Trends for 2008

Looking over the Horizon

I have always maintained that it is important for entrepreneurs and business leaders to be conscious of trends and changes in lifestyle and behavior that affect their industry in a direct or indirect way. Trends is is defined as follows:

Trends - directional tendencies in lifestyle, commerce or demographics. They may be obvious or imperceptible.

Euromonitor 2005

One of the best websites for monitoring trends is tendwatching.com. They recently published: "8 TRENDS TO CAPITALIZE ON IN 2008" report. It is really worth taking the time to read this report if you want some insight into some of the ways consumers may think, act or respond in the year ahead. The report is filled with brilliant insights, great examples and cool pictures to illustrate ideas.
The 8 TRENDS TO CAPITALIZE ON IN 2008 are:


The brief idea behind each trend:

Status spheres - a variety of lifestyles, activities and persuasions, which can be mixed and matched by consumers looking for recognition from various crowds and scenes.

Pemiumization - no industry, no sector, no product will escape a premium version in the next 12 months.

Snack culture - he phenomenon of products, services and experiences becoming more temporary and transient; products that are being deconstructed in easier to digest, easier to afford bits, making it possible to collect even more experiences, as often as possible, in an even shorter time frame.

Online oxygen - control-craving consumers needing online access as much as they need oxygen.

Eco Iconic - Eco-friendly goods and services sporting bold, iconic design and markers, that help their eco-conscious owners to visibly tout their eco-credentials to peers.

Brand butlers - Think baby food or diaper brands opening a lounge area, including diaper-changing facilities and microwaves, for parents and their offspring at a major airport or in malls. Or a bank installing secure, high-tech lockers next to the beach, so beachgoers can safely store their belongings when going for a swim or walk.

Make it yourself (MIY) - having come to expect to be able to create anything they want as long as it is digital, and to customize and personalize many physical goods, the next frontier will be digitally designing products from scratch, then having them turned into real physical goods as well.

Crowd mining - when co-creating, co-funding, co-buying, co-designing, co-managing *anything* with 'crowds', the emphasis in 2008 will move from just getting the masses in, to mining those crowds for the rough and polished diamonds. How to do that? Shower them with love, respect and heaps of money, of course.

For all those taking a break in December, read this before you go as it will fuel your mind to consider out-the-box ideas as to how you could leverage off these trends for business success in 2008.

Here's how understanding trends may help:

1. Vision—Do these trends have the potential to influence or shape your company's vision?
2. New business concepts—Can these trends point you to new business concepts, or entirely new ventures?
3. New products, services, experiences—Can these trends inspire you to add 'something' new for a certain customer segment?
4. Marketing, advertising, PR—Will these trends help you speak the language of those consumers that are already 'living' a trend?

See trendwatching.com for more detail.

Business Models 101

The What? Why? When? and How? of Business Models

What?
A business model is a description of the profit engine within the business; it is framework describing how the business will generate revenue in excess of costs.

Why?
Very few entrepreneurs spend enough time thinking about and refining their business model. So many people approach a business venture with a predefined paradigm of how that venture will generate revenue that they never consider different business model options. Those who do think about how they can refine or apply a business model in a unique an innovative way often create huge amounts of value. Consider these recent examples:

• Netflix applied a “monthly subscription” business model to DVD rental as oppose to the traditional pay per use model.
• Flexcar apply a “pay per hour” business model to the rental car industry compared to the traditional pay per day
• Dry Soda apply a “wine distribution, positioning and pricing” model to a soda soft drink

When?
Many entrepreneurs think that they need to have their business model completely refined and mapped out before they even begin. This may seem like the logical and safe thing to do but history would suggest that it my not be the best thing to do. Many of the most successful entrepreneurial companies in recent times have worked out their business model as they have gone along. Consider these examples:

• Google was formed as a company in 1998 but the pay per click advertising model that sustains the Google revenue line was only introduced in 2001 after they played with a number of different revenue generating options leveraging the page rank search algorithm.
• PayPal was launched as a business that would enable people to transfer money from one PDA to another, they only refined their business model into a per transaction service focused on eBay customers after 12 months in operation
• eBay was launched as sort of pet project by Pierre Omidyar. It was only after realizing that he would incur hefty web hosting bills that he realized he would need to turn it into a revenue generating business.

