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Business Model vs. Revenue Model

My column in the December issue of the Entrepreneur magazine: 

Assuming that the term ‘Business Model’ is the same as ‘Revenue Model’ is assuming that the word ‘aspiration’ means ‘inspiration’. Then, you might as well assume that the surname Singh is the same as Kejriwal. 

The terms Business Model and Revenue Model are as distinct as chalk and cheese. Yes, they do look white at times and that’s how close they ever get. 

To explain their distinction, let’s first consider Twitter – a company we are all familiar with (errr… if you don’t have a twitter handle, then please ask your kids to get you one before reading further!). 

Now, let’s ask: What is the “Business” of Twitter? The website says “Twitter helps you create and share ideas and information instantly, without barriers.” 

To deploy its business, Twitter like any other business in the world, needs a Business Model. That Business Model is the ‘engine’ that creates, executes, delivers and services the business. As an exercise, let’s break down some of the engine-parts of Twitter: 

Product – Clearly, Twitter is a product that you have to use ‘as is’. You cannot customize Twitter too much and create your own version 

Rules – What is allowed, what isn’t; how do the checks and balances work? These change over time. 

Usage & access – Who can use Twitter? Clearly, anyone. Usage defines the ‘market’ that the company is going after and sets the controls of access etc. 

Availability – How and where will the product of Twitter be made available? Currently via the web, as a mobile app and as a mobile service. 

I am sure you can list the rest of the engine parts. Do it! It will be a neat exercise. 

The Business Model is the magical assembly that makes all these moving parts come together and actually creates a live, real business! 

But engines can be pretty ineffective unless they are used for a real purpose! That is the real genius of a Business Model. Creating a ‘magical use’ of the Business Model that makes the company propel itself forward, like a rocket, shooting into the universe. The founding entrepreneurs, the core team and people in the company at the very early stage are usually the magicians! (This is also why startups are such fun!) 

In the case of Twitter, the genius of allowing ‘followers’ &‘following’, trends, and the absolutely ubiquitous ‘#’ hashtag is what sprinkled magic on its Business Model and made it a household name. The ‘rule’ of 140 characters created an amazing reduction in reading clutter that today, allows us to read hundreds of tweets at a time, without getting tired or bored. 

Was the need to add @ before every user name a good business idea? Surely not. It made Twitter a ‘techy’ product and intimidated a lot of people. Could the @ have been dropped just after the launch when the business began to show a strain in user adoption? I think so. This is one example of a defect design in Twitter’s Business Model with respect to usability (the simpler the product, the faster it scales). 

Twitter really took off on gossip. And when Hollywood personalities began using it as their digital mouthpiece. The company’s Business Model was clearly proven out when tweets exploded and we saw twitter handles everywhere. 

Twitter listed on the NYSE in the first week of November and was valued at 22 billion dollars at the time of writing this article. 

Therefore, let’s park the point that the business of Twitter, propelled by a massively successful Business Model was proven massively successful by its IPO and 22 billion dollar market value.

Now let’s tackle Revenue Model. 

In the exercise of listing the engine parts of the Twitter engine, you may have listed ‘revenue’ as one of the items. Good going and good thinking! 

For many years, no one really knew the Revenue Model of Twitter; if and how they made money; and if there was as a plan. I vaguely remember that when the co-founders of Twitter were once asked what their Revenue Model was, they shrugged and said, “We are trying to figure it out”. Evidently the Revenue Model of their massively explosive business was not top of their mind. 

I applaud the Twitter co-founders for their unconventional and contrarian thinking; and for delaying the creation of its Revenue Model while they were perfecting its Business Model. Clearly placing the horse before the cart and not the other way around! 

In the Twitter IPO listing, revenues of the company were pegged at about US$ 400 million (for 9 months). Let us assume that they will generate US$ 500 million by the year end. 

Where does the money come from? Evidently, from advertising via ‘sponsored tweets’. Now, only a few ‘involved’ consumers even notice these sponsored tweets that appear interspersed while reading tweets on twitter walls. 

