Below is the ‘Tip of the Week’ from Ep82: Getting Smart on a New Market, Part 2 (Charles Hudson)
We’ve spoken a lot in the past about companies that receive more benefit as they increase their customer-base and customers become more active. Companies like LinkedIN, Netflix, Twitter, etc. all increase the value that users receive as the user base itself increases. But today, in a simple and direct manner, Charles took it a step further and talked about something I’m choosing to call the customer volume-value curve.
The example we discussed was Slack and how in a smart, but maybe even diabolical way, they are set up so that the more customers using the platform the more value is created for users and for the enterprise. So, not only does the value for the community of users increase, but the value for payers does as well. In this case, the more people Slack has using the product, the more value the paid features have for the enterprise.
In most cases, it seems that this value is more of a linear relationship. Imagine that number of users is on the Y axis and $ per user is on the X axis. The more users a social network has, the more ads they can sell. The volume side of the equation is most critical here. We know how much money we can make per user, so how do we get more users? The below graph depicts the case for most businesses where volume of customers does not impact the price that can be charged per customer:
$ per User is fixed
But what if the more users they acquire, the more they can charge for every ad click? What if as volume increases price increases as well… Here the curve starts to look less linear and more exponential:
$ per User goes up with Volume of Users (ONE revenue stream):
And, on top of that, Slack has taken that a step further; with step change increases on top of the exponential curve relationship. In addition to the main paid service of security, they have other incremental paid features that also increase their necessity as the user base increases. So, once a company has a certain number of users on Slack, the CSO ponies up for paid security. Then based on the extensive usage and conversation history, the CIO adds storage and search-ability. Finally, individual departments may purchase integrations between slack and other value-add services, like the example Charles mentioned of Github integration for developers. Now the graphs start to look even more interesting:
$ per User goes up with Volume of Users (MULTIPLE revenue streams):
As I reflect on the customer volume-value curves, I realize that every business can’t be setup to take advantage of these economics. But there are two questions here, that are relevant for every new business:
1. Will your users receive more value over time?
2. Do your payers need more value over time?
If the answers are yes, then the company is setup to share in and accelerate that value. This is likely why SaaS companies have become so popular amongst investors. Their business model and product delivery is setup in a way to allow for ongoing value creation. Remember, the more value one can offer, the more one may receive in return.