I am really fortunate to have the opportunity each year to teach strategy mapping and Balanced Scorecard concepts to student entrepreneurs at the Conrad Centre at the University of Waterloo. The best part of this gig is that I don’t just teach the material, I also have the opportunity to help these entrepreneurs apply the concepts to their budding businesses and start ups. I really love this part of my work because it gives me a front row seat on the most current innovations in business model design.
One thing I have noticed over the past four years is an explosion in the use of the two-sided business model in entrepreneurial technology companies. Just a reminder that the two-sided business model usually refers to a scenario where there is a non-paying user base and a paying “customer”. Basically, the company that’s employing the two-sided business model is seeking to generate revenue by monetizing a free user base in some way.
Now – there are lots of different ways to monetize a base of “freemium” users. One way is via advertising revenue. That is, you allow advertisers to promote their products and services directly to the free user base for a price (i.e. “pay for click”). You see this on Twitter, Facebook, and LinkedIn. Another way is to drive user traffic to a customer company that “sells” to the user base. In the cases I have seen, the technology firm receives a fee when members of the user base go to the customer’s business and spend money with them. I’m sure that you can think of lots of other examples of how companies monetize a free user base.
With the two-sided business model it’s critical to realize that you have two “customers” who are “paying” you in different ways! One customer (your free users) pays you in attention while your other customer pays you money. To make the two-sided business model profitable for your company it’s essential to keep both of these customers in your sights. However, this can be difficult because each customer has different needs and expectations from you. What causes your free user to give you their attention can be easily lost as the paying customer seeks to monetize the user base – for example, adding advertising to a previously ad free private or social environment can make your paying customer happy while turning off your users.
The most important rule to remember if you are hoping to become profitable using the two-sided business model? Your company’s revenue potential depends on delivering value to BOTH the free user AND the paying customer.
One of the best tools I know for mapping the value creation stream in any given business model is the strategy map. However, traditionally, the strategy map has only one customer perspective/section and this can make mapping the two-sided business model a little confusing and challenging.
So, to make things clearer and help keep our two types of customers in our sights, why not modify the customer perspective in this way?
Now we have a workspace where we can better capture the different ways we deliver value to our two groups of customers.
Let’s begin with our free user base. Remember that we need to give them something and/or an experience that’s continuously attention worthy. When we are successful we can achieve our ultimate objective: attracting and keeping our free users – this is important because it helps get your business model/company over to the paying customer’s side of the strategy map. Other objectives that should go into this strategy map perspective are those that answer the question: “What do we have to give to/do for the free user(s) to earn and keep their attention?” The answers will depend on your business and what your unique users see as being attention worthy!
Now, let’s turn our thoughts to your paying customer. The ultimate objective you want to deliver for this customer group is an opportunity to grow their revenues by accessing and monetizing the free user base. To enable your paying customer to achieve this objective there are really two things your company needs to do: (1) grow an attractive free user base; and (2) deliver whatever else is necessary to help your paying customer achieve their ultimate objective.
Here’s what these two customer perspectives look like together:
Essentially, enabling your paying customer to get what they want (the achievement of their revenue growth objectives) is the gateway for achieving your company’s revenue objectives.
Attracting and maintaining the RIGHT free user base is the gateway for your paying customer to achieve their revenue growth objectives.
And giving your free users something they value in exchange for their continued attention is the foundation on which a successful customer perspective (AND outstanding customer value) is built in the two-sided business model.
Here’s how the picture/strategy map is beginning to evolve:
To ensure that your two-sided business model delivers the intended value and results, be sure that your Internal Process strategic objectives include the things you must excel at to give BOTH your free users AND your paying customers what they need/want/expect. Taking this approach better positions your company to deliver value to both groups of customers.
Juggling the different interests of your two groups of customers and delivering the necessary value under the two-sided business model can be challenging. While the strategy map is a great tool for clarifying the value creation stream and making it transparent to everyone in your organization, my experience working with tech company entrepreneurs has shown me that the traditional strategy map format doesn’t make it easy to keep the often competing value creation streams clear – it gets very confusing about where and how to capture objectives for the two essential customer groups in the two-sided business model.
The strategy map modifications outlined here have helped the entrepreneurs I’ve worked with clarify the customer approaches required under their two-sided business model, giving them an easier way to capture the essential strategic objectives AND map the important relationships between them.
However, please remember that this is a generic template designed to offer you a starting point for thinking about the value you create for, and deliver to, both the free and paying customers of your company. You may need to modify the template further to work for your specific two-sided business model – something that you should feel perfectly fine in doing!
Have you tried to map your two-sided business model using this or another modified approach to the traditional strategy map format? What has worked for you and your company? Please share your experiences here so that we can all learn together!