Find a revenue model that goes with the grain of your business

Several years ago I heard my friend, @aweissman, say this and it rang as true to me then as it does now.

We’re in an age of emerging web services that are blurring lines that, historically, have been clearly defined. In the past, we had individual users or “consumers” who didn’t pay for web services so we blasted them with digital ads or offers for physical goods that they could purchase and have shipped to them. The counter to the consumer was the enterprise. They loved to buy software and would pay handsomely for it. Small and local businesses were a wasteland of HBD proportions.

Bucking any convention in approaching these three markets was frowned upon. These were the people you “sold” to and this is how you sold to them.

But, times they are a changing. There are emergent behaviors in each segment that have consumers looking to spend money in ways they’d not done so before. For instance, take a closer look at the Instapaper API announcement. Precedent had been set for two ways to monetize an API, but Marco took a third approach:

Full API access, but only for paid-subscriber accounts. In other words, all developers can use the Full API, but it will only work forcustomers with Instapaper’s $1/month Subscription memberships.

As more and more applications mash up functionality of multiple paid and unpaid services, I can see this being a compelling model. I can also see it driving the sale of more paid subscriptions. Marco understands the grain of his business and found a revenue model to fit his needs rather than go against the grain of his service.

Twitter is another that is finding the grain of their business. It would have been very easy, and very lucrative, for them to have simply slapped banner ads on their site or forced ads into users streams. Instead, they’re charging companies for exposure to actions their users already perform and it seems to be showing promising signs:

One of the new Twitter ad services, called Promoted Trends, has been selling out its inventory every day, said one person familiar with the matter. The other two ad products, Promoted Tweets and Promoted Accounts, are also doing brisk business.

Then there are entirely new behaviors that emerge. Zynga wasn’t the first to roll out virtual goods, but they’re really the first that made them work at scale in the US. By finding their revenue model in the way their games are played they’re able to introduce vanity and scarcity, which appears to be a powerful combination with staggering results:

Zynga has a total of 275 million active monthly users across all its titles which helped Zynga generate about $400 million in profit last year on approximately $850 million in revenue.

The same blurring is happening in the enterprise. This weekend I ended up on a chairlift with an old skool enterprise software sales guy. He regaled me with stories of selling one piece of functionality to a customer for $15M then turning around and selling the entire stack of applications to another customer for $4M. Contrast that with one of our portfolio companies, Get Satisfaction. 

Sure they have a range of attractive self serve pricing packages, but the grain of their business ran counter to the “price per seat” enterprise software model. Their clients wanted to be where their customers were so they designed a product which was widely distributed across client sites, getsatisfaction.com, facebook and any number of locations on the web. Their revenue model takes into consideration these distributed touch points and its serving them very well.

As web giants continue to consolidate power around their respective properties and platforms there are opportunities for startups to become more atomic, more distributed and more networked. In doing so to the old models of slapping ads on a website to “monetize” your audience or building an expensive sales force to elephant hunt won’t apply to all comers. Finding a revenue model that goes with the grain of your business should require some deeper thinking and even more difficult decision making. But, the web will reward those that do.