Class 10: Unconventional Business Models
Direct-to-consumer (B2C) and subscription-based (B2B) models are extremely common and there are many variations of each model being employed everyday. In modern economic history, I believe that every possible model has been thought-of to varying degrees, some made famous from rigorous modeling while others used in less popular fashion.
In the age of startups and venture capital, I subscribe to the belief of free market and believe that is great value in having many competitors providing a certain good and/or service. I act on my belief when working with startups by encouraging work with startups that possess great quantity and quality of skills and have potential regardless of past work experience. To adjust for the inherent risk of lack of experience and capital, I frequent a model that is seldom used outside of sales , often coined as commission/performance-based contracts.
It is very common for sales people to be working on a commission-based salary where they get a minimum base pay and additional pay is dependent on sales performance of the month. This creates incentive for sales people to work harder to increase individual utility. I believe that this model can be used to leverage risk as well in a business contract.
In a traditional business contract, guidelines are laid out and terms of payment are decided upon the achievement of the goals that were set out at the start of the contract. However, there is an inherent risk of non-delivered goods and/or services in any business contract that is usually offset by reputation of a company. This risk is exacerbated when working with startups which may be new and do not have a reputation. Often, startups undertake the risk by offering lower prices. However, this may not be the best approach as it deters competition from entering due to the higher costs barriers to entry.
I encourage the use of a performance-based contract, where it keeps all the original terms of a normal business contract but with a additive clause — only a percentage of the payment would be made upfront, 60%–90% depending on the risk and the nature of the business. Startups will then receive the remainder of the payment upon meeting the guidelines and I encourage the option of achieving additional payment of up to 120% when exceeding the guidelines. This would allow startups to still charge the same market rate as their competitors, gain sufficient capital to complete the project at the start of the contract while providing incentive to exceed expectations.
I make the concession that additional payment does distort the free market mechanism but should achieve the same equilibrium in the long-term (the reason why we do not see continuous price wars but instead fluctuating equilibriums).