June 2011

"Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage."

Victor Kiam

Abstract

New technologies such as cloud computing and platforms are beginning to emerge as simple, practical ways for entrepreneurs to start businesses in a short period of time and with little money. They allow businesses to quickly take a concept to the market to see if it will work. If the business takes off, these same technologies are ready to scale the business to reach global markets and to stay profitable the entire time.

In this article, an outline is provided of key business models that have proliferated as a result of new technologies, namely multi-sided platforms, long-tail markets, and freemium business models. Next, the author describes FreebirdConnect.com, his new platform business that has emerged out of Carleton University’s Technology Innovation Management (TIM) program. This platform can be used by other entrepreneurs to start a new business venture that can reach new markets around the world. Finally, the article describes the steps that an entrepreneur can follow to start a low-risk, global business on the FreebirdConnect.com platform without substantial start-up capital.

Introduction

These are truly remarkable times. It is becoming ever easier, faster, and cheaper for anyone to start a business that has global reach. New technologies are emerging that, when combined with a global shift in people's attitudes and behaviour, are creating profitable niche business opportunities. Consider the enthusiasm behind the mass acceptance of platforms such as Facebook, LinkedIn, and SalesForce.com. This enthusiasm has only recently been surpassed by the desire of venture capitalists, investment banks, and the investing public to cash in on this wave of internet-enabled business. While the valuations attributed to these types of businesses are subject to much debate, many of these businesses generate significant revenue and are operating at a profit.

For more than a decade, researchers have sought to understand and refine the business models that underlie these ventures, including “platform-based”, “long-tail”, and “freemium” business models. These business models offer interesting and potentially useful perspectives on creating a successful, global business. In this article, a brief introduction to these business models will give a flavour for how these types of businesses work and why they can become so successful in a relatively short period of time.

The Many Sides of Platforms

A well-known example of a company using a platform-based business model is eBay. On the surface, eBay is a relatively simple platform that brings together two sides: buyers and sellers. These two sides come together on the eBay platform to leverage the services it provides and to receive the value (goods or money) that they seek. Because neither buyer nor seller could achieve the same result without the platform, the company that operates the platform become the essential keystone to all those buyers and sellers who need it. The platform allows them to transact and to be successful in their own right. One could argue that there is a third side to the eBay business model: the complementor. The complementor earns a profit by enhancing the value of the platform to the buyers or sellers. PayPal was one such example until it was purchased by eBay and became part of its platform.

Indeed, effective platform-based business models can be relatively simple, or they can be more complex and involve many sides. According to the definition of Osterwalder and Pigneur (2009):

         "multi-sided platforms bring together two or more distinct but interdependent groups of customers. Such platforms are of value to one group of customers only if the other groups of customers are also present. The platform creates value by facilitating interactions between the different groups. A multi-sided platform grows in value to the extent that it attracts more users, a phenomenon known as the network effect."

Bailetti (2010a; 2010b) extends this definition beyond groups of customers to include all stakeholders that receive benefit from the platform even if they would not ordinarily fit the definition of a “customer”. In this context, a stakeholder is anyone who has an interest in what the platform creates (e.g., a product or service) or in the people who participate in it (e.g., customers or non-paying users). Expanding the definition to all stakeholders increases the number of sides and expands the definition of value beyond that of simply receiving a monetary return to include other points of value, such as enhancing a brand or personal reputation or receiving personal satisfaction from participating in an activity that one enjoys.

Benefits of Leveraging an Existing Platform

From the perspective of an entrepreneur, the benefits of creating a business that leverages someone else’s multi-sided platform include:

  1. Lower risk of failure. The platform reduces the cost of failure. For relatively little money, a business based on a multi-sided platform can start up and can quickly go through several iterations as the value proposition is tested and refined. If an attempt is not successful, the entrepreneur lives to try another day.

  2. Low start-up costs. The goal of an entrepreneur on any given day is to maximize revenues and minimize costs. Multi-sided platforms provide an entrepreneur with access to assets and resources that would be very expensive to create and to maintain on their own.

  3. Decreased time to market. Getting to market sooner means generating revenue sooner. Revenue (and the cash flow that follows it) is what will keep an entrepreneur in the game (and is usually the main reason to be in the game). Reaching the market quickly may also bring a first-mover advantage, allowing an entrepreneur to build entry barriers that make the path more difficult for those that follow.

  4. Rapid scaling. Once the target audience has been identified and the businesses' value proposition has been tested and refined, success can elude many businesses if they do not have sufficient cash to finance the resulting expansion. Because of the inherent economies of scale and low operating costs, a platform-based business can leverage the platform to grow quickly.

  5. Continual customer feedback. Many multi-sided platforms provide tools that make it straightforward to engage with customers and gather their feedback. Feedback can be direct, such as engaging in a dialogue with customers through forums or in a monologue with customers through customer surveys. Feedback can also be indirect; either customers pay you for what your selling or they do not. For the astute entrepreneur, not getting paid is a big indicator that your value proposition is not resonating with your potential customers.