So the underlying message is, don’t rush into defining your business model. Come up with some ideas, test them, refine them and keep exploring until to unlock something that shows huge potential.

How?
Many of the most successful business models in an industry have been created by borrowing ideas from another industry or by combining elements of different kinds of business models. Look outside your industry. Consider where other business models seem to be succeeding and consider whether such a business model could be effectively in your circumstance. Could you apply a pay per click model to your business? Would it make sense to become a broker? Would you rather have a subscription or a pay per use model?
As you do go about defining a business model, here are some key questions you can consider to bring clarity and focus to the process:
What are the sources of revenue for the business?
Single or multiple revenue streams?
Payment terms – upfront, over a period of time or post delivery?
What are the cost drivers for the new business?
Major costs incurred to generate revenue?
Nature of costs – fixed, variable or semi-variable?
Payment terms – upfront, over a period of time or post delivery?
What size capital investment is required to launch and sustain the business?
To sustain a positive cash balance?
To make profit?
What are the critical success factors for this business?
Identify the issues that will determine the success or failure of the business
..........................................................................
Business Model Options
Here are some of the common types of web based business models that one could consider:

Brokerage - Brokers are market makers: they bring buyers and sellers together and facilitate transactions. Brokers play a frequent role in business-to-business (B2B), business-to-consumer (B2C), or consumer-to-consumer (C2C) markets. Usually a broker charges a fee or commission for each transaction it enables. The formula for fees can vary.
Examples: eBay, Expedia

Advertising - The web advertising model is an extension of the traditional media broadcast model. The broadcaster, in this case, a web site, provides content (usually, but not necessarily, for free) and services (like email, IM, blogs) mixed with advertising messages in the form of banner ads. The banner ads may be the major or sole source of revenue for the broadcaster. The broadcaster may be a content creator or a distributor of content created elsewhere. The advertising model works best when the volume of viewer traffic is large or highly specialized. Examples: Google, Facebook

Infomediary - Data about consumers and their consumption habits are valuable, especially when that information is carefully analyzed and used to target marketing campaigns. Independently collected data about producers and their products are useful to consumers when considering a purchase. Some firms function as infomediaries (information intermediaries) assisting buyers and/or sellers understand a given market.
Examples: Nielsen, Farecast.com

Merchant - Wholesalers and retailers of goods and services. Sales may be made based on list prices or through auction.
Examples: Amazon.com

Manufacturer (Direct) - The manufacturer or "direct model", it is predicated on the power of the web to allow a manufacturer (i.e., a company that creates a product or service) to reach buyers directly and thereby compress the distribution channel. The manufacturer model can be based on efficiency, improved customer service, and a better understanding of customer preferences.
Examples: Dell Computer

Affiliate - In contrast to the generalized portal, which seeks to drive a high volume of traffic to one site, the affiliate model provides purchase opportunities wherever people may be surfing. It does this by offering financial incentives (in the form of a percentage of revenue) to affiliated partner sites. The affiliates provide purchase-point click-through to the merchant. It is a pay-for-performance model -- if an affiliate does not generate sales, it represents no cost to the merchant. The affiliate model is inherently well suited to the web, which explains its popularity. Variations include, banner exchange, pay-per-click, and revenue sharing programs. Examples: Google Adsense, Amazon Associates

Community - The viability of the community model is based on user loyalty. Users have a high investment in both time and emotion. Revenue can be based on the sale of ancillary products and services or voluntary contributions; or revenue may be tied to contextual advertising and subscriptions for premium services. The Internet is inherently suited to community business models and today this is one of the more fertile areas of development, as seen in rise of social networking.
Examples: Red Hat, Wikipedia

