I devoured Naval Ravikant’s podcasts recently and learned so much from it. One thing that caught my attention, was about business models. He talked about how choice of business model can be good leverage:
“Ideally, you should pick a business model with network effects, low marginal costs and scale economies.
- Scale economies: the more you produce, the cheaper it gets
- Zero marginal cost of reproduction: producing more is free
- Network effects: value grows as the square of the customers
- Network effect businesses are natural monopolies
- In a network effect, each new user adds value to the existing users
- Zero marginal cost businesses can pivot into network effect businesses”
As an indie maker, I tend to think that as long as my product scratches my own itch, and hopefully also scratches others, people will be willing to pay for it and it will do well. “Business model” is something that I’m familiar with but feels very distant and corporate-speak to me. Does a solo entrepreneur working on a lifestyle business really need a business model?
But listening to Naval made me consider otherwise. Granted, his advice seems mostly targeted at Silicon Valley tech startups aiming at creating world-dominating monopolies, but I wonder if we indie makers and solo entrepreneurs can pick apart some of the gold within his advice and apply it on a smaller scale relevant for us. So what would scale economies, zero marginal costs and network effects look like for indie makers?
Scale economies: the more you produce, the cheaper it gets
– productized services like ManyPixels gets cheaper the more business they get, because the process gets more streamlined and more efficient, making each customer cheaper to service.
– bulk orders and group discounts tap on scale economies too. Remember Groupon? What might be the next evolution of bulk orders that some indie developer can build?
– many small online businesses sell physical products this way. Buy in bulk, sell to individuals with a margin.
Zero marginal cost of reproduction: producing more is free
– obviously SaaS products fall into this category. You build a product once like say Basecamp (a team project management platform) to serve one customer, and it takes zero cost to reproduce it to serve another. This is my favourite type of zero marginal cost type of product. Code once, charge ad infinitum.
– media and content products like ebook, courses, podcasts, blog posts cost nothing to provide to the next user, or to reproduce on different media sites, cross-post on forums etc, so that’s another business possibility too.
– difficult with manufacturing and services, as marginal costs climb as you reproduce. Unless you’re doing a dropshipping business (but stay away from becoming a dodgy one)
Network effects: value grows as the square of the customers
– network effects means each additional customer added actually grows the product value that another customer can benefit from. Not all SaaS products work that way - some just add more support needed and has no effect on another customer. Communities are how a product has network effects. Facebook, Twitter, Instagram are the big daddies of network effect. My product Lifelog is too benefiting from this.
– think of how you can build a community around a ‘static’ product. Create a support forum where users can post questions and other users can answer? With each answer the value of the forum grows. Or have affiliate or referral program? Or wow your customers with such outstanding service that they become loyal brand followers that bring other new customers in?
What other examples/ideas might fit into this business model with network effects, low marginal costs and scale economies? Anything I missed?
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