Value Creation 102: Non Transactional Businesses

This is an extension to Value Creation 101.

It’s often difficult to measure value from engagement or adoption-led business models. I have been often asked in pitches that how do VCs look at such ventures. Or, how should the entrepreneur even think about monetizing such businesses?

Time is money. So if consumers are spending time on your platform/product, there is definitely notional value to that time. Invoking our earlier analogy of increasing revenue or decreasing cost, the question you should answer here is ‘Where is the time coming from’. In other words, are you pulling time away from another activity (e.g., NetFlix)? It meant that people started substituting going to a movie hall or renting a DVD with Netflixing a movie. Or are you creating a new time-spend bucket (e.g., Facebook)? It meant that people suddenly started spending time on social media – a bucket which did not exist before that.

The first case is easier to predict – if you’re creating a product which helps better serve an existing need (in the above case it was watching a movie), it’s easy to understand how to value that time, and consequently, also how to price that service. The second is much tougher as you’re not only inducing a new behaviour in the consumer (which companies like Uber do) but also generating a new need (which a Pinterest does).

To explain the second case better, I would like to use the much abused Facebook example. Facebook, over the last 6-10 years, has constantly created new behaviours. It started with a simple social network. Through very simple features like “Like”, “Share”, “Comment”, it created a new time bucket (I am on social media). Then, through more advanced features like “Check In”, “Tag” and “Apps”, it created new behaviors (Wow, let me check-in with a picture of this view and tag my BFF) . Today, even though the direct monetization method for Facebook is ads, the root of that monetization is the massive engagement it generated by both creating this new time bucket and by creating new behaviours.

So if you’re building an engagement-led product which doesn’t directly facilitate a goods or service transaction, the 2 questions for you to answer, when identifying value, are:

A) Is my product replacing time spent on an existing activity through my product?

Common products which would fall in this category are games, music streaming apps, content platforms etc. All of these provide alternative ways to spend time for an existing, well understood behaviour (gaming, listening to music, reading etc). The USP here could be a nuanced way of spending the same time (different games/content collections) or just a better product.

B) Is my product creating a new behavioural pattern?

Not surprisingly, it’s very tough to generalize such products since these are new behaviours. The best is to use examples from the past – Twitter, Pinterest, Facebook are some. The key here is to identify people who spend insane amounts of time on your product, figuring out exactly why they do so and then finding more such people.

Answering both these questions will help you easily identify the value your product is generating and consequently its monetization potential.

[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.]