I spend a lot of time helping companies find the right business model. One of the first questions we ask is, “How close is your core product to the cash register?”
What we mean by this is, “How far are you away from someone actually paying cash for something?” The general principle is, the closer you are, the stronger your business model.
If they pay for your service, then you are the cash register – great. This one is simple. If you’re valuable enough and targeting the right customers, then you’ll make money.
If you are a lead-generation tool, like Google search or comparison shopping site Getprice, you’re one step away from the transaction. People have the intention to buy/shop and you’re core service is about leading people to the cash register.
If you’re core service is information or entertainment, then unless you are charging for it, then you are two steps from the cash register and the business model is weaker. For example, if you are a great website on surfing, and you have ads on the site, even if they are for surfing, you’re not there to shop, so the cash register is a big leap away. Sure, if you have big numbers you can make money, but per unit (person, visit, day) you’re weaker.
The same principle applies if you are a freemium product – you are probably a long way from the cash register. Because they have to find you, get it, sign up, commit to it, love it, keep loving it, and then pay when the value adds up to being worth the cost.
So when I saw Twitter’s new business model on Paid Content, I wasn’t blown away. I know they have millions of searches a day, but they are still a step away from the cash register. I know I use Twitter to find and recommend products and services I need, but I get that from my friends, not from sponsored tweets. So I’m not convinced. It’s certainly not a magic, money-making business like Google.
Mick Liubinskas is one of Australia’s leading web strategists, having served in head marketing roles at Kazaa, Zapr and Tangler. He now runs Pollenizer, the business incubator he co-founded with former-Kazaa colleague Phil Morle.