Five Fifty: Year end 2018

McKinsey Insights & Publications
It's time for your annual review. Here's what the Five Fifty did to support your success. 
Business.com
Which Business Model Is Right for Your Startup?

The choice of business model is one of the key factors that determine the future success of every startup. If the model is not profitable, scalable and sustainable, the business is bound to fail.

The business model should be selected with even greater care if you are planning on launching a marketplace, an online platform where consumers buy products and services from various vendors and providers. Creating a tech platform is important, but without a clear business model, technology is powerless.

For each of type marketplace, balance is vital. You have to think through not only how you'll profit from your marketplace but also how you will make it profitable and convenient for users who will buy and sell using your platform.

There are several basic business models you can use to monetize your product or service.  Below is an overview of six popular models and examples of companies that have adopted these models.

Transaction fee (commission)

One of the most popular ways of monetizing a marketplace is to introduce a per-transaction fee, or commission. There are three ways this model can function: The fee can be paid by the vendor, by the buyer or by both.

Vendors and providers who list their goods and services on a platform tend to prefer the transaction fee model, because they don't have to pay the marketplace until they get their first revenue. Owners also enjoy the benefits of this model because all the cash flows through the platform.

AirbnbeBayFiverr and Uber are all examples of services that charge transaction fees.

Membership fee (subscription)

In this model, a portion or the entirety of the marketplace's users are regularly charged a sum of money for access to the marketplace and the opportunity to find new customers or suppliers.

Unlike transaction fees, this option is better suited for those who sell expensive products or services. Subscription is more convenient for users who plan on constantly using the services of one specific marketplace.

Typical examples of C2C projects that function using the membership fee model are dating sites (OkCupidMatch) and home exchange services  (Love Home SwapHome Exchange).

Projects like these aid their users by analyzing all of their preferences and finding perfect matches. Whether it's a significant other with similar interests or the house of your dreams in a conveniently located area, the idea behind subscription is that the offer itself is exceptional.

Listing fee

Marketplaces that aggregate a large number of listings often operate under a payment-per-listing model. Technically, this model is similar to a paid advertisement. This option works well when the vendor is ready to pay for access to a wide audience and when the platform can guarantee broad coverage.

Craigslist, in business since 1995, is one such marketplace. This online billboard is separated into different categories. Some of these categories provide free listings, while others – job hunting or home rentals – require a fee.

Yet another good example is the IT-related job-hunting service called Techfetch.com. The platform provides employers with a free trial for seven days, and then you can choose from one of its paid plans.

Listing-fee-based models can function well in the B2B segment too. This model was adopted by a marketplace called Mascus, a platform for buying and selling equipment for construction, agriculture and other specialized uses. In the case of Mascus, vendors are not interested in subscriptions and long-term relationships with the platform because the volume of sales is low. (Generally, its users only buy or sell a few units of equipment and then leave.) Consequently, a listing fee is a more attractive model for Mascus than, for instance, a membership fee.

Lead fee

Payment for connecting the contractor and the performer, or lead generation, is a popular business model often used by platforms where users leave their requests and wait for offers from specialists. In this model, the marketplace charges fees for leading the performer to a potential customer interested in their services. This does not always guarantee a successful deal. However, in comparison to listing fees, the chance of a positive outcome is significantly higher.

One of the platforms that proves the efficiency of this model is Thumbtack, which helps local specialists who provide all kinds of services, ranging from house cleaners to belly-dancing teachers, sell their skills to interested buyers. It was estimated that, on average, service providers would pay $500 for each lead. In 2017, customer and performer selection was automated with the help of the Instant Match system.

In general, the lead-fee business model is more common in B2B and B2C, where each customer is especially valuable. In the C2C segment, this business model is usually not a solid choice.

Exclusive services (freemium)

The principle behind this business model is that the basic offer is free for all users, while more extensive features require payment.

Freemium differs from a trial version, in which the user gains full access to all features, but for a limited time. The freemium model allows users to enjoy the basic features of the platform for an unlimited time. Paid features are a buffer of sorts, which the customer might use for more convenience and security.

The C2C Dutch service Peerby is a good example of this model. On Peerby, users can lend each other items they seldom or never use – tools, appliances, gardening implements and so on. To monetize the platform, Peerby offer paid services: insurance (against item damage and loss) and delivery (to save users time on getting the item from the owner themselves).

Featuring listings and offers

Featuring is a way for providers to buy a more prominent listing for their product or service. This model is close to advertising, but in this case, it is common for the platform to provide basic listings for free while also offering more visibility to vendors if they pay for their listings. For instance, after a vendor has paid for their listing, their profile is put on the main page or in the top position in its respective category.

When determining which marketplace model is best for your business, keep in mind users more often than not dislike advertisements, which is why featuring is more effective in niche projects where vendors place listings and offers that are relevant to the interests of the platform and its audience.

A good example would be the Finnish Häätori platform, on which users can freely add listings to sell used wedding dresses. The service was successfully monetized with the help of stores, photographers, wedding planners and other wedding-related vendors and service providers who buy listings on the website. As this advertisement is relevant to the website's users, it does not cause the usual annoyance associated with ads.

