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Fred Wil­son recently mused about the cost side of the profit equa­tion for web star­tups. This was spurred by a timely arti­cle from Chris Ander­son ask­ing such questions:

So Web star­tups are hav­ing to do the unthink­able: come up with a busi­ness model that brings in real money while they’re still young.

Profit derives from a sim­ple equa­tion: rev­enue – costs. Web 2.0 busi­ness mod­els are gen­eral based on the capa­bil­i­ties to grow and scale rev­enue in an expo­nen­tial fash­ion while costs keep grow­ing lin­early or even decrease in growth. Craigslist is close to the ide­al­typ for this model.

While any­one has ideas on what busi­ness mod­els could work for a num­ber of web­sites, the enter­prise mar­ket is almost never part of the answer. Yet, using it in com­bi­na­tion with the con­sumer mar­ket rather than as two sep­a­rate silos can yield star­tups dra­matic improve­ments on both sides of the profit equa­tion. “Con­suprise” plays should be sur­pris­ingly powerful.

If you are a start-up with a pure con­sumer play web appli­ca­tion enabling one activ­ity in a sim­ple and ele­gant way, then you might want to exploit the enter­prise mar­ket. Strate­gi­cally, it can be used with dif­fer­ent angles, but we’ll focus on the sim­plest in this post: take one offer­ing focused on the con­sumer side and devel­op­ing a new rev­enue stream on the enter­prise side.

Con­sumer appli­ca­tions have unique com­pet­i­tive advan­tages for the enter­prise market

Google Apps for large enter­prises is an exam­ple of a con­sumer prod­uct being scaled in the enter­prise mar­ket. The largest deploy­ments need a spe­cific sales force and sys­tem inte­gra­tors involve­ment. But the mid com­pa­nies mar­ket does not add any costs to Google, with self-service online subscriptions.

Most web appli­ca­tions will be served as a ser­vice, thus low­er­ing the costs for enter­prises. But they have other and unique com­pet­i­tive advan­tages. Their usabil­ity level and User Inter­face design are gen­er­ally of much bet­ter qual­ity, because they com­peted for indi­vid­ual con­sumers before enter­prise buy­ers. While the for­mer are their own decision-makers, based heav­ily on design and usabil­ity, enter­prise decision-makers are not the end users and focus on enter­prise infra­struc­ture aspects. This is crit­i­cal in terms of user adop­tion and time to pro­fi­ciency for new tools rolled out by the cor­po­rate IT function.

Change Man­age­ment processes are an order of mag­ni­tude eas­ier with a web appli­ca­tion which has earned its rep­u­ta­tion in the con­sumer mar­ket. This com­pet­i­tive advan­tage is grow­ing more acute as a larger base of employ­ees are exposed and using to stan­dard “web 2.0″ appli­ca­tions. Although not entirely fit­ting our start­ing def­i­n­i­tion, Gmail is a per­fect exam­ple: give a young employee Gmail, and it will be busi­ness as usual. Give her Out­look, and you will wait for a long time before she is fully con­fi­dent with it.

Economies of scale in the enter­prise market

Net­work and viral economies of scale are mostly thought of as attrib­utes of the con­sumer mar­ket. But the enter­prise mar­ket is not made of indi­vid­ual clients with­out any rela­tion­ships with each other. The inter­web of per­sonal rela­tion­ships and pro­fes­sional asso­ci­a­tions make it pos­si­ble to achieve such economies of scale on the enter­prise mar­ket as well. Not using the exact same dynam­ics, but achiev­ing the same effects. The scale is smaller, but each head is a pay­ing customer.

True, orga­ni­za­tional con­tin­gen­cies and polit­i­cal agen­das add over­head to any sales, mak­ing it scary for con­sumer com­pa­nies. But if you develop a large base of oppor­tu­ni­ties at a low enough cost, you can let those oppor­tu­ni­ties mature and evolve at their own pace. You do not have to increase your burn rate other than mar­gin­ally to achieve this.

