.  Or, give the books away to consumers for free, and take a revenue share from the merchandisers as consumers redeem their coupons over time, or upfront from advertisers within the book??  You do not want to create any friction between consumers and them easily and willingly buying your products or services.

The last step in setting your revenue model is making sure it passes the sanity check: (i) is it logical within your industry; (ii) is its marketable to consumers and better than your competitors; (iii) is your revenue per transaction high enough to cover your costs and drive a profit (covering costs of the product, fulfillment and marketing); (iv) have you tested your marketing initiatives first, to ensure you are clear on where your cost of acquisition per customer will end up, and set your revenue plan from there; (v) can you turn your startup losses into profits with a 12-24 month period, and limit such losses at a digestable/fundable level for investors; and (vi) can a 10x return reasonably be acheived by your investors in a 3-5 year period.  All of these pieces of the puzzle are tightly interwoven when trying to determine your revenue model.

There is no one right way to build a business and revenue plan.  But, hopefully, this lesson will point you in the right direction towards building a winning model.

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Lesson #107: Social Media Analytics & ROI

It feels like the Wild West out there in the social media marketing world.  Advertisers are identifying the need to get in front of large social media audiences, like Facebook and Twitter, spending around $5BN a year in advertising on those two sites alone.  And, there are tons of startups out there trying to pitch social media marketing, management and analytics tools.  Which is good, because CMOs are starting to get more pressure from their CEOs and CFOs to clearly show an ROI from their social marketing spend, which has been lacking during the infancy of this channel.  The problem is, with the glut of fragmented solutions in the marketplace, many of which are still learning the business themselves, it can be a daunting task to identify the right technologies to use to optimize your social marketing efforts.

To help me better learn this space, and to get an opinion about the best social media analytics tools in the market today, I engaged the help of my colleague, Joshua Sigler, a Senior Product Specialist at Sprout Social, a Chicago-based leader in social media analytics for SMB's, financially backed by Lightbank (the Groupon founders' venture capital fund).  Joshua did his best to keep his assessment non-biased, and truly educate me on the wide range of solutions available in the market.

To start, I want to summarize what I feel are the various pieces to the social marketing technology puzzle, to ensure whatever strategies and tools you employ, include all of the various components you may need.  This includes technologies to assist with: (i) social content management (e.g., publishing schedules, distribution to all platforms, communications with fans/followers); (ii) content analytics (e.g., retweet/click activity, fan/follower growth, trends over time); (iii) customer sentiment (e.g., are customers happy or angry with your brand/product); (iv) building a social CRM (e.g., identifying brand influencers most passionate and engaged with your product); (v) social commerce (e.g., allowing purchase directly from your Facebook brand page); (vi) campaign management (e.g., buying media on Facebook or Twitter, building creatives, tracking impressions/clicks), and (vii) ROI analytics (e.g., calculating brand awareness, consumer sentiment, e-commerce conversions from your social marketing spend on the inhouse team managing your efforts or the media dollars spent to accelerate growth). 

In addition, it is important you research: (a) how many internal group partitions or team members can access the system; (b) how many separate social media accounts can be managed from your central dashboard; and (c) how these social tools can be used for task management by non-marketing departments (e.g., sales, customer service), to make sure they meet the needs of your specific business.

Right now, many of these technologies are fragmented from many different providers only tackling one piece of the puzzle, and hence, do not tackle the full suite of client needs discussed above.  I expect to see a lot of industry consolidation in this space, as marketers are going to want all pieces of the puzzle aggregated into one easy-to-use social platform.  There are a handful of companies that already provide numerous pieces of the puzzle, and I am going to focus on them below.  But, I haven't found anybody that is doing everything yet, especially in a price point affordable to most startups.

The companies that are most progressed in this space, include companies with affordable solutions focused on SMB's (e.g., HootSuite, TweetDeck, SproutSocial) and companies with very expensive solutions focused on larger enterprise-scale clients (e.g., Radian6, Sysmos, Meltwater, ExactTarget).  I have not personally played with each of the tools, and relied on Joshua to help me assess the plusses and minuses of these various technologies.  So, make sure you kick the tires for yourself, to formulate your own opinions of what will work best for your needs.

In terms of the SMB facing technologies, I would summarize it as follows. TweetDeck (now owned by Twitter) is primarily a platform used to consume and post tweets. It's heavily focused on Twitter and it doesn't incorporate analytics or team functionality like some of the other tools. HootSuite has begun adding business oriented features in the past year, but is generally considered a consumer product, with the vast majority of their 3MM customers using the free version of their software.  SproutSocial offers the largest mix of features for businesses, and even though it only offers a paid version of its platform, it is very affordable for SMBs with functionality on par with many of the enterprise facing solutions, which can be materially more expensive.  As an example, Radian6 has an annual cost starting at $10,000 per year, whereas SproutSocial has full-featured plans starting at around $500 annually.

In terms of the enterprise facing technologies, Radian6 was the first mover in this space, building a large business on 1st generation social monitoring and analytics and was recently acquired by Salesforce.com. The early enterprise tools like Radian6 have a reputation of being confusing to use and lacking audience engagement features.  I did not dig too deeply on Sysmos, Meltwater or Exact Target, since I focused on the affordable solutions for my startup readers, and simply offered up Radian6 as one alternative, if you require more features and functionality.

I am definitely not a pro on these technologies.  So, if you feel that I am missing any important ones, please be sure to add them in the comments field below.  But, it is clear to me, SproutSocial has built a really terrific product for the price point, and is even getting the attention of bigger enterprise clients.  So, be sure to reach out to Joshua at 312-878-3787, if you have any questions from here.