So, is the Revenue Model of the almighty Twitter only advertisements, served via these chintu-mintu non-intrusive and elegant sponsored tweets? 

Maybe, maybe not. But what is clear is that the Revenue Model halo isn’t eclipsing the Business Model of Twitter that is currently going gangbusters. Also, anyone who understands public markets will also tell you that stock investors do not value a company generating US$ 500 million in revenue for US$ 22 billion. Undoubtedly, investors are paying for Business Model vs. Revenue Model. 

At this juncture, let me throw a spanner in the works and remind you of the Internet behemoth called Myspace that was launched in 2003. The site was a social networking platform for music rockstars and their fans. 

By 2005, Myspace had boom, boom, boomed! It became the most popular social networking site in the world and was acquired by Rupert Murdoch’s News Corporation for US$ 580 million. Myspace also became the launch pad for other big startups like RockYou and Zynga and dominated the traffic charts. 

In June 2006 Myspace surpassed Google as the most visited website in the USA! 

You will not refute me when I state that in 2006, the Business Model of Myspace was absolutely stellar! I mean have you ever heard of any website beating the traffic of Google in USA?! 

Alas!

Myspace sat on the wall.

Myspace had a great fall.

All of Murdoch’s finances and all of Murdoch’s men

Couldn’t put Myspace together again.

In a couple of years after its peak, Myspace crashed into oblivion. In June 2011, the once Herculean Myspace was acquired by Justin Timberlake and Specific Media Group for a measly, vada pav price of US$ 35 million! A site that had beaten Google in traffic was now a piece of scrap. 

What went wrong? What made Myspace implode, crash and burn? A very badly implemented REVENUE MODEL!! 

At its peak, Myspace entered into an advertising contract with Google that guaranteed Myspace US$ 900 million  in minimum revenue over a 3 year period. This deal badly compromised the user experience on the website that was anyway reeling under heavy advertising. To honor the Google deal, Myspace had to spray the site with ads. The Myspace CEO Chris DeWolfe reported that he had to push back against Fox Interactive Media’s sales team who monetized the site without regard to user experience (Source – Wikipedia). 

Just like Diwali crakers, Myspace crackled, fizzled and burnt out. The company’s Revenue Model had destroyed the Business Model on which the entire business was built! 

To put it metaphorically, the Revenue Model component in the Myspace engine was such a defective part, that it bust the engine itself.

Considering the Twitter and the Myspace examples, let me summarize as:

– The Business Model of any enterprise is unique, distinct and very, very sacred. It’s the soul of the business that needs to be cultivated, nourished, and preserved. The difference between failed, mediocre and spectacular companies is their Business Model and the magical genius that it comes wrapped in.

– The Revenue Model is an offshoot of a sound Business Model and can wait. It’s a dangerous, volatile, elusive element that needs to be eased into a business like a foreign article entering a sacred body. With care and utmost caution.

A successful combination of a great Business Model and Revenue Model results in a Google of today or a Facebook of tomorrow. But if you place your Revenue Model on the throne and crown it as king, with your Business Model as its slave, then you will land up with a Myspace of yesterday.

 ******

Read ALL my other articles published in Entrepreneur mag HERE.

******

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29 Comments

  1. Profile photo of asha chaudhry

    loved the way you’ve illustrated this topic by giving the twitter & myspace examples!

    very lucid. very articulate. very thought provoking.

    thank you!

  2. Profile photo of Vikram Kohli

    Thanks Alok for sharing this. But don’t you think that this model is specific to ideas where advertisement is the source of revenue. 

  3. Profile photo of Amit Bhagat

    Loved it really….

    @Alok hope to meet you once

  4. Profile photo of Rishi

    Interesting post Alok. Love the last line! 🙂

    On Twitter using @ in usernames/handles, I think in a way it has created an unique identity for itself and its users. If I just put @xyz somewhere (and nothing else), people assume it’s a Twitter handle. That, in my opinion, is very powerful! I still remember when Facebook did not launch tagging people in posts/comments and people used to use @ to refer to people. That was the kind of impact that one character had. 

