Chapter 2 Choosing a Digital Business Idea J.P. Allen version 4-15-19

Chapter 2 Choosing a Digital Business Idea J.P. Allen version 4-15-19

Highlights and Key Takeaways One of the first activities in digital entrepreneurship is choosing a digital business idea to prototype and test online. A good starting point for generating new ideas is to select from one of the most common types of digital business: content businesses, community businesses, online stores, and matchmaking businesses. Another common type of digital business promotes an already existing business in the ‘real’ world. Competitor research in the digital world is easier in some ways, but is also more critical with hundreds of millions of sites and apps competing for customer attention. Digital entrepreneurship offers many different revenue models to choose from, including advertisements, direct sales, subscriptions, donations, or the use of indirect revenue models such as generating sales leads.

Creativity and Innovation Finding a promising new business idea can be broken down into two separate but related processes: creativity and innovation. Creativity is the production of novel and useful ideas by an individual or small group. Innovation is the successful implementation of a new idea.

Simple Model of the Creative Process Four stages: Effectiveness depends on: Presentation of the problem or opportunity. Preparation, or previous knowledge. Idea generation. Idea validation, or choosing an idea according to some criteria. Motivation, intrinsic vs. extrinsic. Skill level in area of innovation. Creative thinking skills of the person or team. Don’t wait for a ‘perfect’ idea to start. Digital business ideas usually evolve and change over time.

Discussion Question Given that intrinsic motivation (or motivation from within) can lead to higher creativity and greater resilience for entrepreneurs, discuss how you will find the intrinsic motivation to pursue a digital entrepreneurship project for this course. What will make a digital entrepreneurship project meaningful to you?

Five Simple Types of Digital Businesses To help beginners think of new digital business ideas, we suggest they start with one of five simple types: A content business, providing information about any specialized topic. Revenue can be generated through advertising, referrals, sponsorship, or merchandise. A community business, hosting a lively and useful conversation about any specialized topic. The revenue possibilities are similar to content businesses. An online store, which sells products or services. The products might be physical, or digital. A matchmaker business, which brings together two groups of people. Often one group is a product or service provider (for example, potential babysitters) and another group that would use their services (parents looking for a babysitter). A promotion business, which attracts online customers for a business that already exists.

Content-Based Businesses A content-based business creates value by providing specialized content in digital form. The content can take many forms: articles, blog posts, images, memes, lists, FAQs, recipes and instructions, eBooks, directories, videos, and webinars to name a few. The list of potential topics is practically endless. Thanks to the global reach of the Internet and mobile devices, even the most seemingly obscure topic can find enough of a following to support the beginnings of a digital business.

Community-Based Businesses A community-based business creates value by providing specialized content and conversations, which are contributed mostly by users. Just like a content-based business, the list of topics is almost endless, but the topic should be one where a community discussion makes the content more valuable. Communities can be more challenging to start, requiring more up front effort and creativity to establish an initial critical mass of participants.

Online Stores An online store business sells products or services. The product might be physical, or purely digital. The product can be something you make yourself, or it could be sourced from a wholesaler. A great starting point for digital business is to team up with someone who has a product to sell, but doesn’t know how to create an online store to sell it. Another possibility is to sell your own expertise as a service, if you have experience or credibility in a particular area.

Matchmaking Businesses A matchmaking business creates value by bringing together otherwise disconnected sets of people. A dating site is an obvious matchmaking business, but so would be a site that brings together students and tutors, or parents and babysitters. The digital world is able to bring together previous disconnected sets of people quickly and cheaply. If one group is more difficult to recruit, a common strategy is to cross-subsidize: make a matchmaking business cheaper or free to use for one group, while charging the other group full price.

Promotion Businesses A promotion business attracts new customers to a business that already exists, or will hopefully exist, in the real world. Most existing businesses are interested in finding new customers, but the complexity of customer acquisition in the digital world can be overwhelming for small business owners or startups. One strategy for starting in digital business is simply to find a small business that has a poor, missing, or ineffective online presence, and make it your objective to attract new customers.

Quickly Communicating Your Idea My idea is to start: A content business about [your topic]. A community business about [your topic]. An online store selling [your product or service]. A matchmaking business connecting [service providers/group A] with [service users/group B]. An online business promoting [a local business].

Discussion Question Use one of the five simple types of digital business to create a new digital business idea. What personal interest and expertise do you have in this area of business?

Competitor Research With billions of Internet users, there is never a shortage of potential customers online, or potential competitors. In general, competitors can be identified by finding companies that target similar markets, that use similar strategies and resources, or that are perceived as similar by customers. Entrepreneurs sometimes create a persona, or brief sketch, of their target customer that includes their biography, and the goal they are trying to achieve. As a practical starting point, begin with search engines and social media.

