Business Models That Mean Business
Scott Cohen, Founder and Chairman, Newmediary Inc.
"Subscription-based? No, no -- you want to get between the buyer and seller so you can get a cut of that transaction." That was what most venture-capital firms said to us when we went out to raise funding for Newmediary, a provider of online directories for e-businesses, in the autumn of 1999. Back then, everyone was thinking "transactions, transactions, transactions," which made our first round rather difficult.
It was a tough sell, but we knew we were right because my partners, Frank Hertz and Steven Cohn, and I understood the ins and outs of our market. We had launched comparable products in the business services space, tested extensively with our audience and built an executive team that had "done it before." Eventually we found VC firms that understood our business, trusted our knowledge of the space and were ahead of the curve in their thinking about business models in the New Economy.
Nevertheless, it surprised me that so many financiers were concerned about the "Old Economy" stigma of our subscription-based model. Instead of recognizing it as a proven, effective, scalable and recurring revenue stream, it was seen as "behind the times." The whole experience got me thinking that even in the Internet Age, there is no such thing as a "new" business model.
The Business of Business Models
There are only three kinds of business models: transaction-based, subscription-based, and advertising-based. Each has its place, and some companies utilize all three. Application service providers take a hybrid approach, charging per-user monthly or annual subscription fees and per-transaction usage fees. Most "new business models" are really just new customer-acquisition and marketing strategies.
A company's business model should be obvious, not "determined" like a corporate identity. If companies don't thoroughly understand their industry and the customers that comprise it, they are likely to pursue a strategy that is doomed to fail. During the past year, it's become obvious to us that all parties – investors, customers and the public markets – tend to favor companies that recognize and adopt one, or some combination, of the big three.
This is complicated by a harsh reality: the Internet is no longer a medium for experimentation. Those forgiving days when companies could morph themselves from news site to search engine to content aggregator to portal – employing a new business model with each iteration of the Web site – are largely over. Refinements in customer-acquisition strategy and marketing approaches will be tolerated and even supported to some degree, but dramatic re-inventions are usually punished. What start-ups now face is extreme pressure to be right the first time.
Know Your Marketplace
The company I helped found, Newmediary, is a subscription-based business, providing publishers and portals with private-label online directories that help them extend their brand and create recurring revenue streams. We deploy, host and fully support these directories for our partners (including customer support, telesales and marketing), then split the subscription revenues with them.
Our team had a long track record in publishing, directories, classifieds and Yellow Page strategies. That meant we knew not only our model but the dynamics of our marketplace. It was fragmented, it was confusing for buyers, and price wasn't the key differentiating factor. Providers were looking for exposure, not simply requests for proposals (RFPs), and – most important – negotiations always took place offline in a face-to-face environment.
So, rather than attempt to change the behavior of our entire target audience or impose a "transaction" model on an inappropriate market, we created a platform that facilitated the deal-making process while still providing value and a scaleable, recurring revenue stream.
Putting Your Model to Work
In marketplaces and exchanges, customer acquisition manifests itself as liquidity. For portal and content sites, it's all about traffic -- can you generate enough activity on your site to produce significant revenues from subscriptions, transaction or advertising? The question, therefore, isn't "Which business models work?" but rather "What is the most rapid and inexpensive customer-acquisition strategy?" In the earlier stages of Internet commerce, the focus was on building and marketing new brands. This, as everyone now knows, proved an exceptionally expensive and often unsuccessful strategy. The market will no longer bear lavish brand-building expense for little immediate pay-off.
Instead, Newmediary chose to leverage already established brands through a private-label strategy. By giving our platform to publishers like CIO, Upside and Fast Company – publications that already had a large and loyal following of buyers and advertisers – we knew we could help our partners create a large subscription base at a much lower acquisition cost. To bolster activity within each directory site, Newmediary made it technically possible to share buyers or RFPs across all partner sites, creating a network that maximizes the flow of business leads and fosters a vibrant environment that far exceeds what each publisher could create individually.
We also created a comprehensive partner-support strategy that executes complete telesales, customer support and co-op marketing programs on their behalf. Instead of directly marketing the Newmediary brand, we help partners market and support these private-label extensions to their brands, because our success depends solely on the success of our partners.
The Path Not Taken
For Newmediary and many other players in the B2B space, advertising is not a viable brand-building strategy -- it's too expensive and too late for most companies to launch new brands in this market. Instead of holding onto an impossible dream of successful brand creation, start-ups should consider aligning themselves with established brands that provide built-in, low-cost access to their target audience.
Don't worry about needing a splashy brand-building effort to win venture backing. You can get the attention of quality VC firms without advertising in the Industry Standard or paying for placement on major portals. And once you do get their attention (ideally with the help of your board members), they will be far more interested in hearing about a solid business model made more viable by smart strategies for acquiring customers at lower cost.
Since our official launch in April 2000, we've signed 25 partners – both established and emerging players, including IDG's ITworld.com, UpsideToday.com, Fast Company, internet.com and many more. Across the Newmediary network of partner sites, we've registered more than 17,000 service providers to date and given them access to more than $200 million in RFPs. These are true signs that our model is working. And the best is yet to come. Soon we'll be closing our Series C round of funding, which will enable us to grow our telesales and co-op marketing efforts more aggressively. All our efforts -- and the fruits of our efforts -- have taught us one very clear lesson: It's not about the model -- it's how you drive the model.