Business Model Breakdown

In: Business Ideas By: Brian Armstrong

20 Jun 2008

Today I’ve been thinking a lot about different business models for internet companies. Specifically, internet companies that have some sort of service to match people up.

As you know I’ve been working on a new tutoring business model lately which is what sparked these thoughts.

Actually there are lots of companies online which match buyers and sellers just like I’m matching tutors and students.

For example, companies like AutoTrader.com match buyers and sellers of cars. Travelocity matches buyers and sellers of airline tickets. Ebay matches buyers and sellers of all sorts of products. Even Match.com matches people (not for buying and selling but for dating).

Would you believe that each of these companies uses a slightly different business model?

First of all, WHO do you charge? Does the buyer pay your fee or the seller?

Secondly, WHEN do you charge? Do you charge up front to use the service or only after a transaction actually takes place?

I made a little matrix to illustrate these different business models with an example of each. Here we’ll look at WHO gets charged and WHEN in the process:

	Buyer Pays	Seller Pays
Pay up front	Match.com	AutoTrader.com
Pay only when transaction takes place	Travelocity	Ebay

So Match.com’s business model is to charge the buyer and they pay up front. Ebay’s business model is to charge the seller and they only pay when an actual transaction takes place. You get the idea…

Which is best? I think the answer is that none are better than the other (after all, all four example companies are highly successful). I think it totally depends on your particular business, and getting in the wrong quadrant could be disastrous if it doesn’t fit.

For example, I’d assume its always better to do the “only pay when a transaction occurs” option IF you’re able to verify when a transaction actually occurs. It’s much easier to sell this idea to customers “hey I only make money if you make money”. Most people have no problem with that because they can try your service for free and if doesn’t work they pay nothing. That’s appealing. I mean, imagine Ebay charging you up front whether you sold anything or not! That would be annoying.

But you can quickly imagine why AutoTrader and Match.com can’t use this model because they can’t verify when a transaction takes places. No one is going to go buy a car or fall in love without going to LOOK at the product in person first ;) And once the buyer and seller are in contact outside of your site, what incentive do they have to come back and report to you that a transaction actually took place? The answer is none. So AutoTrader and Match.com are forced to charge up front. A harder sale, but necessary in this case.

Secondly, who should you charge? Would it make sense on AutoTrader to give free listings to car sellers and charge buyers instead who are searching for cars? I’m guessing not…the car seller has more to gain by getting a higher price for his or her car so it makes sense to charge them. If they can sell the car for just $25 more, then they’ve made up for the cost of posting it on AutoTrader.

Other Variables

There are plenty of other options to look at when deciding a business model. For example, you could just give the product/service away for free and be advertising supported. You could also debate between charging a one time fee vs. a monthly subscription. In general subscription products are more profitable because they come with recurring revenue, but not all products justify it. Is it something that the customer will need on an ongoing basis (like finding more dates every Friday night on Match.com) or is it a one time need (like selling your car once on AutoTrader).

So what about tutoring? A thought exercise…

For my new business that matches tutors and students online, what is the best business model?

Should the tutor pay to find students or should the students pay to find a tutor? The tutor stands to make money, but the student is the one in need. Using the AutoTrader model the tutor would pay, but using the Match.com model the student would pay.

Ideally I’d charge one of them only after a match had been made and they decided to meet. But I hit the same problem of knowing WHEN a transaction actually takes place…if a tutor and student meet through the website, what incentive do they have to come back and report to me they actually met for 10 hours this month? Once they have each others email or phone (which is pretty much necessary for deciding you’d like to work with a tutor) they have no need to come back to the website to give me a cut. So I’m thinking paying up front would be the only option there.

Should it be a one time fee or subscription? Tutors would probably pay monthly to keep their profile up and get more students to work with, but a student has a need to find a new tutor maybe once or twice a year at most…so that makes more sense as a one time fee I’d think.

Or should it just be a totally free service and make money from ads?

This is all a bit jumbled and just some random thoughts floating around my head today. But hopefully it helps you see a new way to think about business models and what would work best in any particular situation.

Lets do a little survey, what do you think would be the best business model for the tutoring business just described and why? Post in the comments below!

12 Responses

Carlo

June 21st, 2008 at 3:45 am

Hey Brian,

Interesting topic, as this is something I’m always mulling over.

When I come up with a business idea, the question of who to charge is always an interesting debate. I’m glad you wrote a post about this topic, since it gave me a lot more thoughts and insight when it comes to determining who to charge.

Given the tutoring business, I don’t have the slightest clue as to who or what your competitors are. And if you have one who already has an effective business model in place… Well, one should always consider not reinventing the wheel.

Since you’re in the “connecting” industry, it would be a fair assumption to say that both tutors and students are in equal demand of each other. The question is, who is more in the position of power? It’s a significant factor since those who are more “powerful” would be harder to convince to part with their cash.

I can definitely say that if I was struggling in school with D’s and F’s I would gladly pay a “miracle worker” to help me boost my grades up. So I guess the factor to consider here is the level of desperation, since the more desperate one is, the more willing they are to pay for something to solve their problems.

