Business Model Options (post #13)
Among our direct competitors, HLT and Pocket Prep had freemium models. Their type of freemium was that it was free to download the app and the user was given a limited version (limited number of questions and topics). The full version had lifetime access for a one-time fee.
Quizlet, on the other hand, was free with advertising. Technically, Quizlet was also freemium, as you can upgrade to their premium version for about $20/year. They utilized user-generated content (UGC) so that they did not have to create content, which was a big cost saver. Alternatively, UGC is harder to trust than content produced by content and exam experts.
We were also interested in a B2B model in which a company provided the content while we provided the mobile technology.
A fourth possible model involved the idea of intra-preneurship. This was pretty far out of the box, but the idea was that we would partner with a bigger publisher and after a certain period of time, they would own our company. I will go into details down below, but the basic concept was that in this scenario we would not have to worry about them stealing our idea, and we could make a nice sum of money over a short period if the product was successful. They would take on some risk on the front end but if successful would own a company/technology for much cheaper than what it would cost to acquire us years down the road.
The first two models (free with ads or one time purchase) were not going to take all that much work. If it was a one-time purchase, then we would have to figure out what the actual price should be, but that was about it. We did feel that ads would interfere with the micro-learning concept, though.
However, the B2B model would be very different. It had become apparent to us that content would be fairly expensive and time consuming to create. It would be better if we had a content partner and could just focus on the technology.
Also, I really was not a big fan of the one-time payment business models. It wasn’t even a subscription model. If an app was purchased for ten dollars and you had to give 30% to Apple or Google, then you made seven dollars before taxes and that was it. That was the LTV. It had to cost you almost nothing to acquire a customer.
If we could partner with a content provider, then our app would be packaged with their book/class. If we were to use a renewable/perpetual license model, we could have something like the following:
Basic: $50,000 renewable license
$5,000 per exam
70/30 revenue split
Premium: $75,000 renewable license
$5,000 per exam
Matching Game
70/30 revenue split
Premium Plus: $100,000 perpetual license
$5,000 per exam
Matching Game
70/30 revenue split
A renewable license (not perpetual) would cover the initial two years for $50,000 (or $75,000), depending on whether the content provider chooses Basic or Premium. This would guarantee the cost of a perpetual license, should they wish to convert to it after a year, at an additional $50,000 (or $25,000 in the case of Premium).
The content provider could renew the license for $25,000 a year after the initial two years for up to an additional two more years. At any time during this period, they could still get the perpetual license by paying the incremental difference between what they have paid and what it would be selling for at the time they choose to upgrade to it.
On exclusivity, whipSMARTT (our company) would brand to their specifications, but that would be the extent of any exclusivity.
This model made a lot more sense than free or one-time payment. There was the question as to the value of a perpetual license. In general, perpetual licenses did not work in the long-term. But in this case, the revenue split would make it much more feasible. However, we could also consider a SaaS based model in which the provider paid us based on end user usage rather than with a revenue split. This would be something like $20,000 licensing fee up front, $5,000 for each additional exam, $.50 for every user who downloads the app and $.03 for every session.
But there was also the idea of intrapreneurship:
Our opinion was that partnering with a company such as McGraw-Hill early on would be a risk. If we partnered with smaller players and built the tech over a couple of years that would make more business sense, but partnering from this point would expose our vulnerability (no legally defensible IP, they can fairly easily steal our idea).
Intrapreneurship would essentially mean that they were funding our development and that we would turn our company over to them after a certain time period. Say that time period was three years. So some back of the envelope numbers would look something like this:
-3 year contract; at the end of the three years they own our company
-pay us $200,000 per year for the three-year contract
-we charge them $5,000 per course
-they commit to 10 courses per year (courses are connected to textbooks)
-we charge them $1.00 per install per customer during the three-year period
-we charge them $.05 per app session per user over the course of the three years
-at the end of the three years, it is possible that this was a success and they want to continue hiring me on in some fashion or extend the contract.
This solution meant that we no longer had to worry about the issue of IP and a bigger player copying us. This solution also meant that we don't really have to worry about much except for building out a great product that students love.
This solution means that the risk for McGraw-Hill is $600,000 total. If they are paying us a lot of money due to installs and especially usage, then they are increasingly having access and eventually ownership to a valuable mobile product.
In terms of trying to project some rough numbers, there are approximately 4 million college freshmen in the United States. If we chose a popular course like Psych 101, maybe McGraw-Hill has 500,000 students over an average year.
Case 1: we assume 50% install the app, and the average person has 100 sessions over the semester (use it 7x per week for 15 week semester). This means 250,000 people installed the app at $1.00 each and these 250,000 averaged 100 sessions ($.05) = $5.00(250,000) = $1,250,000. So each course if worth $1.5 million. If there were ten courses per year, then the first year has a revenue of $15mm, the second year is $30mm, and year three is $45mm.
Case 2: maybe Case 1 numbers are too idealistic. If we say that 5% install the app and the average person has 10 sessions per semester, then for the average course 25,000 people install the app and 10 sessions ($.05) = $.50(25,000) = $12,500. So each course is worth $37,500. Year 1 has a revenue of $370,500, year 2 has a revenue of $741,000, and year 3 $1,111,500.
We were not sure which B2B model we liked more, but we were sure that we liked both of them better than the B2C models. However, we came to the conclusion that we were not going to be able to talk to these publishers without a real product. A prototype might be enough for early stage investors, but for bigger players we would need to have developed a real product with real customers. So that meant we were going to start off in a B2C model. As much as we disliked it, we picked free install and one-time payment because we did not want ads interfering with the micro-learning.