Archive for February 17th, 2010

How to analyse an OSS business model – part one

(now available: part two and three)

One of the activity that I love is teaching: especially, within companies, helping them to assess their business model, and improve it. The first part is analysis; from the dictionary definition, “to separate (a material or abstract entity) into constituent parts or elements; determine the elements or essential features of”. This separation is fundamental – lots of wrong choices are made because some of the underlying choices are done without a clear understanding of what the company do, how it does it, what pays and for what. I will give a small example of such an analysis session, using as a model the Osterwalder business model canvas, that can be found here:
Let’s start with an imaginary company, “widgets inc.”, that uses the “community/enterprise” model, that is a fully open source edition (usually called “community”) and an enterprise edition, that is released under a different license, and includes things like support and additional features. There are lots of vendors using this model, and as such it should be easy for my readers to imagine their own, favourite  company listed.

The exercise is simple: we start by filling all the boxes, answering all the questions; the order that I suggest is: customer segments, value proposition,  channels, key resources, cost structure, revenue streams and the rest in any order. Let’s start!

Customer segments: who we are selling to, or interact with? Let’s start with the initial concept that not all customers do have a commercial relationship with the company. Some may be using the community edition, but may be users as well; the fact that they are not paying (yet) does not imply that they are of no value for “widgets inc.” The company may have a single segment or many segments; some offerings may be unstructured (which is always a bad thing, as it means that the effort for producing an offer cannot be automated) or simply everything may be dumped in a single bucket. The idea is to start from the differences; that is, different channels, different relationships, different profitability, different willingness to pay – every time you have a difference, it should be reflected in a segmentation of your customers. In a lot of situation this is perceived as a useless effort – especially if the company offers a single product. But separating customers across all the different variables allows for something similar to sensitivity analysis; for example, is the directly contacted customer more or less profitable than the one acquired through an indirect channel? How much do we lose by going through an intermediary?

So, let’s imagine that our “widgets inc.” is selling directly and through a reseller network. Resellers are providing additional reach, thanks to their own marketing efforts, so we have at least 3 different segments: users of the community edition, users of the enterprise edition that have a direct relationship with widgets inc. and users of the enterprise edition that are managed by a partner. There is a potential fourth segment, that is users of a potential “community enhanced” edition, for example a commercial offering by an independent vendor that enhanced the community edition and that is selling that in a form similar to our enterprise offering”. What can we say of these segments? The enterprise edition users are paying us (of course) and the profitability of each customer depends on the cost of servicing it (that changes if we follow it directly or through a partner); a reseller will require a percentage of revenues, but on the other hand it handles some of the support costs, and covered some of the expenses for getting the customer in the first place. The community users are not paying us, but can be leveraged in several ways: as a reference (for example GE is an Alfresco user, even if it was not paying for the enterprise edition, and this can be a reference with a commercial value) and by conversion. In fact, community users may become enterprise users, with a conversion ratio that is quite low (from 0.5% to 3%, depending on the kind of software) but that can become substantial if the user base is large enough. MySQL is a good example of such “conversion by numbers”. Sometimes segments are interlocked, in what are called “multisided markets”. An example is a merchant like eBay, that needs a large number of buyers and sellers to guarantee the fluidity of the market itself; it may charge sellers, buyers or both, charge only on trade performed, on publication or not at all (for example, using advertising to recover costs).

A common segmentation is also that based on size or revenue assumptions, so you get something like an SME offering and a large company (or administration) offering. Thanks to data from eBusinessWatch (an observatory of the European Commission) we know that the average precentage of revenues spent for ICT in companies is roughly the same for small and large companies, but this does also imply that smaller companies do have a smaller available budget, while larger companies may have a much longer (and costlier) procurement process.

Value proposition: the reason why someone would want to come to widgets inc. in the first place, because we solve a problem or satisfy a need. In our case, we have two separate propositions: one for the community edition and one for the enterprise edition. The community edition may solve a practical problem for companies (for example, document management, groupware, whatever), and thus gives a concrete value in exchange for the time necessary for the customer to install and adapt the product by themselves, including the potential risk if something does not work. The enterprise edition changes this proposition, by costing something (in monetary term) in exchange for an easier installation or better out-of-the-box experience, support, lower risk (knowing that it is possible to ask for support) and so on. The value proposition should be explicit (to give your customers, paying and non-paying, an idea of why it is useful to invest time or money in widgets inc. products), realistic (your company will not survive in the long term if the value advantage is not there at all) and approximately quantifiable. The value proposition may be different for different customer segments, for example a groupware system for a small company may not require to handle thousands of users; in general, the additional value of a feature or a structural property of your product is dependent on whether your customer is in position to use it, and this usually shows out in the fact that there may be different advertising for different segments, pushing only on those features that are relevant.

Next part: channels and resources. See you next time!