OneCentFlights – Lightweight Models & Cost-Effective Scalability

When large web companies such as Facebook, Google or Wikipedia are interviewed on their early beginnings, more often then not you can guarantee it involved a garage, dorm room or some other home office set up. This is due to an important concept of web development: lightweight models & cost-effective scalability which in essence means to start small when the demand is small but to appropriately scale as demand increases.

The notion of cost-effective scalability has become even easier with companies such as Google/Amazon offering web hosting and storage, as well as many free open source development kits. However scalability does not just apply to the technological aspect of web companies, it also applies to business models where a scalable, cost-effective strategy should be developed for both business and development models aswell.

By incorporating cost-effective scalability into all aspects of the business model you will allow a faster time to market, faster return on investment (due to reduced cost & time), reduced risk of project failure and a greater ability to adapt. In this post we will talk about OneCentFlights, a business which specializes in “penny auctions” (a bidding fee auction) for flights, and how they used the following best practices in cost-effective scalability to enable their market success.

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1. Scale With Demand:

An important aspect of any business venture is to scale your business depending on the current demand in the market, when your business starts up you should start small, as the demand grows you will need to scale appropriately. This is vital in minimizing expenses and maximizing profit, two very important areas that often lead to a businesses downfall if managed improperly. A unique feature of web companies is that scalability can be used in nearly every aspect of business, software can be developed for free via open source development kits and data hosting can be outsourced as a variable expense. OneCentFlights began with 3 founding employees and only produced 2-3 auctions a week, as demand grew they took on further investors (keeping the development team small) and now provide approximately 40 auctions a week, with an expected revenue of $3 million a month at the end of 2013 (less then 2 years since first founded).

2. Syndicate Business Models:

Many features that once required a lot of effort, time and money (eg. Search Functionality, Sharing Features, Advertising), now have become simple plug-in modular components that can be implemented by inserting a few lines of code. Therefore it is important to make use of these features available by other businesses wherever possible, as there is no need to redevelop already working functionality. OneCentFlights has not made use of any advertising plugins as although they are revenue generators they can occasionally be intrusive, however they have made use of social network sharing functionality from Facebook, Twitter & Google+. These features are implemented by inserting a few lines of code available on the distributors website and make simple one-click buttons to share the website on users social networks, an important aspect of viral marketing.

3. Outsourcing Whenever Practical and Possible:

Technological outsourcing can occur on many levels including the base infrastructure, data storage, computing power, software development, test and operations management. When an aspect of business procedures can be outsourced for lower costs while still providing the same functionality it becomes an important practice to take advantage of it. Outsourcing data storage has become an incredibly cheap practice with Google and Amazon providing variable monthly expenses that can scale with use. This removes the costs of initial capital outlay that would once be needed to purchase large servers to house web and application content.

4. Market Virally:

Due to the ease of access to the internet, costly conventional advertising is no longer a requirement for generating user growth. Think about the last time you saw an advertisement for Facebook on television, never, it is just not a vital method of advertising. User initiated positive word-of mouth advertising can lead to dramatic market growth via network effects (as users grow, so will user-generated word-of-mouth advertising). By providing social networking sharing functionality on your website (such as OneCentFlights providing Facebook, Twitter & Google+ sharing buttons), you will provide the framework for viral marketing.

5. Design for Scale:

Network effects can be large and it is of vital importance to be ready for a large influx of user, or risk missing growth if your service crashes. Therefore you should start early with strategic and tactical choices from the beginning to enable scaling as your business grows. By outsourcing data storage and other services you can rely on the scalability of these distributing companies, where increased usage can be provided at a variable expense cost.

Businesses should remain as light as possible, scaling to meet demand.

Businesses should remain as light as possible, scaling to meet demand.

However there are a few precautions and issues that should be understood when using the best practices of cost-effective scalability which will be discussed below.

If you can build it cheap and fast, so can the next guy:

The low cost/time barriers to enter a new product in the market can be a classic case of a double-edged sword, the simplicity of your service can be used against you with other companies developing similar products. Therefore the key to success is holding the most legitimate business model and having a true understanding of the best practices in creating a web company. By following the best practices you stand the strongest chance of warding off any competition by being the most prepared and effective in your market.