Subscription - Users are charged a periodic -- daily, monthly or annual -- fee to subscribe to a service. It is not uncommon for sites to combine free content with "premium" (i.e., subscriber- or member-only) content. Subscription fees are incurred irrespective of actual usage rates. Subscription and advertising models are frequently combined.
Examples: 37Signals, Netflix

Utility - The utility or "on-demand" model is based on metering usage, or a "pay as you go" approach. Unlike subscriber services, metered services are based on actual usage rates. Traditionally, metering has been used for essential services (e.g., electricity water, long-distance telephone services). Internet service providers (ISPs) in some parts of the world operate as utilities, charging customers for connection minutes, as opposed to the subscriber model common in the U.S.
Examples: Amazon S3

The typology for different business model types is adapted from work by Professor Michael Rappa at University of North Carolina - digitalenterprise.org

Lessons from the 2000 dot.com BUST to avoid a 2007 Web2.0 BUBBLE

Ten Lessons from the Internet Shakeout

The past boom and bust of the Internet sector is one of the biggest business events of the past several decades. In the interest of finding lessons that help us avoid similar debacles in the future, here are ten observations about the dot com shakeout.

1) Nothing changes overnight. The single most fatal miscalculation investors made regarding the Internet was to massively overestimate the speed at which the marketplace would adopt dot com innovations. That assumption of speed dictated the rapid pace and scale of investment by both VCs and public investors - and the resulting over-investment led to the inevitable bubble and bust. We somehow believed it was different this time. It wasn't. It will always simply take time and lots of it for people to integrate innovations into the way they do things.

2) New stuff doesn't replace old stuff. History tells us repeatedly that innovations almost never replace existing products but rather typically worm their way into the mix and inhabit their own niche. Yet, many dot coms and their funders persisted in modeling businesses that assumed a zero-sum game in which, say, online retailing displaces a significant percentage of existing retailing. In retrospect, all we had to do was look at the history of catalog marketing to predict that e-tailing might wriggle its way into some minority of purchases, eventually reaching its natural saturation point. Recognition of historic precedent could have spared some large and costly investments.

3) Too early? Too bad. Timing issues continually pop up in the post-mortem of the dot com shakeout. Many of the web's wrecks came to market with high-cost products well before the infrastructure was ready to receive them. The digital entertainment category is one good example. Companies like Z.com, Pop.com, Icebox.com, Digital Entertainment Networks and Pseudo Networks all may have had good products, but they were much too early for the broadband marketplace.

4) Many startups were fundamentally uncreative and "un-Internet." Many failed Internet startups began with ideas that involved little more than shoveling an existing business model onto a web site - or copying another company that did it. Just as "shovelware" in the content world involved transfer of magazine or other traditional media formats directly to the Internet, so too did much e-tailing simply export catalogs to the web. Online retailing of "stuff" is perhaps the most obvious and uncreative use of the Internet, and like shovelware, it largely fails to take advantage of the interactive features that give the Internet its power. The more creative - and sometimes successful - e-commerce startups leveraged Internet tools to produce such innovations as pricing "bots," collaborative purchasing, person-to-person trading, e-procurement systems and name-your-price bidding systems for perishable inventory.

5) All we, like sheep, will go astray (with enough pressure). Amid speculative bubbles that last as long as the dot com one we have recently witnessed, even the most disciplined investors can conclude that the rules really may be different this time and eventually give in to the wicked ways of the herd. Ironically, it is many of those most righteous hold-outs that inherit the iniquity of us all - those that capitulated and invested just as the bubble was about to burst lost both their shirts and their integrity. By contrast, the prodigals that jumped on fads with the alacrity of 13-year-olds had already cashed out handsomely. Few of us are immune from speculative frenzies.