Social media should be a component of any smart marketing plan, and it is critical you efficiently manage and track your efforts with tools like the ones discussed herein.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Lessons in Marketing: Super Bowl 2012

I am sure most of us watched Super Bowl XLVI last night.  Some of us for the game, others for the ads and others for the halftime show.  I just wanted to make sure none of you lost the valuable marketing lessons that we can apply to our businesses.  Below are a few observations and tidbits from the game itself, the halftime show and some of the ads that were featured.

As for the game itself, the NFL has successfully created an annually anticipated event that attracted over 111 millions viewers in the U.S. last night (46% of all TV households), and hundreds of millions more globally (the #1 watched show of alltime).  Notice I did not say the NFL featured a football game, as the Super Bowl has become much more than a football game. It has become a platform for football, for corporate advertisers, for the halftime musicians, for an excuse for friends to get together, for grocery stores to sell food and beer, for apparel companies to sell merchandise, etc.  There is no other single event that commands this scale of audience and engages Americans into action, moreso than the Super Bowl.  So, the lesson for your business:  remember you are selling more than a product or service, you are selling an experience.  And, you have to continually improve that experience over time, to command more and more loyalty and excitement around your brand, as the Super Bowl has built up over the last 46 years.

As for the halftime show, I am curious how many music downloads Madonna had last night, during her 15 minute show?  Probably as many as consumers who downloaded her music in the last month overall.  Not even American Idol, the #1 music focused show, can stimulate as many downloads for its acts, in such a short period of time.  So, figure out what platform is going to ignite your business and how you are going to tap into it, to help your business take off overnight. 

Staying on the halftime discussion, we have to talk about Madonna herself.  Madonna is a marketing genius, that has figured out how to reinvent herself and stay relevant, since she first hit the scene in 1982.  First of all, she is 53 years old, still looks great and is dancing on stage with artists half her age.  Secondly, she knows what is going to keep her relevant, staying visible in front on hot distribution vehicles (e.g., the Super Bowl, episodes of Glee). Thirdly, she surrounds herself with hot young talent, as she did last night with Nicki Minaj, LMFAO and Cee Lo Green, to tap into their young fan bases by association.  And, the same holds true for your businesses.  You constantly need to be reinventing your business and looking for partnerships that can help you scale your growth over time.

That said, Madonna was not perfect last night, by any means.  First of all, it was obvious the acts were lip synching their performances, which lessoned the authenticity of the product.  And, Madonna mostly sang songs that were produced decades ago, positioning her as an "old act".  Instead of using the majority of her time on promoting her newest album, showing she is still relevant as a "new artist".  As a comparison, I thought Jennifer Lopez did a much better job resparking her career when she performed her newest song, On The Floor (a duet with Pitbull, a hot current artist), during the finale of American Idol.  So, the business lesson:  when you have the opportunity to materially move your sales needle, don't blow it with an inferior product or the wrong pitch.

And, finally, as for the Super Bowl ads, I am not going to disect the plusses and minuses of every single one.  There are plenty of sites that can do that, including this recap of the 2012 Super Bowl Ads at Hulu.  What I am going to do is highlight key things that I would deem important as a marketer, in terms of taking advantage of getting in front of such a large audience.  To me, that is summarized as:  (i) did it help me build my brand awareness; (ii) did it help me spark a viral buzz; (iii) is the messaging in tune with my core product; or (iv) did it help me sell more product, understanding it is tough to do all of these things in one ad.  Below, are a few "hits and misses", based on this criteria.

A few hits:

• I thought Hulu won the night in terms of having an ad that was fun and memorable, but was also directly tied to their core business, featuring key clips from TV and movie watching history, directly relevant to their TV and movie watching business.
• Audi did a nice job emphasizing one of their car features (e.g., headlights as bright as daylight), with them unintentionally killing all the vampires at the night party when it arrived.
• Acura featuring Jerry Seinfeld as the #2 person on the waitlist for their hot new car, and the extent that he is willing to go to get to #1 on the waitlist.
• The ecstatic high school graduate who thought his parents just bought him a Chevy Camaro, prominently featured throughout the entire commercial.
• A Hyundai car literally getting your "pulse going", by resuscitating a man back to life with his seatbelt, by quickly starting and stopping the car in repetition.
• Budweiser showing clips over the history of time, with people partying with their beer over the decades.
• Pepsi's ad was clearly a hit for Melanie Amaro, the winner of X Factor's singing contest, and I think it was also a hit for Pepsi too, as she topples the king (Elton John) and gets Pepsi for all. 

A few misses:

• I loved the positive message of the Chrysler ad with Clint Eastwood talking about Detroit and the auto industry fighting back.  But, would Chrysler have been better served by featuring a few of its cars??  Honestly, I was waiting for a "brought to you by the Obama campaign" closing graphic, for successfully bailing out the auto industry.
• I loved the return of Ferris Bueller in the Honda ad, which sparked a viral sensation (which in some regards acheived its goal), but I bet it had people wanting to see a Ferris Bueller movie sequel more than it had them wanting to buy a Honda.
• Volkswagon is doing a better job marketing for Star Wars, than they are for their own cars.

Just remember with these ads, funny is great (especially to create virality online), but funny is even better if you can directly tie it back into your core product, which should be heavily featured in the ad.  Don't waste your 30 seconds in the spotlight on stuff irrelevant to your core product and marketing goals, especially when you are spending $3MM on that 30 second spot.

For future posts, please follow me at:  www.twitter.com/georgedeeb