Driving factors: Differentiation
- Are you a trusted brand or voice for a well-defined topic?
- Are you able to set the agenda for a well-defined audience segment?
- How strong is your recall among that well-defined audience segment?
- Have you stitched the most active members of that audience segment into a tight knit community?
- Is the community co-building with you or via you?
- How are you ensuring that you are not only building but also retaining 1:1 relationship within that community?
- What’s your information architecture and content strategy?
- How deep are you serving that vertical?
- Is your website (yes! a website even after GenerativeAI) representative of who you are?
While the above gets your driving factors in place, the next aspects define how much you can amplify. This includes:
- Ability to sell advertisements, subscriptions, or events
- Ability to market and develop audience
There are various fundamental aspects of an editorial product business. Most of these businesses have been edged out of the amplification factors:
It is always advisable to have one major source of revenue and then diversify by having multiple minor streams of revenue that de-risk you from that major source of revenue. For example, YouTube’s revenue split is 1:3 between subscriptions and advertisements.
Why it matters:
- It protects against risk of ruin.
- It protects against ups and downs. For example, revenue from advertisements is seasonal.
There are different forms of revenue models:
- Digital Advertisements, where revenue is Sessions Per User x Users x Pages Per Session x Ad Impressions Per Pageview.
- Subscription, where revenue is Average Revenue Per User (ARPU) x Active Subscribers (i.e., Existing Subscriber Base + New Conversions + Renewal)
- Affiliate and deals
- Sell playbooks, courses, trainings, etc. using micro-transactions
- E-commerce: For example, launch branded products
- Offer services like Job Boards
Some of these revenue models can be in opposition to each other and make commoditized businesses complicated. This in turn mandates the need for propensity models.
Over the past many years, we have generally seen a decline in interest in the news.
A discount is a temporary price drop of the same product. This could either be a coupon or a fixed-period Free Trials. In contrast, a promotion adds extra value to the offering without dropping the price.
- Discounts are best targeted to launch your product to a new segment or to Win-back lost customers. You could also offer them to potential customers in a new geography and drop the price as per purchasing power parity.
- Promotions are best targeted to to allow users to try out new products or to simply sweeten the deal without devaluing your core product.
- If you give discounts and promotions regularly, then it becomes Habit-forming, i.e., users think that the actual value of the product is lower and hence they get used to wait for discounts.
- If you discount too much, you run the risk of someone seeing it as an Arbitrage Opportunity.
- If you drive up Conversions to Subscription products with discounts but the product is weak, then you’ll have high Churn and struggle during Retention.
- Good discounts are typically not scheduled, for limited time (until tomorrow evening) and can be for limited supply (for first 100 purchases). This creates a sense of urgency and creates a buzz that can drive in Top of the Funnel.
- It is recommended to provide bulk discounts if a user purchases your Subscription product using the annual plan instead of the monthly plan.
- Targeting is very critical else you’ll end up discounting users who could have paid full price. One way around this is to add new Pricing Tier.
- They’ve a low barrier to entry making them easier to start.
- There is already an existing wide customer-base. Hence, it becomes a question of standing out. Such markets tend to support many adequately sized businesses.
- Finally, if there isn’t much of a competitive differentiation, then customers tend to stick to whoever is habit-forming and matches their sensibilities.
How to operate: In running a commodity business, there are three primary areas to focus on:
- Owned Identity: Can you tell your story better than your competitors?
- Owned Network: Are you the preferred choice for customers and employees alike?
- Operations: Can you outshine your competitors in efficiency and effectiveness?
- Fixing technical debt, for example, data migration for integrating into one CMS
- Infrastructural elements, for example, warehousing clickstream history
In contrast, you shouldn’t outsource future looking waves of growth. You want to win the wave and not teach vendors how to operate in your domain so that they can sell the same service to competitors.
This is because most products cannot always be targeted. For example, a specific SUV might be targeted towards off-roading enthusiasts but an urban professional who had a recent hike might also buy it not because the product was built for him but because they can.
- Use: Number of users, editors, pageviews, how much customer support will be provided, number of times in a day when the product is used, what is the GBs of data allowed, etc.
- Value: For example, a student will gain less from a Macbook Pro compared to a business or professional.
Businesses pay top dollar for advertising on Print and TV. However, the same isn’t the case for digital.
- Reach: In TV and Print, the DAU/MAU is assumed 100%. The same isn’t true for digital.
- Targeting: Targeting is assumed in newspaper and TV. Most digital publishers have not enforced login struggle to build First Party Data. This makes it impossible to know socio-economic and demographic information about these Anonymous Audience. Hence, businesses pay lesser ad rates if one cannot Target advertisements.
- In TV and Print, all sales is Direct-sold. However, in digital a substantial portion is Indirect-sold.
- Bid down: In Digital, ad networks operate as bidding engines, i.e., the publisher that bids the lowest gets the Digital Advertisements. In contrast, in TV and Print, the businesses bid (up) to get space in a relatively scarce property.
- Cut: These ad networks can take up to ~45% of the revenue.
- Can’t monetize premiumness of platform: All businesses want to advertise on a premium Owned Identity, for example, a premium platform like The Times of India newspaper instead of an ad hoc billboard. Hence, Print and TV command premium rate. However, when advertising via ad networks, a business cannot say that it wants its advertisement to appear on a specific website. It could go to anyone who bids the lowest.
