On averages and risk or skewed business models

Last week after a great (even Magnificent) visit to the Magnificent Maps exhibition at the British Library with Gary Gale, Steve Kennedy and Giuseppe Sollazzo we sat out in the courtyard rabbiting about maps, mobiles and stuff.

GeoRabbiting at Magnificent Maps by Gary Gale

Steve was explaining to us how the broadband ISP’s who purchase capacity from BT and buy in bulk but on a volume used basis (GB or similar) and then resell to us consumers on an all you can eat basis for a monthly fee. Old style guys (like me) might imagine that you could lose money when you buy on a pay per use basis and sell on a flat monthly fee but the business model depends on the fact that most people do not hammer their connections so on average you make a margin on their business. But there is risk – what happens when there is a sudden change in the behaviour of your customers or at least some of them? Along comes BBC iPlayer and suddenly bandwidth is being hammered by a lot more users and all of a sudden the numbers don’t look so good for ISP’s let alone when you add in the other on demand services that are coming to market.

Another example of the law of averages was the early SMS based version of Twitter, they were actually paying the mobile operators a tiny fee for sending SMS messages to subscribers. You can see how that model was not going to scale well as their user numbers rocketed and usage also exploded even at tiny rates intensive users would become financial burdens.

My old company once made a deal with a customer whereby the customer got unlimited access to our service for an annual fee and we were in turn buying transactions from a SaaS supplier/provider in bulk. The deal was profitable at about 4 times their realistic volumes but it still left a chink of risk if usage suddenly exploded way beyond our expectations. I never felt completely comfortable with that exposure even though the deal was highly profitable.

In business we have to take risks but it helps to understand the scale of the risk and its potential to do your business serious harm.

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