The One Business Model That Doesn’t Fail
“To make the most of your money, I recommend sticking with mutual funds that don’t charge a commission when you buy or sell.” — Suze Orman
I was often told that mutual funds are the most convenient investment vehicles and banks are a risky industry to invest in. Especially in the subcontinent, the risk of defaulters paving their way to the riches is quite a common phenomenon, whereby the banks are then forced to seek bailouts from the government.
But despite that many people have put their faith into such organizations to facilitate their day to day transactions and needs.
But it is not the bank itself that completes the two-way process. As with a typical marketplace, there is a buyer and a seller. The “market” being the facilitator or intermediary that accommodates the buyer and seller under one roof to expedite the transaction. Most of these transactions are fulfilled using either a debit or a credit card.
Two of the most well-known brands in this segment include Visa and MasterCard. Every time a transaction takes place through one of their terminals a small chunk of the total amount is deposited as fees into the accounts of these two companies.
The commissions themselves are not that enticing but multiply that with a billion and you might be able to estimate the daily revenues of both these companies.
According to a 2018 McKinsey report, “ The 11 percent growth generated by payments — which topped $1.9 trillion in global revenue — is the largest annual increase we have measured in the past five years. The milestone of a $2 trillion global industry is set to be surpassed two years sooner than expected, and a $3 trillion threshold looms just beyond our five-year projection horizon.”
That was the landscape of things in 2018. Fast forward to 2020, the coronavirus pandemic has expedited the transition of going “cashless”. 86 percent of Sweden’s population was reported to pay for their daily needs using some form of digital currency and more than 1.5 billion people in China use smartphones to pay for their goods and services. But commissions aren’t only restricted to banks and financial brokerages. There are many other institutions and small business which make use of this business model and in times of crisis, this form of revenue generation can keep a business afloat.
The primary reason being that consumers will keep on thriving and the culture of “consumerism” will only continue to grow in the near future.
A small amount of commission in lieu of obtaining an essential good or service hardly bothers anyone.
It is the convenience that most people pay for nowadays and in most circumstances, the amounts are so small that most individuals do not even notice such discrepancies in their monthly bank statements.
The commission models in a marketing professional’s handbook
- Global Commission — Regardless of the vendor or product the marketplace owner will get a fixed commission on every transaction. Banks, brokerages, POS terminal operators in stores all make use of this model. However, it isn’t restricted to a small percentage of the total amount under consideration. Instead of a fixed percentage, the vendor can set a fixed commission on each transaction regardless of the value. This means that whatever the product price, the vendor, and the credit/debit card companies will usually get a fixed sum on every purchase a consumer makes.
- Category Based Commission — A more sophisticated commission structure is the category commission-based model whereby the vendor will place a floating rate of commission on all the items it sells. If you happen to be a convenience store manager, you can charge $1 on the purchase of chocolates, but $2 on the acquisition of lottery tickets. This model usually works well for large retail and distribution stores.
- Product Based Commission — A variation of the category commission model whereby a vendor sells a very popular product and he/she seeks to generate more revenue on the sale of that item. The result of this is that a certain percentage of the fixed price can be applied to a particular product to enhance commission revenue from it.
The subscription-based pricing model for marketplaces
With the rise of Amazon Prime, Netflix, and a host of other technology giants, most companies are looking to imitate the “subscription model”. Users are given a plethora of options and asked if they would like to avail of such services for a small monthly/yearly subscription fee.
Although there are many pros and cons to this model, a key issue is often the reluctance of the end-user to sign up for such schemes. After the trial period is over many people do not want to avail such services anymore.
If the company can sell its subscription package to a bigger group of audience as a bundled package it might help to generate further sales of their packages.
During the development of my first startup, I was able to test this theory whereby we asked our users if they would like to subscribe to our weekly newsletter for a small fee of $0.25.
If they clicked yes, then they were automatically redirected to Google’s search page. This gave me an idea about the number of people who were genuinely interested in what our startup was doing. Generating traffic on a fake landing page can sometimes give the founders an idea of how the customer sees them as an entity.
The amount of revenue can be increased by offering a host of subscription options that cater to various groups of people. For example, most companies have a silver, platinum, or gold option whereby the range of offerings vary and the subscription charge for each category varies according to the service/content being offered.
As with most product offerings, ensuring quality and reliability triumphs everything else. Even if most mutual funds underperform in comparison to major market indices, the underlying commissions and “fund management fee” will be cut off from the investor’s portion of earnings year on year. Similarly, banks do not dispose of the accrued interest for their clients if they fail to make their annuity payments on time.
Building a business that focuses on generating a bulk of its earnings from commissions alone might keep the business hovering in bad times since a part of its revenues are always derived from the sale of its other products.
The costs to upgrade plant, machinery, and equipment for an auto manufacturer are relatively higher than a software company that only has to upgrade its IT infrastructure once every few years.
But in terms of software, a few million downloads don’t cost any more than one download. The scale is unlimited and the potential revenue from such operations under the commission model can often be unparalleled to the conventional methods.
In the event that a company doesn’t sell a physical commodity, an online service as such provided by SaaS companies can be a great way to keep the revenues in check since the cost to pay a few computer scientists is often less than paying thousands in a capital intensive industry.