Business models

Simple charging models work best

By June 19, 2012 4 Comments

I’m a big fan of simple charging models. I’m at LeWeb London right now listening to the CEO of Evernote who describes his business model as direct – he only makes money off his users and then only if they use the product (for those that don’t know Evernote operates a freemium model where the free version of the software is quite rich and advanced users can pay for a variety of advanced features – I use the free version). This has a beautiful simplicity that is easy for customers to understand and works well if your product is as fantastic as Evernote’s.

Other simple models that have been very successful include Google’s search advertising and Salesforce’s subscription software licensing.

There are plenty of successful companies that don’t have simple business models. Sometimes that is because there isn’t an obvious simple way to go – Facebook springs to mind as a great example. However, there are other companies, and sometimes industries, that choose to have opaque business models because they can make more money when it is harder for their customers to understand exactly what they are getting and what they are paying. These companies can be successful in maximising their revenues over the short term, but confusion stifles innovation and is rarely the best long term answer for them, and it certainly isn’t good for society at large.

The mobile industry has long used bundles of minutes, data, texts, handsets, contract tie in and free gifts or cash back on sign up to maximise revenues and innovation was stifled as a result. We didn’t see meaningful innovation in handsets until Apple used its clout to make carriers adopt the iPhone and confusion over data charges slowed adoption of the mobile web. In order to encourage adoption carriers then flipped to all you can eat data plans, which were great for consumers, but resulted in a dislocation in value received and cost of service provision, and carriers started looking to politicians to force providers of web services to subsidise their operations and we had the whole net-neutrality debate.

The simple answer is for carriers to charge on the basis of network usage and I was pleased to see that last week Verizon announce a plan that operates in exactly this way – wish users paying more if they use more data. They still have a proportion that is bundled as there is a significant line rental element and unlimited free calls and texts, but this is a step in the right direction. When cost of provision is aligned to value derived then the market operates efficiently and appropriate investments get made.