After speaking to some of Australia's most successful entrepreneurs, here are the 7 questions you should ask before building an online business

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The big disruptors know something most don’t. They know that if the goal is to create a seriously disruptive business, that impacts millions of people, that can scale quickly without a commensurate increase in costs, then they must choose carefully what they sell, how they sell it, to whom they sell it and the business model that underpins each transaction.

Here are seven questions that all the big disruptors ask to help them make those important decisions. Founding Executive Director of Singularity University Salim Ismail covers these in greater detail in his ground-breaking book, Exponential Organisations but here’s the quick-start guide to the questions you should be asking before you take any further action.

1. What will you sell?

Before you decide what you’re going to sell and how you’re going to sell it, it’s worth hearing what Tony Nash of Booktopia has to say about choosing business models. He runs a business that turns over $100 million, so he knows what he’s talking about.

People often come to me with an idea and I hear them out. And then I ask, “So when are people going to hand over the money?” And they’ll say, “Oh, when they subscribe, or the site will generate advertising.” But it’s all very vague. It won’t cut it. I’m trying to be fair and honest with them, but in the beginning, it’s all about cash flow rather than financial statements. Where’s the money coming from? What have I got to pay out? Make sure you’ve got more money than you need to pay out.
When you’re starting out you must focus on the cash. Money must be coming into the company.

Indecision surrounding the right or best business model to pursue is often the number-one reason why people fail to get started; they simply can’t make up their minds about what they want to sell and how they’re going to generate revenue from it.

When it comes to working out what you will sell, you generally have four options to choose from:

1. You can sell products/services that are purely information-based.
Examples: LinkedIn, Facebook, Instagram and GitHub are all information-based businesses. As a result, they have been able to scale quickly, without friction, and bene t from the network effect — that is, the bigger they get, the bigger they get. Closer to home, TRIBE and Joust follow this model. Information is their currency.

2. You can sell products/services that are physical, but the underlying services sold are information-based and revenue- generating.
Examples: Apple’s iPhones are tangible products, but they facilitate information-based businesses such as the buying of online music, the downloading of apps, and so on; Fitbits are tangible products, but they generate data that companies will buy.

3. You can sell products/services that are physical in nature, but they use information-based technology to deliver or produce them.
Example: Amazon sell books, but their information-based infrastructure (website, algorithms, size, commission system, automation) enables the business to scale.

4. You can sell products/services that are physical in nature.
Examples: Gloria Jean’s, Cotton On and Tiffany’s all sell physical products — tangible products you can eat, wear or touch.

Disruptive businesses often choose to sell information-based products as this enables them to monetise software at low marginal costs over time. They also re-calibrate their services to make them more able to scale. For example, Airbnb went from using PayPal to their own custom-built payments collection system because they couldn’t effectively scale the PayPal system to meet their needs. This radically changed the way they were able to accept payments and deal with refunds and this in turn enabled them to scale their service and operate in multiple countries.

Best practice strategy

The most disruptive disruptors embrace the first model: an information-based business that inhabits the “sharing” economy.

These disruptors generate multiple sources of revenue ranging from advertising fees to subscription models to premium versions of their free products. They may also be marketplaces or platforms that connect suppliers/producers/makers with buyers, and then take a clip of each transaction for their efforts. Marketplaces are massively disruptive models and they are changing the face of business, threatening legacy industries like never before and creating enormous opportunities for startups that demonstrate depth of vision.

2. What staff will you hire and on what basis?

When Instagram was acquired by Facebook in April 2012 for $US1 billion in cash and stock, it had only 13 employees and a handful of investors.

When Google acquired Waze in 2013 for $US1.1 billion, the company had no infrastructure, no hardware and fewer than 100 employees. It did, however, have 50 million users.

So much success; so few staff. It begs the question: On what basis do you engage/hire your staff? One of the hallmarks of successful startups (such as Instagram and Waze) is that they have a small, full-time core team providing stability and leadership, and they complement this with a range of on-demand contractors who can be upscaled or downsized as the business needs.

Using on-demand contractors enables startups to engage highly specialised, exible, cost-effective talent to complete micro-tasks.

This work is often conducted outside the organisation and is regularly done by suppliers in other countries. Many of Envato’s staff work are based overseas and work at a time that suits them and their personal needs. Envato welcome this and believe it creates a well-balanced, more dynamic team. They focus on team results rather than team attendance. Many startups access the gig economy, which makes the hiring of top staff at lower costs possible.