Another thing to consider now is which one of the two has more purchasing power? If you consider the Monster.com business model, the employers definitely have more purchasing power since they’re the ones with the money. And that’s exactly what Monster does. Relating this to the tutoring business, the tutors are “hired” by the students so it would make sense to charge them.

But one factor that negates that is the fact that students are mostly always broke, and would rather spend whatever cash they have on the latest gadgets, entertainment and partying…

If you take the Monster model and apply it to you, you could always build a large base of “job seekers” (in this case, the tutors) and advertise that to “employers” (the students) and continue doing what you do — charge the students to connect with the tutors.

How and when you charge them is a completely different beast…

You could also consider the Elance model… Taking a completely different step from the herd, they don’t charge the job seekers nor the employers, and I don’t believe I’ve ever seen ads on their site. I believe they don’t charge anybody, but rather make their money by taking a cut when people to use their escrow service (to ensure that the transaction/connection has been made). In this case, coming up with something totally left-field to earn your revenue.

Anyway this is long enough. Just wanted to contribute to the conversation as this is something that I’ve been thinking a lot of lately. Reason being is that I’m struggling to come up with a way to monetize a site similar to TripAdvisor or Glassdoor.com, plus another business idea that I’m currently working on.

-C

Freddie

June 21st, 2008 at 12:24 pm

Good comments Carlo. However the problem with the Elance model, as Brian explained, is once ethe student and tutor exchange phone and emails, they have no incentive to come back to Brian’s site to give him a cut of the future money. I have used elance and think it is great, however, once I have found a Virtual Assitant that works, we contract directly with them and avoid elance.

Just my two cents….

Still working on a solution for you Brian.

Brian Armstrong

June 23rd, 2008 at 2:46 am

Wow Carlo this is great…I like what you said about checking out the competition and not reinventing the wheel (in general this is a great strategy and I know a few sites I’ll take a look at). Good point about purchasing power too…thanks for the comment.

Carlo

June 21st, 2008 at 3:48 am

To sum up, I guess other critical components to consider adding into the matrix (which is a very nice idea, btw) is supply, demand and purchasing power. I think I’m going to come up with a matrix of my own that I can use to analyze who to charge, how and when :D

Nick

June 21st, 2008 at 3:57 pm

Hi Brian,

Speaking as a college student, I think the only reasonable model is tutors pay (probably a monthly fee) to be listed, and buyers use it for free. I dont think it is a leap to assume that the number of transactions that take place is a function of the number of people looking for tutors, rather than the number of tutors looking for students.

Since students are the limiting factor, you would maximize your transactions (and consequently, your gains)by maximizing the number of perspective students, which is obviously highest if it is free.

Brian Armstrong

June 23rd, 2008 at 2:48 am

You’re right about that…it has been much easier to find tutors than students who want to sign up. Mostly by running Facebook ads I was able to find lots of potential tutors…

Emily

June 22nd, 2008 at 9:55 pm

As a math tutor, I’ve looked for ways to advertise online and was sorely disappointed. The only service I found wanted to take a cut of EACH session with each student I contracted through them.

Now, being an honest person, I did not sign up with them because I just couldn’t see me sending them a cut of each session after the relationship was established.

Anyway, as to your questions: as a tutor, I would be willing to pay a monthly fee to advertise with you. I agree with Nick that I want as many eyes as possible on my profile, so I’d prefer that the students don’t pay a fee.

Brian Armstrong

June 23rd, 2008 at 2:49 am

Good to hear the perspective of an actual tutor, I should survey more of my tutors.

Lucky

June 23rd, 2008 at 2:03 pm

You could make it free for both sides and only charge tutors for premium placement which will get them more bites. You could also work something out that students would have to pay a certain amount but the first hour of tutoring will be free. you can then use part of the students fee to pay the tutors their first hour. If you figure out how to work that, you will also get an accurate picture of how many people are successfully using your site.

What are your thoughts on making the whole site 100% free and relying on ads to make some money and then once the site becomes popular, starting to charge for the service?

Brian Armstrong

June 23rd, 2008 at 10:12 pm

I’m hesitant to go ad supported up front and then switch to paid down the road because I think its human nature that once something is free you think of it that way and switching can anger people.

If I’m gonna go only ad supported I’ll just go all the way with that….but I consider that a backup plan if every other way to monetize it fails….thats not ideal in my mind.

I’m leaning toward charging tutors to put up an account, just like a classified ad. I’ll test it and post results as always to the blog ;)

Prabu Rajasekaran

November 10th, 2008 at 4:45 am

I think the current model of charging successful tutors (those who’ve received more than five enquiries) is the best one.

Because howmuchever they make is because of a standard listing (for which they make a standard fee) and due to their performance – referrals, repeat students, etc. (for which they fix their own price)

Good job, Brian. It’s a joy to see how your brain thinks.

Brian Armstrong

November 11th, 2008 at 12:42 am

Yep I think I picked the right one. It’s working the best so far.

Breaking Free

Business Model Breakdown

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