As I mentioned earlier, open source has already had an enormous impact on companies building traditional enterprise software. There are many new opportunities, also, in what Fortune’s David Kirkpatrick calls “the contribution economy” (Jeremy Levine expands here, in a nice post–hat tip to him for finding Kirkpatrick’s original article). In a nutshell: various developers are taking the open source model and applying it to new markets.

Since David and Jeremy have already ably introduced the topic, I’ll try to flesh out a few areas, with a focus on consumer-facing companies.

First, what business models work best? Generally, most consumer internet companies provide a service that enables communication (eg reading or discovering new content, connecting with others, etc) or transactions (eg buying or selling). That in mind, there are three primary means to generate revenue: ads, subscriptions, and transaction fees. Developing a large business generally requires a large and active user base. Deciding which of the three revenue streams will work best depends on the particular dynamics of the audience in question and the products (if any) being transacted. Usually, though, a combination is offered.

Second, what characteristics do highly successful companies generally share? Here’s a laundry list:

• A large, high-growth market. Appealing to multiple demographic segments is generally better than focusing on a single area. This isn’t always the case, though, as certain segments are much more valuable than others.
• Exceedingly low customer acquisition costs. Related to the network effect. The idea is to make it as cheap as possible to get an enormous number of users. Google may be the case study here: initially, they spent very little on marketing but still increased site traffic exponentially. You do this by offering…
• A better mousetrap. Obvious point, but the product/service really does have to be better/faster/cheapter than the alternatives. In fact, the more customers are delighted (rather than simply pleased), the better.
• Minimal barriers to using/trying the product. Signup should be trivial.
• Great design. Workflow matters. Wasted clicks matter.
• Acceptable risk/reward. If personal data (or other setup work) is required, the user should receive meaningful value in return.
• A continually improving product. Doesn’t matter how–could be through better personalization, larger selection, faster service, etc.
• A sticky product that somehow becomes an increasingly important part of the user’s life. The more time users want to spend using the service, the better.
• Vendor lock-in. This is where a customer becomes dependent on a product or vendor and cannot move to a competitor without incurring substantial switching costs. It’s worthwhile to note that lock-in schemes, when poorly applied, can destroy value for the vendor in question. It’s important to think through how to create lock-in. Airline frequent flier programs are a positive example; the Unix Wars of the 1980s and 1990s are a negative example.
• Trust. No hidden charges or abuse.

What did I miss? What companies do you think are particularly noteworthy?

Posted by Dan Grossman on Sunday, August 28th, 2005 at 5:50 pm.

As I mentioned earlier, open source has already had an enormous impact on companies building traditional enterprise software.  There are many new opportunities, also, in what Jeremy Levine calls "the contribution economy"  (Fortune’s David Kirkpatrick originally defined the term here in another good read).  In a nutshell: various developers are taking the open source model and applying it to new markets. 

Since David and Jeremy have already ably introduced the topic, I’ll try to flesh out a few areas, with a focus on consumer-facing companies. 

First, what business models work best?  Generically, most consumer internet companies provide a service that enables communication (eg reading or discovering new content, connecting with others, etc) or transactions (eg buying or selling).   That in mind, there are three primary means to generate revenue: ads, subscriptions, and transaction fees.  Developing a large business generally requires a large and active user base.  Deciding which of the three revenue streams will work best–though usually a combination is offered–depends on the particular dynamics of the audience in question and the products (if any) being transacted.

Second, what characteristics do highly successful companies generally share?  Here’s a laundry list:

• A large, high-growth market.  Appealing to multiple demographic segments is generally better than focusing on a single area.  This isn’t always the case, though, as certain segments are much more valuable than others.
• Exceedingly low customer acquisition costs.  Related to the network effect.  The idea is to make it as cheap as possible to get an enormous number of users.  Google may be the case study here: initially, they spent very little on marketing but still increased site traffic exponentially.  You do this by offering…
• A better mousetrap.  Obvious point, but the product/service really does have to be better/faster/cheapter than the alternatives.  In fact, the more customers are delighted (rather than simply pleased), the better.
• Minimal barriers to using/trying the product.  Signup should be trivial.  Design matters.
• Acceptable risk/reward.  Asking for some personal information is OK if sufficient value is delivered in return.
• Product improves continually.  Doesn’t matter how–could be through better personalization, larger selection, faster service, etc.
• Product is sticky and become an increasingly part of customers’ lives.  The more time users spend using the service, the better.
• Path dependence.  This refers to a situation where the outcome depends on preceding events.  Good example (using VHS vs Betamax) at Wikipedia here.
• Vendor lock-in.  Make it easy to get it, but customers should have a tough time getting out. 
• Trust.  No hidden charges or abuse.

What did I miss?  What companies do you think are particularly noteworthy?

Posted by Dan Grossman on Sunday, August 28th, 2005 at 2:00 pm.