6) Free is folly. The junkyards of many innovation cycles are piled high with business plans built around the idea of giving something away free and "making it up on XYZ." A decade ago while I was working at Ziff-Davis we received a business plan that called for giving away free fax machines and "making it up" on faxed advertising. That's only one step sillier than giving free exercise machines to health clubs in order to sell advertising blasts to sweaty boomers. The numbers simply don't work out for most free models. The Internet's low incremental distribution costs nourished a large crop of freebie wannabes - and now the "F" section of our shutdowns list is very long indeed with names like FreeInternet.com; Freerealtimeworld; Freeride; FreeTaxPrep.com; freeWebStuff.com; freeworks.com - you get the picture. Next time around - we'll focus on our value proposition a bit more closely.

7) We used narrowcast to broadcast. A surprising number of entrepreneurs, presumably in the search for the big play, decided to use the Internet, the ultimate narrowcasting medium, to reach the widest and most undifferentiated consumer markets imaginable. In using the WaterPik of the Internet to water the broad consumer garden, entrepreneurs bypassed the many rich demographic lodes that the Internet enabled them to mine for a fraction of the cost of the big play. Many of the big and broad consumer startups ranging from Value America to Webvan went aground on the inherent low margins and the massive marketing and infrastructure costs of such ventures.

8) The $50 million rule can kill. Many dot com casualties fell victim to the temptation to gin up business plans to meet the size criteria of the typical venture capitalist. A typical VC firm, in order to justify the time it spends on an investment, needs to dispense fire-hose amounts of cash, implying that the recipient business must be fairly big, able, say, to generate revenues of $50 million in three years (hence the $50 million rule). The resulting dynamic creates a sort of theme park of co-dependency - VCs dangle big carrots to encourage bigger thinking on the part of entrepreneurs whose DNA already is programmed for grandiosity. The sad result is that many of these inflated business plans were overfunded. They were never destined for the fifty-mil world, but would have made nice $10 million to $20 million businesses had they been more appropriately financed. In retrospect, angel investing, with its ability to funnel smaller jets of funding, would have been more appropriate for many of shoulda-been-niche plays.

9) It's hugely difficult to build chicken and egg simultaneously. Many of this past year's disasters stemmed from business models that required the startup to build both a critical mass of buyers and a critical mass of sellers - and do it at the same time. Many B2B marketplaces fell into that category, as did collaborative purchasing models, rewards programs and many others. It requires huge amounts of money to create either half of the equation in a many-to-many model. Investors that want to create the next eBay had better plan to spend a lot of time and even more money to do it.

10) Prediction tools must improve. As we observed above, the biggest mistakes of the dot com bubble were mistakes of timing - of misjudging the speed and direction of development and adoption and placing investment bets accordingly. In order to avoid those mistakes in the future, we need better predictive tools to plot the speed at which new technologies will spread. Spreadsheet gymnastics by 20-something b-school graduates should not dictate our investment decisions. We can produce better predictions. We have the data - from decades of technology innovation. We have the ability to analyze the data - after all, Everett Rogers wrote "Diffusion of Innovations" 40 years ago. We have the history. The dot com bust suggests we should begin to learn from it.

From "The Business Plan Archive" -- a brilliant collection of business-planning documents from businesses envisioned during the initial commercialization of the Internet (1995 through 2002)

Comic Relief - Ali G "pitching his idea"

New Life New Direction

For all those MILLIONS of you (actually its only a few) who have been faithful readers of this blog, thank you. I have been quiet in the past two months as I have settled into my new life on the West Coast of the USA. I am now living in Seattle, studying at the University of Washington and lapping up the technology focused entrepreneurial culture of the Pacific Northwest.

My focus over the next few years is on BUSINESS MODELS . I am looking at how entrepreneurial success is linked to the business model of a business. As I have worked with, studied and been part of entrepreneurial ventures over the past few years I have developed the belief that too little attention is paid to the concept of a business model.

A business model, as the profit engine within the business, is central to the survival and success of a high growth entrepreneurial business. Without a clear model for generating revenues in excess of costs, a business cannot survive in the long term. Yet very little is understood about what differentiates one type of business model from another, what impact a business model has on firm performance and how a business model is created and develops over time in young, entrepreneurial organizations.

So this will be focus over the next while and as a result, much of what I put on my blog will relate to business model creation, evolution and performance.