  6. Simplicity. Particularly for first-time entrepreneurs or those that juggle multiple opportunities, existing platforms reduce the number of decisions the entrepreneur needs to make. For example, many platforms have built-in sales channels, payment processing, technological requirements, and other features. A new entrepreneur can take advantage of a shallower learning curve to focus on a reduced set of new skills and responsibilities.

The disadvantages of creating a business that leverages someone else’s multi-sided platform centre around the issue of control. Creating a business that is reliant on a business owned by someone else is necessarily riskier when some of the critical assets and resources are not owned directly. The loss of some elements of control is a compromise one makes when choosing to leverage the benefits of starting a business using someone else’s platform. If the platform owner is unable to maintain the health of the platform by enhancing the platforms’ capabilities or if the platform cannot maintain reliable access to it, any business venture that relies on that platform will be affected. The entrepreneur is also subject to the platform’s terms of use, which may be subject to changes by the platform owner.

Long-Tail Business Models

Long-tail business models are used to offer a wide range of products or services that may be individually low in demand, but collectively represent a significant market. Often, a long-tail market opportunity is a brand new opportunity that could not be, or has not been, served before because it was not possible for a traditional business to sell a large number of items in small quantities profitably. For example, eBay created a new market opportunity on a very large scale by providing an many small-scale opportunities for sellers to reach markets of one customer or relatively small numbers of customers. The value of the long-tail business model as used by eBay has been proven; eBay allows millions of people to sell relatively small quantities of items to relatively few people. As a result of being underserved, demand from customers in tightly-defined markets can be very high.

Freemium Business Models

The freemium business model is based on a simple strategy. First, attract a large numbers of potential customers to a platform by offering some free services. Then, convert a percentage of those non-paying customers into paying customers by offering higher-value, premium services. Entrepreneurs can use this strategy to establish a strong competitive position in new markets. The freemium business model has been used as a successful commercialization strategy by platforms such as Facebook and LinkedIn, enabling them to capture as many potential customers as possible and dominate their market.

The freemium business model has emerged over the past decade as products and services have become digitized and distributed (for money or for free) over the Internet. In the context of a multi-sided platform business, a freemium business model would be used to provide a group of customers with continuous, free access to the platform (or parts of it). Additional premium content or services would be offered for a fee. The majority of free users may never become paying customers. The reason why this model works well when based on a platform business model is that the low marginal cost to add new, free users is more than offset by the revenue generated by the paying customers. The trick is to continually explore ways to both increase the number of non-paying users and increase their conversion rate to paying customers.

FreebirdConnect.com

Based on his studies in Carleton University’s Technology Innovation Management (TIM) program, the author has created a new company called FreebirdConnect.com, which uses a platform-based business model. The FreebirdConnect.com platform, and how it can be used to solve specific economic development challenges faced by municipal governments, was described by the author in the November 2010 issue of the OSBR.

With its data analytics, knowledge management, and social-media technologies, the FreebirdConnect.com platform enables users to collaborate and create a collective understanding of their data. Users receive value from the platform by being able to understand facts and data and by leveraging the collective intelligence of communities to solve real problems. Furthermore, the platform has broad applicability to entrepreneurs who can use the platform to quickly start a business.

The FreebirdConnect.com platform takes advantage of the three business models discussed earlier: multi-sided platforms, long-tail markets, and freemium business models. As a multi-sided platform, FeebirdConnect.com provides value to specific groups of people with definable problems. The platform provides value to several stakeholders depending on the problems being solved:

  1. Paying customers, who receive value by solving a problem.

  2. Free users, who gain satisfaction from contributing to a community.

  3. Media members, who increase their profile and level of recognition (brand).

  4. Academics, who increase their profile and level of recognition (brand).

  5. Entrepreneurs, who receive revenue.

  6. Associations and non-profit organizations, who receive value by solving a problem.

These distinct groups of people and problems can be viewed as small, niche markets that together, constitute the long-tail market. A long tail business model works best when the costs of purchasing and keeping a stock of inventory are kept low. In the case of the FreebirdConnect.com platform, the inventory costs are zero. Unlike eBay, which sells predominantly physical goods, the FreebirdConnect.com platform sells a highly sought-after intangible good: knowledge. If that knowledge is actionable and helps to solve real problems for people, then people will be willing to pay to gain access to it. From the perspective of an entrepreneur looking to start a business using the FreebirdConnect.com platform, the potential to make money is very large. The fact that there is an unlimited number of important, but tightly definable problems that groups of people need to solve, aligns the FreebirdConnect.com platform with the business potential of long-tail markets.

The freemium business model is important to the platform because it is dependent on creating communities of people who work together to create collective intelligence around specific problems. Free access to the platform is important in helping to attract a critical, self-sustaining mass of participants to the process.

Starting a Business on FreebirdConnect.com

Many businesses fail, not because the entrepreneur is too ambitious, but because their focus is too scattered. When resources (time, money, talent) are limited, once must have a very specific focus and set realizable goals. The FreebirdConnect.com platform rewards entrepreneurs with a strong focus by helping them to start a business that can pursue many new niche markets with a unique and compelling value proposition. Specifically, the opportunity to earn revenue will come from two sources: selling access (subscriptions) or finding partners who will pay to provide free access to specific groups of people.

