Innovation in Startup Business Models

Opinion

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drive revenue at the lowest possible cost. Examples of this include freemium or tiered pricing that allow you to seed the market with a low- or no-cost offering as the basis for paid conversion over time.

As one basis for making products more digestible and achieving tiered pricing, I use a technique that I call “Russian doll packaging.” Here, your base product is free or nearly so to encourage viral adoption. As you build a community around the free version, you can convert to paid usage by upselling and cross selling paid “editions” layered on top of the free version.

Aligning with well-established technology stacks can also become a multiplier when you’re filling a conspicuous gap in a high value and acknowledged way. It not only can complete a “whole product,” but done correctly, this sort of strategic alignment can create dramatic pull in the market, putting you in a position for multiplied growth.

Underpinning all of this is the necessity for what I call “SLIPPERY products”: Simple, Low or no initial cost, Installs easily, Proves value quickly, Plays well with others, Easy to use, ROI is obvious, Your customers can’t live without it. Slippery products grease the skids for end-user adoption, which can dramatically reduce customer acquisition and retention costs.

Levers to drive down costs

Levers help you reduce time, cost and resources to deliver your value proposition. Open source (OSS) and other co-creation models are great examples of leveraged business models. Here, you sell value, often in the form of services, support and perhaps commercial add-on products, on top of a core product that is built and maintained by the community. Red Hat is the classic example of a company that has built a franchise around the Linux open source community and a billion-dollar business around this model. Acquia is following a similar path around Drupal open source community and, with cloud services as their multiplier, in the social publishing space.

Crowdsourcing is another great example. For example, uTest is a company that has leveraged crowds effectively by mobilizing a global community to execute a mobile application test matrix of such combinatorial complexity that it would have been economically infeasible otherwise.

From the perspective of demand generation, viral, inbound and social marketing has changed the game altogether by shifting the economics of marketing through an inversion of the model from push to pull, and therefore outbound to inbound, making marketing more cost effective and powerful when executed well.

Of course, the real magic is getting multipliers and levers to work together, where multipliers like freemium models also provide leveraged selling value through a community of free users who see value in conversion to paid usage tiers. Your community becomes your pipeline.

By thinking through the three aspects of business model creation—identifying your C.O.R.E. value, finding multipliers for growth and levers for cost economies—you’ll have much better odds of building a company that returns value disproportionally to all of its stakeholders.

So, that’s a partial summary of my lecture on business models. I hope you’ll review the slides and please leave your comments here to let me know your thoughts on being disruptive and gaining competitive advantage with your business model.

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Michael Skok is a general partner at North Bridge Venture Partners. His investments include Apperian, Akiban Technologies, Acquia, Unidesk, and Demandware (NYSE: DWRE). Follow @

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