You don’t have to customize

The main objec­tion to this line of think­ing is: “When enter­ing the enter­prise mar­ket, each com­pany will request some cus­tomiza­tion, and that will increase our costs pro­por­tion­ately with any addi­tional rev­enue.” Indeed, it makes no sense strate­gi­cally to cus­tomize your offer­ing, as this will lower your profit mar­gin dras­ti­cally. But you don’t have to cus­tomize to win in the enter­prise market.

True, com­pa­nies will often request cus­tomiza­tion. Just state your posi­tion and refuse to do it. You will be sur­prised how quickly they will accept to use your stan­dard offer­ing. Of course, this is not valid for all con­sumer web appli­ca­tions. But if your product:

• caters to a stan­dard need which is the same in all large organizations
• enables an iso­lated workflow
• needs lit­tle to no data integration

…then cus­tomiza­tion is not a requirement.

If you are con­cerned about the cus­tomiza­tion require­ments or sim­ply want to improve your com­pet­i­tive posi­tion­ing, offer­ing a pub­lic API or becom­ing a plat­form host­ing plug-ins, appli­ca­tions or wid­gets will work pos­i­tively just as well as in the con­sumer market.

I’m con­vinced, any prac­ti­cal advice ?

Of course, there’s still work to do, but the ROI should be worth it.

• Authen­ti­ca­tion and account pro­vi­sion­ing: you need to pro­vide inte­gra­tion with the sys­tems used by your clients, such as LDAP or Active Direc­tory. You need to (re)-architecture your appli­ca­tion to sup­port eas­ily these sys­tems. Even if such sys­tems are quite stan­dard, for each new client, you will have to do some quick man­ual work. My advice: set expected rev­enue lim­its to avoid a bar­rage from small clients, charge it at cost (enter­prise are used to this) or waive it for larger clients. This is the sin­gle most impor­tant point as the main dan­ger is unau­tho­rized access from a for­mer employee to the appli­ca­tion. If your “enter­prise” is expected to become large, hire a spe­cial­ist that will whip through the man­ual phases with­out problems.
• SSO: nice to have, but not 100% required. Employ­ees are used to their cre­den­tials by heart and if the cost to input them out­weigh the ben­e­fits of the appli­ca­tion, the prob­lem is much bigger.
• Web secu­rity: must have of course. Enter­prises will want to make sure your appli­ca­tion, acces­si­ble from the inter­net and host­ing their data, can­not be hacked eas­ily. Those audits are fairly stan­dard as well, and after 2–3 large clients, you will prob­a­bly have to pro­vide the results from past audits, not per­form new ones.
• Data seg­re­ga­tion and secu­rity: of course, you will have to come clean on those points. Seg­re­ga­tion is your respon­si­bil­ity, as well as choos­ing a host­ing provider you can trust.

Note that these points do scale: once in place, there will be lit­tle costs to add more cor­po­rate clients. They also ben­e­fit the con­sumer side of your business.

Accel­er­ate and reduce the cost of Prod­uct Development

If you focus on a stan­dard enter­prise need, take advan­tage of an early part­ner­ship with 2 or 3 rep­re­sen­ta­tive clients. Most will wel­come the oppor­tu­nity to pro­vide you with their needs and requests, even if the prod­uct is still being devel­oped. That will cut your devel­op­ment time as well as improve your prod­uct. And chances are your con­sumer side will ben­e­fit from the same improvements.

Enter­prise plays pro­vide a unique oppor­tu­nity to refine your prod­uct safely, even before you take it to the con­sumer mar­ket in fact: large orga­ni­za­tions avoid lit­i­ga­tion risks by all means. So you can be sure your IP is in safe hands, they won’t take any risks. Such part­ner­ships are ben­e­fi­cial for both partners.

So if your a large orga­ni­za­tion: are you orga­nized to take advan­tage of this new wave of offer­ing? And if you are a con­sumer web startup: how can you lever­age the enter­prise mar­ket to improve your profit mar­gin and your com­pet­i­tive posi­tion on your core con­sumer play?