The following sections describe the steps that an entrepreneur can follow to build a successful business on the FreebirdConnect.com platform.

Step 1: Identify the problem(s) the business will solve. Start asking questions to identify problems that specific, identifiable groups of people have. Also identify the different types of data needed to solve those problems and whether additional solutions can be generated through a process that creates collective intelligence around the data (i.e., a single version of the truth). The more narrowly the entrepreneur can define the problem that they want their business to be focused on solving and the greater the value of leveraging the platform to generate actionable intelligence to solve the problem, the greater the chance they will succeed.

Step 2: Define the value propositions. Identify each of the stakeholder groups and list the value that each stakeholder would receive from their involvement in the platform. Which groups of people would have an interest in accessing the platform to solve the problem? What problem(s) will be solved for that group? What parts of the platform could be made available for free and what parts could be offered as a premium service for a monthly or annual (subscription) fee? The data analytic capabilities of the FreebirdConnect.com platform make it easy to offer higher-level aggregations of data or older data for free. The more detailed, lower-level data or more recent data can be offered as a premium service.

It may also be that more money can be made by finding one or two groups who would be willing to pay to provide stakeholders with free access to the premium service. For example, an association or a municipal or regional government may want to provide free access to their members or constituents as a way for them to add value to that group. An added advantage to finding a single sponsor for your business is that the community of contributors is likely to be larger when everyone can access it for free.

Step 3: Source the data. There are several options available to obtain the data. One option is to find free data. Because there is a wealth of freely available, easily downloaded data from various sources, it may be worthwhile to spend some time thinking about the kinds of problems that can solved with this data. Examples include open data from local, regional, and federal governments (e.g., census, health data, trade data, labour statistics, industrial production, poverty and wealth, environmental data) and large non-profit organizations (e.g., IMF, World Bank, UN). Another way to source free data is to use tools like Web crawlers or Yahoo Pipes. Yahoo provides a service that allows people to use key words and logic to search the Web for specific content and returns not just links, but the actual content from Web pages. This process, known as crawling, can be a very effective way at gathering data from many different sources, which can be combined to create a unique repository of useful data.

Another option is to buy the data from a data aggregator or from the data owner. Many organizations collect data as part of their operations, but either do not have an interest in monetizing that data or do not have an easy path to do so. This presents an excellent business opportunity for the savvy entrepreneur. As an alternative to buying such data, the entrepreneur may consider partnering with the data owner(s) to leverage their data asset. The community or customers of the data owner can receive discounted access to the premium services or the data owner can receive a share of revenue if they help to promote to earn money for both sides.

Step 4: Build a dashboard. Once the entrepreneur has the relevant data, they can leverage the data experts at FreebirdConnect.com to help understand how the platform’s analytic tools can be used to create dashboard views of the data for presentation to the community. Dashboards are an effective way to present multiple views of data so that issues can be highlighted and presented in a logical way. They encourage people to contribute their insight to help solve a problem.

Step 5: Seed the platform with expert insight. The best way to encourage people to join a collaborative community is to work with a few selected experts to create discussions and to begin the collaborative process before the platform is made accessible to a larger audience. The goal is to find people who have deep subject-matter expertise in the issues addressed by your business and who would also receive value from having a significant profile on the platform. These stakeholders include academics (e.g., researchers, professors, and graduate students), media (e.g., print journalists, freelance journalists, and journalism students), and consultants (i.e., professionals who are paid to provide their subject-matter knowledge and analysis). Note that these stakeholders are also potential paying customers, so it is best to only recruit as many as are required to adequately seed the platform in its early stages.

Step 6: Spread the word. Make it known to your target customers that a solution to their problem is now available. All stakeholders to the problem have an interest in accessing the platform to see for themselves if there is sufficient value for them to join the community and to contribute their insight to what the data means and to collaborate with others. A complete understanding of the value received by each group of stakeholders will help the entrepreneur maximize the number of paying customers. For example, consider a community where there are many consultants who earn a living by providing their subject-matter expertise. If you have been successful in recruiting a few of them to contribute their insight to seed the platform, then all other consultants have a strong incentive to pay to join the platform so that they too can maintain or even enhance their profile as a subject-matter expert by contributing their insight to the community. Similarly, the executives of associations or not-for-profit organizations may have an incentive to join the community and to participate in the collaboration to maintain credibility with their membership.

Conclusion

A variety of factors, including the arrival of new technologies, the failure of legacy business practices, and turmoil in global financial systems, are greatly disrupting the business world. However, as usual, history repeats itself and new opportunities abound. In the Earth’s not-so-recent past, large lumbering dinosaurs failed to adapt to new environmental realities and were replaced by small, nimble mammals that had the ability to adapt and flourish. Today, entrepreneurs fill the role of the quick and the nimble in the new business climate. While incumbents are unable or unwilling to adapt, entrepreneurs find new opportunities and creative ways to flourish from them. In this article we have discussed how new technologies have enabled new business models that provide entrepreneurs with a way to quickly design, launch and grow a business. By leveraging the business platforms of others to get to market faster while reducing the risk and cost of failure, entrepreneurs remain at the forefront of innovation.

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