Some business models can make it a challenge to build a great product

Name a good product.

If someone said that to me I would name things like Spotify, the iPhone, AirBnB, Netflix. I would probably not mention things like my bank or the telecom operator I’m using.

So here’s a simplification for you: how well you like a product or service is tied to the business model behind it.

If revenue is generated *directly* as a consequence of the user satisfaction of a product, the more focused the company behind it will be on your happiness.

Spotify make money if the product really delivers on the proposition of allowing people to listen to any kind of music whenever they want. That’s what make people subscribe.

Subscription is a great business model and a very predictable revenue stream. Once you have positive traction on subscribing users, your focus is on building a better product and make sure more people sign up.

Same for Netflix: great technology and infrastructure delivering enjoyable content to wherever people are bored, results in more subscribing users. It’s a positive feedback cycle.

It makes total sense of course: if happy users means more revenue, then you’re incentivised to build better products.

As a product person, the problem with revenue streams is that they’re not always aligned with how you build lovable products.

Advertisement revenue is a pretty easy example. Let’s say you’re a newspaper and you attract users with the stories you’re telling. Let’s also say you’re generating revenue from advertisement. Then your revenue stream is an indirect result of the value proposition of the company: @ interesting stories. It’s indirect because revenues come from page visits, and not necessarily because people are reading your stories. Consequently, the focus of your organisation is split in two: those that focus on telling great stories vs. those that care about selling banners.

As a Product Manager, the “wrong” business model can become noisy

A free, second hand marketplace

I used to work for an online marketplace for second hand goods. Being a popular websites with lots of visitors, advertisement was introduced as a way of generating revenue: ad banners linking to other websites in exchange for money. Good money.

The dilemma is the same as with the newspaper example above: the efficiency of the marketplace (happy users exchanging goods and money) did not directly generate revenue, page visits (and advertisement) did. This lead to quite some frustration for the people working on the user experience within the company. The UX experts would go out and talk to users in order to understand their needs, but as a business we were incentivised to stick more banners on the website, greatly contradicting what the users said they wanted.

Users tolerated quite a degree of advertisement because the website had “critical mass”: it was so full of relevant content that it attracted most buyers, and sellers didn’t sell their stuff elsewhere because this is where the potential buyers were hanging out.

This became a continuous product discussion: balancing revenue and the core value proposition.

Products vs. advertisement

Most platforms that are free to use, such as Twitter and Youtube, generate revenue from paid content or premium services. That kind of model doesn’t mean you can’t create a good product, but it means you have to be very conscious about how you make money, what the core proposition is, and how to balance these two. I’m sure they have the same discussions at YouTube and Twitter as we had at the marketplace I was working for: how to approach the user experience vs. the money dilemma.

Netflix could be selling ads to boost short term revenue, but they’re choosing not to. Google could stick ads on their home page, but they choose not to. Both of those are of course conscious choices: choosing long term competitive edge over short term revenue.

AirBnB and the “transaction cut”

AirBnB use a different revenue model to the online marketplace I used to work for: they take a cut of the transaction between renters and hosts. This is a product friendly model because it incentivises the whole company to make sure that as many transactions as possible are happening on their platform, which in turn requires satisfied renters and hosts.

A UX friendly revenue model might drive longer term competitive edge, but less revenue short term.

Different revenue models

I’m not an expert on revenue models, but here’s a list of popular ones that I’ve picked out from the book “Business Model Generation” which is a great read on this subject.

  • Asset sale is typically revenue generated from selling a product such as phones. There are many factors that come in to play here, but the price point is often the main driver. Apple has proven that there’s also a lot of money in creating great appeal and good user experiences.
  • Usage fees is revenue generated by usage, for example by telecom operators charging for the number of megabytes used by your phone. This is often a model that incentivises users to limit the usage of a particular product.
  • Subscription fees: think Netflix or Spotify or your gym. This is one of my favourite revenue streams because of it’s simplicity and how it motivates creating fun and satisfying products
  • Leasing or renting was the revenue stream for Blockbuster, but also for new and innovative companies like zipcar.com.
  • Licensing is revenue generated from re-use of original content, like music or patented technology
  • Brokerage fees or commissions are typically revenue generated by intermediaries, such as real estate agents or credit card fees.
  • Advertisement is a revenue stream which often contradicts the core value proposition of a product. It can drive good revenues for companies that have a lot of users on their platforms.

B2B

In addition, there’s a difference between building products for consumers and businesses. If you’re building business-2-business products then it’s often the case that an organisation will buy your product based on how well you solve a problem for them, and at what price. So you’re in a position where revenue will not be connected directly to how satisfied end users are with your product. Once you “win a deal”, the product might be launched to a bunch of internal users with few options but to accept it (think MS Office, CRM systems, JIRA, Slack or Confluence).

How the Product Manager fits in

It’s the job of a Product Manager to be aware of how revenue streams affect the product, adjust the product development process accordingly, and advice the company on the dilemmas and choices it has.

If the revenue model is not aligned with the product, the Product Manager must step up and ensure the company still remains competitive over time.