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The Two Components of The Perfect Online Business Model
11th June 2015 • The Digital Entrepreneur • Rainmaker Digital LLC
00:00:00 00:28:08

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Many dream of starting a profitable online business. And that dream is more attainable and legitimate than ever.

As digital commerce becomes the norm instead of an outlier, more entrepreneurs are attracted to creating purely digital products and services. More importantly, your prospective customers want the convenience and on-demand access that digital allows.

Digital allows for all sorts of revenue models. But there’s one that has become the darling of entrepreneurs and the investors who seek to fund them.

In this episode Robert Bruce (he’s back!), Jerod Morris, and I discuss:

  • The legitimization of subscription revenue models
  • Digital goods: From dubious to in-demand
  • Why you should aim for a recurring digital model

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The Transcript

Two Components of the Perfect Online Business Model

Voiceover: This is Rainmaker FM, the digital marketing podcast network. It’s built on the Rainmaker Platform, which empowers you to build your own digital marketing and sales platform. Start your free, 14-day trial at RainmakerPlatform.com.

Jerod Morris: I’m recording as well.

Brian Clark: Right, Jerod’s got it because I can’t get out from under this towel. That’s staying in.

Jerod Morris: I’m multi-tasking under a blanket and recording.

Brian Clark: I’m in a closet. I’m under a towel held up by a robot piece of bound material art.

Jerod Morris: There is no glamour in podcasting.

Robert Bruce: Wait a minute. I thought this was a phone call. We’re recording this?

Jerod Morris: I ve been recording.

Robert Bruce: You re recording? I retired two episodes ago. And now you drag me back in.

Brian Clark: Nice work.

Robert Bruce: This is ridiculous.

Brian Clark: I knew you couldn’t stay away.

Robert Bruce: Oh I’m staying away. I’m here for, let’s see, 20 minutes. And then I’m retiring again.

Brian Clark: Which means 45.

Robert Bruce: Yeah, if I know anything about you.

Brian Clark: You never ever, ever accurately predicted the length of the podcast.

Robert Bruce: Right, right. Jerod’s here with us too, right?

Jerod Morris: I am. I’m here.

Brian Clark: All right. So this is what I’ve resorted to only one week into my revolving co-host thing. We make Robert come back and the drive poor Jerod in as well.

Robert Bruce: Yeah, nice work there.

Brian Clark: Whatever it takes, you know. You leave me on my own — I really can’t be choosy.

Robert Bruce: Brian, if you could have any business/revenue model going in the world, what would it be?

Brian Clark: The one I have.

Robert Bruce: And?

Brian Clark: Oh, would you like me to elaborate?

Robert Bruce: Maybe, since this is a podcast, that might be — yeah, please do.

Brian Clark: I would say, sitting here in 2015, that a recurring business model selling some form of digital product or service is the Holy Grail. Now, I’m not the only one who feels that way. I’ve spent the last six weeks talking to various people with large amounts of capital who don’t even want to hear about something that’s not a recurring subscription model. Which is odd, because that’s not — think about the history of business: someone has something, you’ve got some money, you give them the money, they give you the thing.

All of a sudden, that is completely unacceptable. Even though that’s still the vast majority of business as it’s transacted today. But that’s what people are obsessed with. Because recurring revenue is so much more stable. It’s predictable. You can extrapolate into the future. You’re not hunting and gathering constantly each month just to try to meet or exceed where you are at.

But think about it, this wasn’t a thing. Now we all pay for Netflix recurring. And maybe you’re a member of Dollar Shave Club and you get your razors that way because you’re too lazy to go to the store. What do you think about this?

Because when I was a kid utilities were the big recurring things. If you didn’t pay your water bill every month, you didn’t have water. I think the biggest shake-up in my childhood in my childhood years in this regard was cable TV. Not only did you go from paying for something that was free, but you paid for it every month or you didn’t get your MTV.

Robert Bruce: Jerod, I know you’re only 19 years old. We were talking earlier today about the Columbia House CD subscription business.

Brian Clark: Jerod, do you remember that? You know, when you were four?

Jerod Morris: I do actually. Yes, I do remember that.

Brian Clark: That was the irresistible offer, right?

Robert Bruce: It really was. That big fat catalogue —

Jerod Morris: It was like 10 CDs for a cent.

