Business operating models are a funny thing.
If you look at a given industry, say the restaurant business, you look around, you see expensive restaurants in nice locations, and you see low cost restaurants in convenient locations and you can pretty much assess how much a nice restaurant charges for a steak (maybe $35) and you can see how much a pizza costs at a neighborhood pizza place (maybe $12). If you want to start a business, drawing up a business plan comparing how others in your industry charge is a pretty commonsense way to go about it. From there you figure out your costs, a nicer place will be more expensive, but you will be charging more.
But then come the big disruptions in industry where all bets are off in terms of defining a business operating model when someone comes up with a radically different approach.
Pizza by the slice was a hugely disruptive idea at the time, scoffed at by many people who couldn’t fathom why a person might buy one slice. But obviously it was a great idea.
Then came fast food and take out. The notion of being in a hurry and being able to eat on the go were introduced as possibilities in the restaurant business that really shook up some fundamental assumptions about what customers wanted and what they were willing to buy.
Buying an individual song from an album was also a hugely disruptive idea, and Napster tested the boundaries of intellectual property and how to make money in that industry.
Still in music, the band Radiohead posted an album on the internet for people to download and pay whatever they thought it was worth. A huge risk that paid off handsomely for them.
Alice.com sells packaged goods over the internet at cost with free shipping and makes their money through advertising in a unique model. Costco is the only other business I can think of that doesn’t make any money from the goods they sell to their customers (their profits come from membership dues).
And now, Conde Nast takes a turn at it. Conde Nast owns popular magazines like Vogue and Vanity Fair and they are ready to turn their industry on its ear as described in this article by Jeremy W. Peters. In short, the model for the glossy magazine business has been to get lots of ad pages and then charge the customer as little as $12 a year for a subscription, and have a pretty high newsstand price for people like me who buy them at the airport. It has gotten harder and harder to get ad page revenue, making the basic model riskier and riskier. Ad revenue is declining because more people are getting their content online, so the solution Conde Nast is going to,which is pretty radical, is to charge customers a lot more and give them access to both print and online content for their fee. Charging for online content is largely going against the trend in the world of content. They seem confident that the customer will buy into this more expensive model with CEO Charles H. Townsend pointing out
“They pay $180 a month for a cable bill.”
Hmm. Comparing cable to Vanity Fair doesn’t really work for me.
TV for most people is a viewed as a necessity, Vanity Fair is not. For many people, the fee they pay is because there is only one cable operator at their location, so they have no choice but to pay this rate, and in addition to it being a necessity, a lot of people watch TV every single day – people don’t read Vanity Fair every day. So comparing Vanity Fair to cable TV is a non starter. Does that mean that I think they will be able to charge more than $12 a year for a subscription? Probably. And one place they might take a page out of the cable company play book is to charge a monthly fee. $180 a month for cable is over two thousand dollars a year, but you don’t see that number in any of their marketing literature even though most operators require a minimum one year contract. Do I think it’s smart for Conde Nast to get away from dependence on advertisers, sure. Do I think they should do more experimentation with the direction of content and how people want to pay for it and who they compare themselves to? Yep.
The bottom line is that we are seeing basic assumptions in industries being tested because of the way people are consuming information and entertainment these days. Publishing is currently one of the most up-in-the-air industries and it’s still the wild wild west when it comes to figuring out business models. The key is staying in touch with what your customer values and what they are willing to pay for it = and keeping a very open mind about where you may need to do some rethinking.
As Warren Buffet said “price is what you pay, value is what you get.”
-Ric
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