  5. Profile photo of Alekh M

    i do agree but shouldnt we remember that we are in india not in silicon valley ? No VC in india will fund startup with no revenue…and you cant bootstrap your idea.

    result :kill ur idea

  6. Profile photo of Nakul Bhatia

    great post Alok. Loved reading it.

  7. Profile photo of Krishna Chandran

    Thank You Alok for sharing the post. Simple and thought provoking. I think most of us believe every business model can generate revenue on its nascent stages itself which is not correct and which you have explained clearly with the MySpace example. We need to understand that “The Revenue Model is an offshoot of a sound Business Model and can wait. It’s a dangerous, volatile, elusive element that needs to be eased into a business like a foreign article entering a sacred body. With care and utmost caution”, which is very true. 

  8. Profile photo of Anup Kumar Tripathi

    Very nice article. Made the facts easily understandable

  9. Profile photo of Gaurang Agrawal

    The post is amazing. The poem, was incredible.

    I am observing the way you write. Someday, I will write the way you do.

    Thank you so much for the post and gyaan ( of course )

  10. Profile photo of Alok Rodinhood Kejriwal

    Vikram – what do you think of Dropbox’s “Business Model”?

  11. Profile photo of Ajay Agrawal

    Crisp and clear.. Awesome..

  12. Profile photo of Alok Rodinhood Kejriwal

    You have to aim to write FAR BETTER than me

  13. Profile photo of Amar Pratap Singh

    Dear Alok,

    Did you mean that Surname Singh is Business Model & Kejriwal is Revenue 😛

    Awesome read as usual, thanks a ton for this golden example 🙂

    We will look forward someday for Google Vs Yahoo. However, a quick question : Does this apply always to a Sales Organization / Trading Company or Manufactory, their Business Model itself is revenue oriented…is not it ??   Best regards- @mar   

  14. Profile photo of Akhil Singh

    Hey Alok

    Nice read. But don’t you think that ‘revenue model can wait’, can only work if the investors believe in the DNA of the Business model, whereas in India most of them focus more on the DNA of the revenue model. We here focus more on bottom to top approach that surely leads to a better revenue model in short term but certainly fiddle with the business model somewhere.

  15. Profile photo of Vikram Kohli

    Dropbox “Your stuff, anywhere” allows you to take backup of any kind of documents. And further allows you to access it from any other device(mobile) and enables you to share documents with others. That about the actual product. Anyone can use it and its available all the time. To increase the usage, Dropbox uses networking effect by encouraging you to involve other to get more storage.

    The perspective I am getting from the written article is to first figure out business model a.k.a the actual product, the people who will use it, the place where they will use it and how they will use the product etc. And later on down the line you can figure out the revenue streams/model. Now doesn’t it make more sense to also validate the revenue model along with your business model. As only 0.001% of startups make it to the levels of Facebook, Google and Twitter.

  16. Profile photo of Rohit Nayak

    Dear Alok Bhai,

    Great post !!

  17. Profile photo of Preity Thomas

    Waiting eagerly for the launch of IIE. Knowingly or unknowingly, the syllabus is being sketched, and the chapters are being written, in the background like this one.

  18. Profile photo of Jitendra Gursingh

    Amazing article! makes the concept very very clear…

    However, Are there any successful companies who have had a clear business AND revenue model from day one? Till the time a company spends time perfecting its Business Model, does it have to stay bootstrapped?? The Twitter Wiki on Funding says, in 2008, when questions were raised about Twitter’s financial viability, this is what Twitter had to say

    Twitter board member Todd Chaffee forecast that the company could profit from e-commerce, noting that users may want to buy items directly from Twitter since it already provides product recommendations and promotions.”

    Today, Twitter is not remotely related to ecommerce! 