Discussion Question Find two important online competitors for your proposed digital business idea. What will be your competitive advantage over, or differentiation from, each of these competitors?

Revenue Models Trying to raise revenue is a powerful method for testing a proposed business idea. The digital world opens up a whole new set of potential revenue sources. Common revenue models include: Advertising and Affiliate Marketing Transactions Subscriptions Sales Donations Customer Leads and Indirect Models

Advertising and Affiliate Marketing The rise of advertisement publishing networks, such as Google AdSense, has made digital advertising as easy to use as cut and paste. Advertising networks can select from an inventory of millions of advertisements to find the ones most likely to generate revenue for your business. A digital business can earn revenue from displaying advertisements, but more revenue might come from the higher rates offered for advertising clicks (the ‘pay-per-click’ model). An affiliate marketing revenue model generates revenue when a customer clicks through to another site and buys something. Each purchase might earn a flat commission, or a percentage of the sale. The largest affiliate marketing program in the US, Amazon Associates, starts their payments at around 4% of sales value.

Transaction Revenue A transaction revenue model charges a flat fee, or a percentage of total sales, every time a transaction is successfully completed. Transactions work well with matchmaking businesses, because a successful match can create substantial value for the consumer. For example, consumers are very willing to pay 6-10% for a successful online room booking, or 20-25% for a car sharing ride, not to mention 5-6% to buy or sell a house. The transaction revenue model is more appropriate when consumers are more accustomed to paying for services in your market.

Subscription Revenue A subscription revenue model commits the consumer to regular, recurring payments. Product and service subscriptions are always popular with digital entrepreneurs because they offer a consistent, steady stream of revenue that has stickiness—consumers have to take action to stop sending you money. Subscriptions can work well for services delivered digitally, such as tutoring. Subscriptions to carefully chosen sets of products can be effective for consumers who enjoy discovery and variety. A common variant is a ‘freemium’ model, where a free level of service is offered to attract customers, with the hope of upselling them to paid services with additional benefits.

Sales Revenue The classic sales revenue model is easier than ever to implement online. Payment methods have become easy for digital entrepreneurs to sign up for, with transaction fees not much larger than traditional credit cards. For products and services that can be delivered digitally, such as an e-book, sales fulfillment is easy. Even for physical products, there are many services available to make order fulfillment easier, or an entrepreneur can start by fulfilling orders on their own.

Donation Revenue Asking for donations has been a popular funding mechanism for small scale digital projects, particularly when projects offer a community benefit such as free software. Donations are a tough sell for for-profit businesses unless they can be tied to some future consumer benefit, as with recent ‘crowdfunding’ models that offer early access to future products. A great use of digital business is to raise money for a not-for-profit organization.

Customer Leads and Indirect Revenue Models The revenue model for a digital business is indirect if the business does not generate revenue on its own, but instead creates actions that will lead to revenue elsewhere or later. A typical example of an indirect revenue model is generating new customer leads. As an example, the sales process for a consultant might have multiple steps, where a potential customer seeks out background information, client testimonials, and maybe a personal discussion or consultation before agreeing to become a client. For these complex sales processes, particularly in a business-to-business context rather than consumer sales, a successful digital business finds customers and moves them through the sales process, rather than make sales directly. An indirect model is well suited for a promotion business, where seeking new customers is the main objective.

Matching Revenue Models to Digital Business Types Ads/Affiliate Content Community Store Matchmakin Promotion g - - Transaction s Subscriptio ns Sales Donations Indirect - - - Revenue models can and do shift over time.

Discussion Question List two different potential revenue models for your proposed digital business idea. (An indirect model can be one of the possibilities.) For each model, estimate how much revenue might be raised from the first 100 customers.

Exercise Use one of the five common types of digital business to create a new digital business idea, focused on an opportunity that you have a personal interest in, or expertise about.

Exercise Find a small business whose online presence is either missing, or is less effective than it could be. Propose a new digital business idea that will create value for this small business.

Additional Links www.google.com/adsense/start/—Google AdSense, a large advertising network friendly to beginning publishers. www.associateprograms.com/directory—directory of affiliate marketing programs. mthink.com/best-cps-affiliate-networks/—another directory of affiliate marketing programs. www.ecommercetimes.com/—news about e-commerce topics and different revenue models.

Supplemental materials for the book: Digital Entrepreneurship,1st Edition by Jonathan P. Allen Published by Routledge, 2019. Routledge website Book website with additional mate rials and ideas