And here is what I learned from each, before admitting the total failure.
There are numerous ways to generate an income for your online business and all of them have certain pros and cons over each other.
I’ll talk about each of them but to make this story meaningful, maybe I should start by giving a little context on the nature of my business first.
Our startup was an internet platform that was mainly functioning as an intermediary between businesses and customers(B2C). This B2C relationship was starting initially with a customer creating his/her demand on our platform, collect price offers from the providers, and select the business they favored based on the given offer, comments of other customers, and their average rank from past works facilitated through our platform.
As it’s somewhat a marketplace model, we were also processing the payments and following-up if the trade between them took place successfully.
In order to create a sustainable business around this model, we had to build an income stream and so our expensive experiment has begun.
1. Charging a Commission on the Providers
Following the examples of other similar businesses in the world, we’ve selected the most common model in the industry and decided to charge our providers a certain percentage as a commission.
They were the ones making money thanks to our platform and it seemed quite fair to ask a certain percentage of their income through our platform.
The problem is that only after we’ve started charging our providers, we’ve seen quite a negative reaction towards this model. The providers complained that their profit margins were already really low and our commission was a huge burden on them. Yet the assurances we’ve provided to the consumers were making us a preferred way of working, so the businesses had to work with us to reach their target audience, but I could clearly see that they hated it.
Pros:
- This is a good model to start generating income the moment you start facilitating relationships that end up as successful trades.
- It’s easy to prioritize the requests based on their income potential.
- Charging a percentage prevents overcharging small jobs and makes it worthy to spend more time on bigger jobs.
Cons:
- It’s hard to create a long term win-win relationship with the providers when they have a strong, negative opinion about the model.
- After the provider and customer make the initial contact from the platform, there is a risk of them going behind the platform to avoid commission costs.
- Even if you spend the effort to collect quotations and bring them to the customers if they don’t proceed with the trade or go behind the platform, no payment takes place and the cost of your services brings a financial burden to the business.
2. Charging Customers With a Fixed Fee per Request
We really believed in the value of a healthy relationship both with our providers and customers as the foundations of a sustainable business. Therefore, we were not happy with the commission model. It was a well-known problem in the industry and we had to solve it. Also, as a newly founded start-up, we didn’t have enough cash in hand to spend on facilitations that were not completed and failing to generate income. After great consideration and collecting various opinions, we’ve decided to switch to a different model.
Everybody would like to have a nice service if they’re willing to open a query in a platform and going through the effort of collecting price offers, evaluating them, and deciding a provider eventually. Also, since the request comes from the customer, the service we deliver is mainly for them to receive high-quality service and they’re already willing to spend some money to access a worthy service, we thought that it’s best to request a fixed fee per request.
Pros:
- We didn’t have to cut any costs from the businesses and squeeze their profits.
- Customers and the providers would have no reason to go behind our platform since the customer is already charged at the request creation.
- And even if the trade is not completed successfully, we would have provided the service we promised to the customer and charged them for it, so all our costs per request would have a guarantee to be covered.
Cons:
- Even though the platform allows customers to access exclusive prices, gives them an opportunity to compare them with the offers from other providers and get the service for a lot cheaper than they would normally get by themselves, paying for their request is perceived as an additional and undesired cost.
- It dropped the number of requests that were being opened through our platform, so it had a negative impact on the growth.
3. Monthly Subscription for the Providers
Charging the customers per request turned out to be a bad idea since it had a significant negative impact on our growth numbers. The number of requests had dropped and so our revenue.
It was also blocking us to offer different services to our member businesses. After all, we were charging the customers who didn’t even have to be a member to open a request. We didn’t want just to be a facilitator, because we were full of ideas to help small businesses through our platform with various tools they can improve their businesses with.
Therefore, it was best to return charging the businesses again but considering both we had to avoid commission-based income and we needed a way to charge our providers for the tools we were planning to offer, we’ve decided to proceed with a monthly subscription model to gather all our offerings under three different packages.
Pros:
- It was a great model to keep innovating and diversifying our service offerings.
- We would have a way to earn from the businesses, even during the times they were not serving one of our customers.
- It enables very accurate financial forecasting for the future since the user growth numbers are direct indicators of the income growth and do not depend on how small or big the requests opened in the platform are.
Cons:
- Our service offerings to the providers were perceived as bonus tools and were not really worth paying for unless they made more profit on the platform then the membership fee.
- It took our focus out of the main business and let us allocate too much of our capital and human resources to the business tools.
- If you don’t guarantee a job every month, the providers don’t want to pay you on a monthly bases.
As you may see, no model is perfect and each of them had their own pros and cons. We had to experiment with each of them to find what was working the best, yet it was an expensive experiment for a start-up and we couldn’t keep financing the cash we were burning.
Our three-year-long startup experience with a different business model in each year taught me a lot of things, and this piece was just a glimpse of the journey that was full of priceless learnings. I hope I can share with you the other valuable learnings as well in future articles.
Till next time!
Originally published at Medium on July 1, 2020.
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