Business Model vs. Revenue Model

Assuming that the term 'Business Model' is the same as 'Revenue Model' is assuming that the word 'aspiration' means 'inspiration'. Then, you might as well assume that the surname Singh is the same as Kejriwal.

The terms Business Model and Revenue Model are as distinct as chalk and cheese. Yes, they do look white at times and that's how close they ever get.

To explain their distinction, let’s first consider Twitter - a company we are all familiar with (errr… if you don't have a twitter handle, then please ask your kids to get you one before reading further!).

Now, let’s ask: What is the “Business” of Twitter? The website says “Twitter helps you create and share ideas and information instantly, without barriers.”

To deploy its business, Twitter like any other business in the world, needs a Business Model. That Business Model is the 'engine’ that creates, executes, delivers and services the business. As an exercise, let’s break down some of the engine-parts of Twitter:

Product – Clearly, Twitter is a product that you have to use 'as is’. You cannot customize Twitter too much and create your own version

Rules– What is allowed, what isn’t; how do the checks and balances work? These change over time.

Usage & access – Who can use Twitter? Clearly, anyone. Usage defines the 'market’ that the company is going after and sets the controls of access etc.

Availability – How and where will the product of Twitter be made available? Currently via the web, as a mobile app and as a mobile service.

I am sure you can list the rest of the engine parts. Do it! It will be a neat exercise.

The Business Model is the magical assembly that makes all these moving parts come together and actually creates a live, real business!

But engines can be pretty ineffective unless they are used for a real purpose! That is the real genius of a Business Model. Creating a 'magical use’ of the Business Model that makes the company propel itself forward, like a rocket, shooting into the universe. The founding entrepreneurs, the core team and people in the company at the very early stage are usually the magicians! (This is also why startups are such fun!)

In the case of Twitter, the genius of allowing 'followers’ &'following’, trends, and the absolutely ubiquitous '#’ hashtag is what sprinkled magic on its Business Model and made it a household name. The 'rule’ of 140 characters created an amazing reduction in reading clutter that today, allows us to read hundreds of tweets at a time, without getting tired or bored.

Was the need to add @ before every user name a good business idea? Surely not. It made Twitter a 'techy’ product and intimidated a lot of people. Could the @ have been dropped just after the launch when the business began to show a strain in user adoption? I think so. This is one example of a defect design in Twitter’s Business Model with respect to usability (the simpler the product, the faster it scales).

Twitter really took off on gossip. And when Hollywood personalities began using it as their digital mouthpiece. The company’s Business Model was clearly proven out when tweets exploded and we saw twitter handles everywhere.

Twitter listed on the NYSE in the first week of November and was valued at 22 billion dollars at the time of writing this article.

Therefore, let’s park the point that the business of Twitter, propelled by a massively successful Business Model was proven massively successful by its IPO and 22 billion dollar market value.

Now let’s tackle Revenue Model.

In the exercise of listing the engine parts of the Twitter engine, you may have listed 'revenue’ as one of the items. Good going and good thinking!

For many years, no one really knew the Revenue Model of Twitter; if and how they made money; and if there was as a plan. I vaguely remember that when the co-founders of Twitter were once asked what their Revenue Model was, they shrugged and said, “We are trying to figure it out”. Evidently the Revenue Model of their massively explosive business was not top of their mind.

I applaud the Twitter co-founders for their unconventional and contrarian thinking; and for delaying the creation of its Revenue Model while they were perfecting its Business Model. Clearly placing the horse before the cart and not the other way around!

In the Twitter IPO listing, revenues of the company were pegged at about US$ 400 million (for 9 months). Let us assume that they will generate US$ 500 million by the year end.

Where does the money come from? Evidently, from advertising via 'sponsored tweets’. Now, only a few 'involved’ consumers even notice these sponsored tweets that appear interspersed while reading tweets on twitter walls.

So, is the Revenue Model of the almighty Twitter only advertisements, served via these chintu-mintu non-intrusive and elegant sponsored tweets?

Maybe, maybe not. But what is clear is that the Revenue Model halo isn’t eclipsing the Business Model of Twitter that is currently going gangbusters. Also, anyone who understands public markets will also tell you that stock investors do not value a company generating US$ 500 million in revenue for US$ 22 billion. Undoubtedly, investors are paying for Business Model vs. Revenue Model.

At this juncture, let me throw a spanner in the works and remind you of the Internet behemoth called Myspace that was launched in 2003. The site was a social networking platform for music rockstars and their fans.

By 2005, Myspace had boom, boom, boomed! It became the most popular social networking site in the world and was acquired by Rupert Murdoch’s News Corporation for US$ 580 million. Myspace also became the launch pad for other big startups like RockYou and Zynga and dominated the traffic charts.

In June 2006 Myspace surpassed Google as the most visited website in the USA!

You will not refute me when I state that in 2006, the Business Model of Myspace was absolutely stellar! I mean have you ever heard of any website beating the traffic of Google in USA?!

Alas!

Myspace sat on the wall.

Myspace had a great fall.

All of Murdoch’s finances and all of Murdoch’s men

Couldn't put Myspace together again.

In a couple of years after its peak, Myspace crashed into oblivion. In June 2011, the once Herculean Myspace was acquired by Justin Timberlake and Specific Media Group for a measly, vada pav price of US$ 35 million! A site that had beaten Google in traffic was now a piece of scrap.

What went wrong? What made Myspace implode, crash and burn? A very badly implemented REVENUE MODEL!!

At its peak, Myspace entered into an advertising contract with Google that guaranteed Myspace US$ 900 million in minimum revenue over a 3 year period. This deal badly compromised the user experience on the website that was anyway reeling under heavy advertising. To honor the Google deal, Myspace had to spray the site with ads. The Myspace CEO Chris DeWolfe reported that he had to push back against Fox Interactive Media's sales team who monetized the site without regard to user experience (Source – Wikipedia).

Just like Diwali crakers, Myspace crackled, fizzled and burnt out. The company’s Revenue Model had destroyed the Business Model on which the entire business was built!

To put it metaphorically, the Revenue Model component in the Myspace engine was such a defective part, that it bust the engine itself.

Considering the Twitter and the Myspace examples, let me summarize as:

- The Business Model of any enterprise is unique, distinct and very, very sacred. It's the soul of the business that needs to be cultivated, nourished, and preserved. The difference between failed, mediocre and spectacular companies is their Business Model and the magical genius that it comes wrapped in.

- The Revenue Model is an offshoot of a sound Business Model and can wait. It's a dangerous, volatile, elusive element that needs to be eased into a business like a foreign article entering a sacred body. With care and utmost caution.

A successful combination of a great Business Model and Revenue Model results in a Google of today or a Facebook of tomorrow. But if you place your Revenue Model on the throne and crown it as king, with your Business Model as its slave, then you will land up with a Myspace of yesterday.

Alok blogs at http://therodinhoods.com/