This principle of ‘on demand’ staff also extends to the assets a company engages. Disruptive entrepreneurs use on-demand assets to remain agile and minimise overheads. For example:

    • they use co-working spaces instead of leasing of ce space
    • they use cloud-based solutions such as AWS for data storage instead of buying expensive hard-drive storage units
    • they use Trello, Yammer, Slack and other cloud- based software products for fast, accurate and exible communication between stakeholders
    • they use Uber for company vehicles, (or if they’re seriously on the move, they’ll use Netjet, the ‘Uber of jets’.)

Best practice strategy

Accessing staff and assets on demand enables you to get the skills you need without the overheads and risk attached to hiring full-time employees and buying expensive fixed assets.

3. What social tools will you use to engage your community?

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How extensively do you use social technologies to engage with your users, customers, partners and fans? Does your community heavily influence your product development, product innovation and market testing, or is social simply a passive tool that you engage on an ad hoc basis to help with sales, listening and market research? Most successful disruptors rely heavily on a range of social technologies to fast-track decision making and get immediate results.

Matt Barrie’s Freelancer knows a thing or two about harnessing the power of social technologies to get a massive result. They activated a global competition on social to get its community to promote the Freelancer name and logo. The competition spread to multiple countries. Matt says:

The amazing thing with the internet now with two billion people online is you’ve got this “one to many” relationship. You can, for example, put up a contest and a prize and you can now crowdsource a result from billions of people online.

We used our contest platform, which is usually used to get something like a logo designed. So, for example, you put up $100 in prize money and you might get a thousand logos submitted and you can say, “I don’t like these—change the colour or change the font”, etc.

But we thought, “how far can we push this paradigm?” So, we said, “let’s put $25000 into the platform and just see what happens.” And the prize was distributed based on people downloading our logo, printing it out and just promoting it in their local area.

So what was the result of the contest?

We gave all the freelancers four weeks to come up with something and it was pretty mind blowing. One team in Bangladesh got 3000 people involved and they printed 3000 shirts, 3000 bandanas and 3000 flags with our logo. they marched 3000 villagers into a stadium, unveiled a 2400-square foot sign of Freelancer and then, using laptops, taught 3000 villagers how to use my website. that was pretty amazing.

Harnessing the power of your social community helps customers feel engaged. It’s also good for business.

An engaged community can be very useful. They can even convince supermarkets to stock your product. Here’s how social enterprise Thankyou activated their social community to get the big supermarket chains to stock Thankyou’s bottled water.

Co-founder Justine Flynn explains how it worked.

We asked our social community to post a video or send a message to the large supermarkets asking them to stock the thankyou range. On the first day of launching, the supermarket’s Facebook pages were flooded with people saying, “Please stock the thankyou range”. the supermarkets relented, the product got stocked and the rest is history.

Justine and Daniel also launched a business book using their social community.

We launched our Chapter One book campaign, where we said, “Pay what you want” and told them that the profit of Chapter One will be funding the future of thankyou and starting new initiatives. We had people pay as little as five cents for the book and some people paid up to $5000.

Best practice strategy

The most disruptive businesses have social technologies at the heart of everything they do and rely heavily on their community for product development, product innovation, market testing and sales.

4. What gamification tools will you use to increase customer usage?

Disruptive entrepreneurs embrace gami cation and deliberately gamify their product to increase user uptake. You need only watch a six-year-old play on their iPad to see the power of gami cation in action. You’ll notice they want to keep playing to “get to the next level”, “win a badge”, “open the next door” or “unlock the vault”. Here’s some common gami cation strategies that increase user engagement.

Progress bars

Online education provider Khan Academy uses the filling of the ‘”progress bar” to incentivise children to finish a maths module: “3 more questions to complete the module”; “You’re nearly done!”; “2 more steps to go ’til completion”.

Netflix uses a similar progress bar to show you how much of a show you have already watched.

Leaderboards

Minecraft, an online game that lets users build virtual worlds, has gami cation down to a fine art. One “game within the game” allows players to compete against each other to be the best “builder” of a random object. Once the “build” is finished (you get three minutes to build it), the players vote and the online leaderboard displays the winner’s name. I watched my son play it and took ridiculous pride in seeing his name top the leaderboard for building the best “pineapple” out of Minecraft blocks. These are the small moments a mother treasures.

Quizzes and polls

Asking people to take a quiz or complete a poll are other ways to gamify an online offering and thereby engage an audience. Business coaching companies often use provocative questions such as “How entrepreneurial are you?” to inspire you to take their online quiz. After filling in the quiz you receive a report back outlining where your strengths are and what you need to work on.