Brian Clark: Or 10 CDs for a penny. And this was pre-internet, so you had to tape a penny to a cardboard thing, find a stamp, drop it in the mail and you were never more excited than that. Because you were just cleaning up on Columbia House. Of course, that’s not how it turned out.

Robert Bruce: You were too young to read the fine print and the 25-page —

Brian Clark: Well, no, I knew the deal. What I was not old enough to have a feel for was my own lack of follow through. So you were committed to buy x amount of CDs in the future and I’m a music junkie so “Hey, no problem.” But then they send you that card in the mail every month and you had to open it up and look at it and see that it was Debbie Gibson and say, “No, hell no,” find a stamp and send it back.

Robert Bruce: It’s all right, you got the Debbie Gibson, it’s fine.

Brian Clark: That’s later. If you dig through my CD collection — “What’s with the Abba and Debbie Gibson,” and I’m like, “I didn’t return the card, okay?” And you know, contractually, if you didn’t return the card and it showed up, you had to pay for it. Now I’m sure there were people, just like there are now, who would send it back anyway. But that’s even more work than sending back a postcard.

But that wasn’t recurring revenue necessarily, it was a recurring obligation. Even then, the whole idea we kind of thought of as somewhat shady. It just wasn’t the norm. And now that’s the first thing — whether it be a fellow entrepreneur, a VC, or a private equity person they’re like, “Recurring revenue? No? I don’t want to talk to you.” As if there aren’t other valid business models. But I do have to say, it is one half of the Holy Grail of business models.

Robert Bruce: So back then — Columbia House, you’ve also got newspaper subscriptions, you’ve got magazine subscriptions, cable — it was not a prevalent model. Then we move in to the early days of the internet where it’s easier and easier to distribute digital goods, namely like ebooks.

The Legitimization of Subscription Revenue Models

Brian Clark: Yeah. So that’s the second half of digital, but before we leave the recurring thing, it really was the internet that exploded the concept. All of the sudden the precursor of what we now call the sharing economy was kind of predicted. I read this great book called “The Age of Access” that totally called all of this. The end of ownership and the rise of the Age of Access which you would pay for one-off or on a subscription basis. And now we have Uber, and we’ve got bike sharing and all of these things the kids are into these days. I still like to own my car.

Robert Bruce: It’s a pretty natural shift because you think back to the Columbia House, we had to have a lot more patience back then. We were willing to wait on the mail and send them back postcards. With the internet, it’s like our expectations have shifted. So we want access and we want convenience, which is why we’re willing, I think even as consumers to pay on this more recurring model. Because I want stuff when I want it and I want exactly what I want. So the trade-off is instead of paying one off, you’ve got to pay on a recurring basis so it’s there when you need it because you can’t predict when you’re going to want it.

Brian Clark: But think about Columbia House. It was such a fantastic deal that I got 10 free CDs so I could buy bad CDs on accident. Now, for ten bucks a month, I get pretty much every song in the world on Spotify and yet it’s still hard for someone my age to just … The first time I think, “Hey, I used to have that CD or LP or 8-track.” Robert, how’s the extensive 8-track collection of yours going?

Robert Bruce: It’s somewhere in a box in some storage unit.

Brian Clark: I still have that. I shifted, obviously, to iTunes early on. But my first impulse still, and I’ve done this many times, is I’ll say, “Man, I haven’t heard that Ramones album in forever,” and I go buy it. And then I’m like, “That’s on Spotify, oh my God.” It’s hard to shift, but the millenials in our company are like, “What are you doing?”

Jerod Morris: So both of you are still buying files? For music?

Brian Clark: I’m weaning myself of it. It’s just tricky because that’s your impulse that you’ve always — and I buy a lot of music, I buy a lot of books. I can’t train my brain. It’s not like I’m not paying for Spotify, I am. I just forget.

Robert Bruce: Jerod, are you buying files?

Jerod Morris: No, I stopped a couple of years ago and it just became all on demand. In fact, I had a really extensive collection of songs on iTunes and I was recently cleaning up my computer because I had memory issues and that was one of the first places I went to save room. I just said, “Well I paid for these, but I don’t really need because I don’t really come here and — ”

Brian Clark: You deleted your music? I could not do.

Jerod Morris: Yeah.

Brian Clark: I just buy another hard drive.

Jerod Morris: That was another option that I might have considered, but I figured I’m never in there listening though.