Advertising dependencies:

Not all companies can rely on advertising as their primary source of revenue, as advertising revenue relies solely on the amount of user traffic which click on the advertisement. Websites like Facebook have a high success rate in advertising revenue as they can cater adds to specific user groups via their advanced algorithmic methods along with the vast amount of user data they possess. Whereas smaller businesses in niche markets may not find a high demand for advertising, therefore it is important to create a diversified revenue model (which relies on subscriptions, premium services, etc) to create stable income.

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Etsy – Conquering the Long Tail

Every young web developer dreams of creating the new Facebook, or the next Google, however history shows that it is more effective to aim smaller and conquer the Long Tail of the Internet. Small sites make up the majority of the Internet’s content with only a select few catering to all users, it is the narrow niches that are available within the Internet that provide possible applications to monetize markets previously too small to capture. This concept is called “Leveraging the Long Tail” and encompasses the ideology of striving to provide a new service in a niche market (within the Long Tail), rather than trying to overtake the most popular products (within the Head).

Products and Services with the “Head” of the Internet usually provide a general experience or benefit to users, this allows them to be useful to a large amount of users however make them less effective then specific services. A downturn of this is that with large general companies there lacks any specificity to unique niche markets and by trying to provide a good overall service they neglect enhanced features for smaller markets. This is where the “Long Tail” of the Internet strives, by developing in a niche market overlooked by the more general businesses you provide a more tailored experience to users in that market.

In this post we will discuss the Best Practices Etsy used to Leverage the Long Tail left over by eBay’s general eCommerce business by developing in the niche market of hand-made personal goods. This has provided customers a specialized service which concentrates on this specific area of eCommerce, while also providing makers a unique area to sell & distribute their goods.

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1. Build on the Driving Forces of the Long Tail

The driving forces of the Long Tail of the Internet are present in the easy creation of services in further niche markets (making the long tail longer), decreased costs of selling & distribution and new forms of connecting supply & demand. Etsy was created due to the difficulty in buying & selling homemade goods through eBay, as no additional merit was added to homemade goods over mass-produced goods on eBay. Etsy gained success through providing users specialized features to buy, sell & distribute homemade goods.

2. Use Algorithmic Data Management to Match Supply & Demand

Once customers have been attracted to a web service it becomes a vital practice to keep them returning by meeting their needs. This becomes increasingly important when leveraging the long tail as niche markets will have a lower possible customer base, therefore reoccurring customers become the foundation for continued success. Providing products of similar interest to consumers can be achieved by storage of algorithmic data relating to products purchased by similar users. Etsy does this by suggesting further products to users based on previous purchases, web services and purchases from similar users.

3. Use an Architecture of Participation to Match Supply & Demand

By making use of the “Wisdom of Crowds”, matching supply & demand becomes easier by allowing users to rate products and filtering based on these popularity ratings. Etsy allows companies and users to “Add to Favourites” their favourite companies, allowing other users to search through similar users or popular companies favourite lists. Furthermore each company gets feedback ratings from customers which are displayed on their profile page, allowing other users to view the trustworthiness of companies.

4. Leverage the Low-Cost Advantages of Being Online

Unlike traditional product sales companies, online eCommerce stores work at minimum cost as they only act as middleman in purchases. Etsy allows users to list their products for a small listing fee, receives advertising revenue and takes a small cut of product sales. Therefore Etsy fulfills an aggregation role where no products need to be stored and the company only incurs regular online web company expenses.

Businesses should not neglect the potential of the "Long Tail"

Businesses should not neglect the potential of the “Long Tail”

When leveraging the long tail there are some guidelines & issues that need to be understood to achieve maximum effectiveness in the market, these will be listed below.

Some Markets and Goods Benefit More

Digital goods with low costs of production and distribution have been found to be particularly effective in leveraging the long tail of the internet. Since niche markets have a smaller market it is important to minimize costs, Etsy in particular accomplishes this by simply acting as a middleman which removes any costs in production & distribution.

When the Tail is Smaller

As discussed below, leveraging the long tail requires meeting specific requirements of smaller niche markets. By aiming at smaller niche markets you can better meet their demands however finding the right incentives to attract customers, as well as demonstrating and reinforcing the value of your product is vital. This concept is called “Making the Tail Fatter” and concentrates on attracting more returning customers to your service.