Best practice strategy

The most disruptive businesses fully embrace the principles of gami cation to incentivise and engage users.

5. What level of failure will you accept from your staff?

Disruptive entrepreneurs don’t just tolerate failure, they expect it. They also reward it. Believe it or not, companies such as Grey Advertising, Proctor & Gamble and Google hand out Heroic Failure Awards to those who have failed spectacularly. It’s not without purpose. Their belief is that great innovation comes from trying new things, measuring, testing and then pivoting if changes need to be made. They’re not fearful of failure; they just want to do it faster so they can move on to the next iteration. They also take care to set goals around the innovation process so that valuable learnings are captured.

Successful disruptors sometimes provide their staff with “20 per cent time”, a concept that enables staff to take one day a week to ruminate, play and develop personal or passion projects on the company dime, in the hope it uncovers innovation “gold”. Google was one of the early pioneers of the concept. Much has been made of their decision to terminate the concept, but it allegedly led to the creation of products such as Gmail, AdSense and Google Talk.

Best practice strategy

The most disruptive businesses have enormous tolerance for failure but set goals and processes around how that failure is monitored and measured.

6. What goals and metrics are used to track staff performance?

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Disruptive entrepreneurs may reward failure, but they systemise and measure staff performance and results too using detailed goal- tracking mechanisms such as:

    • Objectives and Key Results (OKRs)
    • Net Promoter Score (NPS)
    • Key Performance Indicators (KPIs).

NPS and KPIs are well documented and used widely by leading companies. What’s not so well known is the concept of OKRs. Google is famous for using OKRs as their executive measurement tool of choice as it offers a simple way to create structure for teams and individuals.

What are OKRs and how do they work?

OKRs work on the principle that the objective must be ambitious and feel a tad uncomfortable, and that key results must be quantifiable and lead to objective grading.

Here’s an example of the activities and metrics that a fintech entrepreneur may nominate as part of her OKR plan:

    • Increase profile by applying for the Woman of the Year award by the end of the year.
    • Re-establish blogger leadership by speaking at three key industry events.
    • Identify and reach out to the top-10 Australian-based nance bloggers to be a guest contributor.
    • Create a ve-part video series for YouTube addressing key challenges for home-loan borrowers.

Best practice strategy

The most disruptive businesses use detailed goal-tracking mechanisms such as OKRs to measure and track innovation and progress.

7. What data will you rely on to make business decisions?

Using data to personalise an offering is the hallmark of great disruptors. Net ix uses your previous viewing habits to offer recommendations on what you should watch next. Amazon offers the same service: “If you liked that, you’ll love this”.

On a more prosaic level, Domino’s used data sourced from their own social-media channels to produce self-deprecating TV commercials that openly acknowledged the negative feedback their customers had given them. They even showed screenshots of the real Facebook comments in the TV commercial. It was a gutsy move that could have back red, but that’s the risk all great disruptors take if they choose to share data with their customers.

Kate Morris’s Adore Beauty uses data to help customers select a shade of foundation that matches their skin tone.

We use Findation, a widget that helps shoppers find their perfect foundation shade when shopping online. customers enter any foundation they have previously used and the Findation widget will recommend the closest shade match so they can be 100% certain that the foundation they purchase will be right for them.

Findation uses data from more than 6,534,000 foundation users worldwide and a sophisticated proprietary algorithm to match shades between brands.

Serious online players use data to measure everything. And why wouldn’t they? The tools are there. As Jane Lu from Showpo says, ‘Most of what we do with marketing can be measured now, so it’s not as hit and miss as it used to be. We can see what post is working, what headline had cut-through. We can see what email worked and what image got a better response. It’s so much easier to measure now.’
Leading entrepreneurs use data to measure increases or decreases in:

    • orders
    • revenue
    • refunds
    • website traffic
    • customer database statistics average order value
    • active emails
    • items sold each minute
    • percentage of cart abandonment
    • new email addresses gained per day
    • Google review ratings
    • followers on all social media platforms each day
    • average customer support response time
    • average time until second purchase
    • brand recall
    … and much more.

I asked Booktopia’s Tony Nash what he measures and he said “sales”.

Best practice strategy

The most disruptive businesses rely heavily on data to make business decisions and to personalise their marketing.

Asking these seven critical questions at the start of your entrepreneurial journey will help you choose the right business ideas and revenue models to match your personal goals.

This extract is from How to Build an Online Business (Wiley $29.95) by Bernadette Schwerdt. It has been edited for length and clarity. Find out more at here.

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