Brian Clark: So did you miss anything? Did you find everything on Spotify then?

Jerod Morris: Yeah. I mean, for the most part. I’ve never —

Brian Clark: Yeah there’s only a few, like AC/DC, and even I think they gave in. There’s a few holdouts and they’re all kind of coming in. But the internet is made for recurring. I can remember, when I started my real estate business, I was paying recurring for my email service. Email software as a service — those were the earliest models of that, at least at our level. I remember I had to pay a monthly subscription to get IDX which is how you display MLS listings on a website.

Businesses today are built around APIs. Mine was built around these recurring subscriptions that were really — even if it was a hundred bucks a month, that was nothing compared to the revenue that you could generate from those tools. It’s really kind of extrapolated from there.

Anyway, long and short, before we shift over to the second part. If you can devise a recurring revenue model, whether it be a membership site of some sort, whether it be some other kind of innovative subscription — all these things now that you can buy in a box. What is up with that? “You can’t dress yourself because you’re a man so here’s an outfit in a box,” and they send you a new one every month.

Robert Bruce: But that’s it. You take the thinking out of the equation. Same thing with razors.

Brian Clark: It is convenient..

Robert Bruce: Who wants to go to the store and buy razors? Whatever, it’s not that big a deal, but —

Brian Clark: You have wine clubs, where you subscribe —

Robert Bruce: — coffee. Well now Amazon has developed — I don’t know if it’s even still going, but a few weeks ago they announced that push button thing. A literal — they’re giving you a button —

Brian Clark: I made three purchases in the last week where that was an option. They are things that you run out of — whether it be facial cleanser or shaving cream or whatever. And there was that, “Every three months,” you get to choose a recurring interval. I just didn’t do it because that’s just another thing I’m going to have to adapt to, but I guess it makes sense. I even bought oil changes on subscription, basically. Like you buy a certain amount of oil changes at a bulk rate. Does that count?

Robert Bruce: Yeah.

Digital Goods: from Dubious to In-demand

Brian Clark: All right, so we’re talking about a bunch — from Columbia House to ham in a box — we’re talking about physical stuff, and that’s kind of a hassle. Because, again, if I wouldn’t return a Debbie Gibson CD, then I’m not the type who wants to pack boxes. Of course, they have fulfillment services and what-not, but I have to say that the fact that we also deal in end-to-end digital products and services, that to me is the second part of the ultimate business.

Robert Bruce: So what does that look like then? What types of things are we talking about? We talked ham in a box and all that. What types of things are we looking at on the digital side?

Brian Clark: Ebooks, online courses, software as a service, downloadable software like the Genesis Framework plus the themes that work with it. Even our hosting division is an end-to-end virtual transaction. Nothing shows up at your house. No one comes by. There’s no physical aspect of it because it’s a web service. But those are the big ones. It’s anything that can be digitized and/or fulfilled online. Reflecting back on all of our various lines of business, they’re all digital.

So there’s two things that have happened that I think a lot of younger people may not really appreciate because they just live this way. They’re digital natives. And we were talking about this earlier, that all of us on this podcast are digital natives even though we’re of another generation, but because we were weirdos. In the late 90s — early 2000s when I’m online all the time, do you think my friends thought I was cool? No, they thought I was a crazy person. But I’m laughing at them now.

Here’s what’s changed. I’ve been talking over the last few episodes about how online education has gone from this thing that was an outlier, not really trusted and greeted with skepticism, and now it’s a $15 trillion a year — trillion, that’s not much of a jump from billion! You know, when you’re at that level —

Robert Bruce: Hyperbole …

Brian Clark: But still, $15 billion is quite impressive. It’s a mainstream thing. I think we’ve hammered that point home. But so are ebooks. I mean, back in the day, an ebook was a shoddy .pdf that some internet marketer tried to scam you with. That’s a generalization, but that was the perception.

Now, ebooks are a huge publishing industry sector that’s growing much faster than the traditional book industry. We’ve got dedicated file formats. The Kindle Store on Amazon is just killing it. You’ve got entire legions of authorpreneurs. So again, that’s a legitimate thing that used to be illegitimate, kind of like online courses. There’s been downloadable software forever, but it was a highly geeky thing about 10 years ago. It was only the devs, and the coders, and the hardcore internet people that would dare whip out a credit card and download a piece of software that didn’t come on a shiny little disc, or a floppy disc before that....

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