    The point is, how long can a startup continue to bootstrap? Any person who is parting with funds would first like to know how, when & how much will he get back on his investment. If a revenue model is not clear or is not viable or is not tested, how can one get funding in that case.

    The other side can be (possibly the best option) ; if a startup’s revenue model is clear and is actually working, there is NO need for funding! Make the revenue model in a way that the biz starts funding itself & grows organically.

    Would like to ask for examples of companies (preferably from India)

    – Strong business model, No revenue model

    – Strong business model, Strong Revenue model

  19. Profile photo of Ashwin C Parulkar

    Should we say ,Indian Eco system is yet to evolve further to value just the business model?

    Revenue models can become Obsolete/irrelevant any moment, it’s just the pay off of Business model. So I think people to value BM more than RM.

  20. Profile photo of Ashwin C Parulkar

    For eg if tomorrow ppl completely switch or shift from playing games online the revenue model will dry up in giffy!

  21. Profile photo of Prakash Mishra

    I would like to add that business model must be seen as  wider term than what it is used here. A business model describes the rationale of how an organization creates, delivers, and captures value (economic, social, cultural, or other forms of value). The process of business model construction is part of business strategy. In theory and practice, the term business model is used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, target customers, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies. (Source –wikipedia)

    Business cannot be built without thinking of revenue model. It can be given any fancy name one may prefer to give to his project, if there is no desire to earn revenue from it.

    Sounds little theoritical and thats how it is when we talk about words…….

  22. Profile photo of Ali Naveed

    I am interested to know more about Whatsapp in this perspective.

    Whatsapp has bought about a revolution in the SMS world especially in third world countries where sending International SMS was a bane and now Whatsapp has been a boon to them.

    So my question to the RodinHood members would be what exactly is the revenue model that is helping Whatsapp keep afloat or is it the business model which has attracted the investments so far ?

    Hope to see interesting insights for Whatsapp from Rodinhood Members

  23. Profile photo of Hemant Desai

  24. Profile photo of Spencer Waldron

    I am amazed that we don’t see more companies making a revenue model out of big data… these huge companies have such powerful information beneath the surface of their platforms… 

  25. Profile photo of Jaive Smare

    Wonderful post!!

    I found this article particularly challenging and I called a meeting with two of my senior staff to discuss this article. Unlike Twitter and Facebook and listed public companies in more developed investment markets, I dont have the luxury of building a business with a major userbase first. And then monetizing it. I have to make sales all the time. Especially in these early years. After reading this post and discussing it, we decided that we are putting all that we do into one basket and not effectively separating our Revenue Model from Our Business Model ie we had no real model at all to base our future on. So as a resolution, we have split the Revenue Model responsibility to two dedicated persons including myself, and the Business Model mantainence to the other lead staff.  We believe this will ensure that the process of raising revenues for our work is important and prioritised, yet does not compromise the quality of what we deliver to clients. And future success. ( What I have written probably deviates from the original intent of Alok’s pose, but when you are an entrepreneur, you are always thinking about tomorrow and tomorrows)

  26. Profile photo of Alok Rodinhood Kejriwal

    When you receive a mail like this, you realise that all the hours, days & years of writing are so, so worth it!!!! TQ god for choosing me..

  27. Profile photo of Rohit Kuttappan

    I must have read this article at least ten times, but I still don’t understand how a business chooses it’s revenue model? There are various sources on the internet that tell you how to write your business plan, but invariably none mentions the revenue plan. 

    What is the best way to study all the business and revenue models available in the world and choose the best one for your business? Any suggestions or guidelines, Alok Sir? 

  28. Profile photo of Yunus Dange

    Perfect…i think…now i am very much clear about the exact difference between this two models 🙂

  29. Profile photo of darpan jain

    Did good justice with ‘MySpace’ part, though starting was not so catchy. Googled the facts as why company burnt. Though would love to hear more insights on the same, or may be about some other such company.

    Good work.

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