Value Creation 101: Transactional Business Models

In my post on Show me the Money, I referred to the importance of identifying the ‘value’ that is being created through the business. A couple of people asked me to elaborate on this and hence I thought of writing a more detailed post on the same.

Value gets created in 2 basic ways – increasing revenues or decreasing costs. A proxy for either of these could be convenience (i.e. convenience might be equivalent to saving money or making more money depending on whether you are a consumer or a business)

Some of the more common ways to increase revenue are:

Increasing Fixed Asset Utilization

A lot of businesses have fixed assets with huge sunk costs and relatively smaller variable costs. Increasing utilization of such assets is one of the most common ways of increasing revenue. A good example here is the cab market i.e Ola or Uber increasing utilization of the cab or Oyo rooms increasing budget-hotel utilization etc

Expanding target market

A lot of businesses, due to constraints of capital or geographies can focus only on a certain target market. Expanding the target market for such businesses helps increase revenue. A good example here is any product marketplace eg SnapDeal which enables a seller in Gurgaon to sell in Chennai or of a Zomato which allows restaurants to be discovered easily online.

Providing better quality leads

Often, the biggest barrier to a business’ expansion is lack of quality leads. Improving quality of leads or prioritizing them on the basis of relevance can help focus the business’ efforts and increase top-line. Many service marketplaces eg UrbanClap can be bucketed into this category. Many analytic companies also fall into this category.

Better consumer targeting/Increasing lead conversion

Enabling a business to better target their consumers or convert existing leads is another common value proposition as now with the same resources, they can increase their top-line. Many SaaS and marketing automation tools fall in this category.

Enabling price discovery and convenience

Most consumer businesses fall in this category – while time is not strictly “revenue”, guarantee of best prices with minimal effort through a transparent and unique product is equivalent to revenue for the customer (time is money and money saved is money earned!). Online booking sites eg ClearTrip or BookMyShow are examples of convenience led business models.

Increasing price point by adding value to product

This is a more conventional business model wherein you skillfully add sufficient value to a product or a service that enables you to charge a higher amount to the end consumer than the cost you spent on adding the value. Usually these businesses are one of scale. Examples of such businesses are conventional manufacturing and production. More recently, models like WeWork have used the same principle to provide better real estate offerings to the consumer by sprucing up the existing home/office set-ups.

The most common ways to decrease cost are:

Remove middlemen to increase margins

Directly connecting the buyer to the seller ensures maximum margins and hence cost reduction. The simplest example that comes to mind is Uber that removed middlemen by eliminating offline taxi aggregators thereby freeing up margin to be distributed between the driver and the rider. Young real-estate start-ups like NoBroker or GrabHouse are also examples of the same as they trying to remove brokers from the real-estate value chain.

Reducing business opportunity cost by time reduction

This could be seen as an equivalent of ‘convenience’ for businesses. I think a good example here is Shopify. It made opening an online store extremely easy thereby freeing up their time to work on selling stuff. Similarly, Wix made web development extremely straightforward allowing people to focus on their core business without worrying about the website.

Increasing productivity/efficiency of manpower

For most service oriented companies, decreasing manpower by replacing them with automated software for low variability, repeatable tasks is a major cost optimization lever. This not only increases productivity but also frees up valuable manpower. Manpower could also be freed up by simplifying complicated tasks. Examples which come to mind here are robotics companies like GreyOrange which provide automation solutions to repeatable shop floor tasks.

Note: Many businesses will use a combination of 2 or more of the above methods. Moreover they are not exhaustive, merely indicative of what the most common ways are.

[Disclaimer: The thoughts and opinions expressed herein belong to the author and do not necessarily reflect those of Bessemer Venture Partners or any of its affiliates (“Bessemer”) or any other organization the author may be linked with. Specifically, the material here is written on the author’s own time for his own reasons and Bessemer has not reviewed or approved the information herein. Any discussion of topics related to Bessemer or its investment activities should not be construed as an official comment of Bessemer.]