New business model - take out the exploiter
Last July, I was talking to a bookseller who was complaining
about the poor quality service being provided by one of the
largest collectible and antique sites on the Internet. I was
appalled to learn that this site was charging the seller a
monthly listing fee plus an 8% commission on the sale of each
book. I looked around other similar sites and they all worked on
the same or similar business models. What these sites seem to be
offering was a virtual 'shop window' where people interested in
rarer books would search their catalogue. Individual books would
not even been indexed by the popular search engines!
Now, I am not against an entrepreneur making money and in
business as in love or war, all is fair game, but this seems to
me over exploitative. As any technologist knows, once a site is
up and running, the costs of operation is based upon capacity.
Therefore charging a commission on sales on top of a listing fee
is just removing the cream! I know all you sales guys who look
at opportunities for residual income will baulk at this, but, I
think revenue models should, in some way, reflect the underlying
economics of the business.
Given this situation, my colleague, Peter Blue and I resolved to
do something to help rare book sellers. First of all, we decided
that we would not borrow money to invest in advertising but,
taking a leaf from Friendsreunited, we would try and establish a
site that would grow organically by 'word of mouth'. Secondly,
we would provide a service to small booksellers based upon a
membership fee and take no commission on the sale. Basically, we
would act as an intermediary between potential buyers and
sellers. Thirdly, we would design the technology in such a way
that all the books listed would be indexed by the popular search
engines.
In August 2005, we launched our rare book site. Apart from a few
conversations with booksellers at local book fairs, we have done
no marketing as such hoping that word of mouth and our
accessibility to search engines would promote the site. We set
ourselves the target of breakeven in 12 months. We also decided
that we should try and foster a community aspect to the site
focusing on those who are interested in selling and collecting
rare books.
Like all new ventures, some of our ideas, whilst reasonable in
theory, turned to be bad in practice. At first, we wanted all
people who were interested in a particular book to sign on as
members. We could see a lot of hits on the books but very few
were willing to go through the rigmarole of sign up to contact
the seller. We removed this restriction in November and the
inquiries started flowing. We also thought it would be a great
idea to allow members to 'chat' to each other interactively on
our site but after a few months operation; it was obvious that
no one wanted such a facility.
We have now produced version 2 of our site. Our traffic has
grown from zero in August 2005 to nearly 20,000 hits per month
and rising. We have now achieved break-even six months ahead of
schedule. So what does this all prove?
I have always been suspicious of businesses that charge by
volume whose costs are not volume related but capacity related.
I class the telecoms suppliers, software producers and most
media companies. We have been conditioned to pay per
transactions for things when it is the capacity that dictates
the costs. Bundled packages in mobile phones are a better match
between the underlying economics and revenue than pay per call.
Once a piece of software development costs are recovered the
marginal cost is practically zero.
Our experience with the rare book site would suggest that it is
possible to compete with established businesses if we match the
business model more closely to the underlying economics
especially where this provides a better value proposition to the
customers. It also suggests that many big established businesses
are exploitative in the sense that they are making more profits
through their charging models than economically justified.
Business policy makers please note this point. Perhaps the next
step is to look at why eBay are charging a commission on sales?
Anyone want to have a go at them?