- During the months of April to June, advertising spends tend to be relatively low as advertisers are in the process of strategizing how to allocate their budgets for the entire year.
- On the flip side, from October to March, ad spends skyrocket, accounting for a substantial portion, typically around 60-65%, of the total annual revenue. This period coincides with festive occasions like Diwali and Christmas, as well as significant sales events like Annual Republic Day Sales.
- Additionally, March End becomes a crucial timeframe as marketers aim to utilize the remaining budget before the start of the new year.
Unit Economics tells you how Profitable is your business for every unit of product or service sold. For example, the unit of a Subscription business is a subscriber. Hence, the unit economics is LTV minus Customer Acquisition Cost and Cost Of Goods Sold.
Why it matters: It helps you do break-even analysis, i.e., if you invest a lumps-sum amount now, then after how much time and units sold will you start earning a profit.
Game Theory is a mathematical discipline which helps you understand how others may respond to your decisions.
Why it matters:
- Game Theory is useful when your decisions impact others and their decisions impact you. For example negotiations or business decisions like if you change Pricing, Pricing Tier, Discounts and Promotions, then knowing how will suppliers, customers or competitors react?
- It helps you identify who is playing Zero-sum game versus Positive-sum Games.
- The Complexity rises as the number of players rises. Hence, it becomes critical to identify and focus on dominant scenarios. If there are no dominant scenarios, then you can still find the Nash Equilibrium where all players choose the best possible strategy.
- We often have to decide based on incomplete or imperfect information. In this situation, based on what you know create a Decision Tree to narrow down to a limited number of options.
Pricing isn’t a static decision. You should continuously keep evolving it based on changing marketing conditions.
- What is the value addition you are doing in your customer’s life?
- A strong Owned Identity adds to your ability to charge a premium.
- Benchmark competitors’ price: Even if you are in a Commoditized Business, still you would have some Competitive Differentiation. Hence, it is unlikely you can copy a competitor’s price. However, knowing it tells you what is the willingness to pay for such a category.
- Understand the Price Elasticity
Target Revenue Divided By the Number of Expected Customers: This is a straight-forward goal setting method. Say if you want to earn $100,000 per month, then
- $100,000 monthly recurring revenue = $10 per month x 10000 customers
- $100,000 monthly recurring revenue = $100 per month x 1000 customers
- $100,000 monthly recurring revenue = $1000 per month x 100 customers
- $100,000 monthly recurring revenue = $10000 per month x 10 customers
Cost Plus Pricing: All products have fixed costs and variables costs as per Unit Economics. In this method, you select the price by adding a profit margin on top of your costs. This is the easiest method but in this situation you might be leaving money on the table.
Value-Based Pricing: If you possess a deep understanding of the value (time saved, cost saved, additional revenue) your customers gain from your product, then you can justify charging a significantly higher price. However, this is fairly complicated to measure.
Set your Pricing Tier.
Think through Discounts and Promotions.
Customer Acquisition Cost (CAC) is the price you pay on an average for Conversion, i.e., acquiring each customer. For example, even Google spent $14.4 billion in 2015 to acquire Paid or Acquired Traffic.
- Beyond Digital Advertisements, CAC also includes spends on Discounts and Promotions, Free Trials, PR, visiting events and conferences, Candid Communication, etc.
Why it matters:
- Without knowing CAC, you cannot know your Unit Economics and LTV and thus if you are Profitable.
- Segmentation by Channels is critical so you can determine if that channel is Profitable. Always attribute CAC and LTV to each channel.
How to calculate CAC?
- It is extremely easy to calculate the cost of Digital Advertisements or Paid or Acquired Traffic. It is calculated in the form of CPM, CPL, etc.
- Calculate the cost of Referral Traffic by determining amount spent on PR, etc.
- Calculate the cost of content marketing by determining the cost of creating Candid Communication and the cost of running your Owned Media.
- Do you provide Discounts and Promotions? Then include those too.
- If you distribute a physical product then include the cost of your distribution partners (wholesales and retailers) and the cost of repurchasing unsold inventory.
- If you have a money-back policy, then include the rate of return too. Alternatively, do not classify customers as acquired till they qualify for money-back.
- If you have a sales team, then include the cost of the sales team and sales commissions.
Why it matters:
- The larger the market, the larger the business can become. No point collecting pennies when you can earn dollars within the same effort.
- This exercise helps you list down your assumptions and risks that you will need to overcome.
How to estimate?
- Top-down: Go through large statistical datasets like census, surveys, etc. to identify total users, average household spending, etc. Then reduce it down by adding assumptions. For example, the geography you intend to serve, outliers, legal limitations, etc.
- Bottom-up: Break down your system into an Unit Economics equation. For example, product, frequency of use, price, accessible customers, Conversion Rate, Churn, etc. and then estimate each variable.
- Comparables: Which are the other markets, companies, product categories, and business models that have scaled and serving the same customers that you will serve?
- Replacements: Often new products are replacements for existing products. For this scenario, estimate the replacement product’s market and your probability of replacing it.
- New demand: In some situations, your products create new demand for something that consumers don’t spend on today. This is much harder to estimate and requires understanding target markets purchasing power.
Triangulate the estimation: Once you have estimated your TAM with multiple methods, then keep changing the assumptions or discover new data until all three models agree.