Summary

When choosing the right business model, it is necessary to account for a lot of factors, ranging from the scope of your future marketplace and the problem it solves for customers to the average price of the listed products and services.

Focus on attracting and retaining the party that will later allow you to profit the most. Calculating your unit economics – profits (or losses) per user – is essential as well. This can be done by subtracting the cost of attracting one customer and carrying out their order from the average revenue brought in by this customer. The result might help you see whether the selected business model is financially viable or not.

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In 2017, CIO magazine reported that around one-third of all customer relationship management (CRM) projects fail. That was actually an average of a dozen analyst reports. The numbers ranged from 18% to 69%. Those failures can mean a lot of things — over-budget, data integrity issues, technology limitations, and so forth. But in my work with clients, when I ask executives if the CRM system is helping their business to grow, the failure rate is closer to 90%.

The primary reason they miss the mark in helping companies increase revenue is that CRM systems are too often used for inspection — to report on progress, improve accuracy of forecasts, provide visibility, predict project delivery dates, and provide a range of other business intelligence — rather than creating improvement in the sales process. Front-line sales professionals and managers rarely find the majority of these capabilities useful in winning more business for the company.

CRMs today also serve a lot of masters, from executives in the C-suite, technology, marketing, finance, and, oh yeah, sales. They try to address more objectives than are reasonable for any software system. I recently led a working session for a team of executives looking to select a CRM provider. By the time everyone weighed in on their must-haves, we had identified 23 unique objectives. With such a diluted focus, it’s virtually impossible to succeed.

I saw this clearly at another client where there was a wide range of answers to the question, “Was the CRM implementation a success?” The EVP of marketing was pleased she could now track the assignment of every single lead. The CIO was unhappy about data integrity issues that arose from the integration of more than 20 discreet databases. The EVP of sales liked the easy-access dashboard to report on metrics and the forecast. Sales management was less positive but acknowledged that it helped them monitor activity. And the sales team — well, they mostly hated it. They had to enter a lot of information that added little value (for them), and provided no help in selling more. Because the sales team had so little incentive to keep up with the data entry requirements, the quality of the data in the system became less and less reliable over the following year. The result? Incomplete or inaccurate information from the CRM was exported into Excel spreadsheets for further manipulation by each level of management.

If you want your CRM implementation to increase revenue (which it only will if it enables your sales organization to increase sales), I recommend doing the following:

Re-think your CRM as a tool to increase revenue. Period. That is why you bought this system and spent millions, sometimes tens of millions, on its deployment. Broadcast this message loud and clear from the CEO and sales leadership. Your sales team needs to understand that they drive the execution of your strategy every time they interact with a client or prospect. Your implementation of a CRM system is not about the technology, and it is not to fulfill an administrative reporting requirement, which is how too many sales teams view them. The CRM is a tool to help them sell more, access support resources during sales cycles, and manage their territory or “book of business.” If the sales team recognizes the value of this tool, you’ll get all the metric and forecast information you desire. If not, you’ll be back to modifying guesses in Excel spreadsheets.

Integrate your marketing efforts with sales activity. Historically, these two functions collaborate on CRM implementation so poorly it’s almost a cliché. Marketing blames sales for not following up on all the leads produced. Sales points out that marketing doesn’t understand field reality and truly qualified leads. Overcoming these interdepartmental squabbles requires a collaborative effort by both teams throughout the sales process. Early in the sales cycle, marketing and sales have roles to play in identifying and qualifying opportunities to actively pursue. As sales cycles develop, they should have a shared understanding of what constitutes a qualified lead, as well your ideal customer profile — both in terms of the company and level of buyer. This helps filter out business you shouldn’t pursue. Later in the sales cycle, marketing works with sales to create materials that can be customized to client objectives and case studies, instead of the generic collateral sales teams often see as low value. Finally, working together on win/loss analysis provides an active feedback loop for joint planning and addressing future needs. This kind of integration, using your CRM as the glue, will improve marketing’s efforts to create gravity with prospects, and sales’ ability to accelerate sales cycles. It’s an advantage for the business if you can use at least some of the same metrics to evaluate the success of both departments.

Managers provide coaching to improve, not reporting to inspect. The pivotal role in driving CRM success is not individual sales people. It’s sales management. They will determine how the sales team uses and experiences the CRM. If they use it solely to check on the amount of activity, call volume, or other measures of efficiency, it’s of low value to the sales team and likely be rejected or filled with fictional data. Instead use it as a tool to jointly create strategies for major opportunities, and help the sales team to maximize opportunities by coaching them throughout the sales process. I’ve written in the past about the high value of coaching and the fact that it’s rarely done well. But CRM can be a powerful mechanism to support coaching for individual sales calls, as well as opportunity, account, and territory management.

CRM is an important tool, but it is just a tool. When the laptops are shut down for the day, it’s your sales team that is responsible for bringing value to clients and driving revenue. Implement your CRM with that in mind and you’ll be pleased with your ROI.

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