Start Up Blog

Value creation & extraction

Posted in entrepreneurship by Steve Sammartino on October 11, 2011

The web has changed business models so much, it’s hard to know where to start when discussing the implications of revenue streams.

In the past I’ve been very clear on my views about Free – it is not a business model. It’s a sampling campaign, or a related revenue strategy. But in truth, the methods for extracting revenue are being totally reinvented by the web. Given the cost of producing everything from flat screens, the flat pack furniture to microchips is in a state of rapid deflation means we need to reconsider the revenue equation – or more appropriately, the timing of the revenue.

For a business to survive, revenue must be extracted.

But before revenue can be extracted, value must be created.

When creating web based startups it is very hard to create value, until we have large numbers of participants (espoecially if we are not selling physical or virtual goods). The way to get large numbers of participants is the reduce the barriers to usage and entry. And the best way to reduce the barriers to entry, is to reduce the price, or even remove it entirely in the short term.

So when thinking of pricing models we need to forget about the price and start thinking about value. It isn’t until we have created value, that we will be able to extract it. So the real question is not ‘what to charge’, but has value been created yet?

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