TAO/Handbook/Business Models

Designing a Business Model for Online Communities

A business model describes the rationale of how an organization creates, delivers, and captures value.

Business Model Design: Components of a Business Model (general)

Every organisation, business or undertaking strives for creating value. Its business model describes the architecture of an organisation and its network of partners for creating, marketing and delivering value and relationship capital to one or several segments of customers in order to generate profitable and sustainable revenue streams. Though the term „business model“ has existed for a long time, there is no common understanding and various theories stress different aspects. In the following we use the Business Model Canvas by Osterwalder & Pigneur (2010), a widely accepted and practical concept. However, our preference for this business model approach is not intended to impose this approach also on other users of / contributors to the TAO Handbook. It is worthwhile, though to consider the Business Model Canvas with regard to the strategic questions each firm has to clarify in order to make its business model work.

The Business Model Canvas (see Figure 1) consists of nine building components that show how an organisation has decided to create value. These components also cover the crucial areas for any business, namely customers, offer, infrastructure and financials:

• Customer Segments: For whom are we creating value; who are our most important customers.
• Value Propositions: What customer problems do we solve and with which offers do we satisfy which needs.
• Channels: Through which Channels (communication, distribution, sales) can we reach best our target customers
• Customer Relationships:What relationships to our target audience do we establish and maintain for successful customer acquisition, retention or to increase activity (sales, traffic,…)
• Revenue Streams: For what value / offering is each customer segment willing to pay and what are the pricing mechanisms. Are revenues resulting from one-time payments or are they recurring (In cases where volunteer work or in-kind contributions play a major role, we need to take into account all the relevant resource streams – not only financial revenue streams.)
• Key Resources: What key resources (physical, financial, human, intellectual) are required to create and offer the defined Value Proposition.
• Key Activities: What most important things have to be done to make the Business Model work.
• Key Partnerships: Which activities do we outsource to whom and which resources are we acquiring from Key Partners.
• Cost structure: What are the most important cost incurred by operating the business model. How important are low cost structures for our Business Model.

Figure 1: Business Model Canvas according to Osterwalder & Pigneur, & al. 2010

Specifics of Business Models for Online Communities

Business models for online communities can in principle follow the Canvas approach, too. However, some specifics should be taken into account. First of all, Web 2.0 components are not always as strictly separated as in tangible goods markets:

• The community member may at the same time be also a service or content provider (co-creation does not differ between producer and consumer but assumes a “prosumer”-approach
• The “platform” on which interactions between the different components and actors of the business model are executed may simultaneously be part of the Value Proposition, Distribution Channel, Key Resource (and operating it = Key Activity).
• If an existing online community is approached, the values, rules, principles and habits of this community must be respected. The administration or management bodies of this community should be considered and treated as partners that help to explain the requirements of the community and maybe provide a code of conduct for interacting with community members. In addition, these bodies should be respected as gatekeepers to the community in order to avoid that contacting the community will fail or the relationship between the administrating body and its community gets harmed.

Nonetheless, the Canvas is also for Web 2.0 applications a very valuable tool. In the following some specifics of Web 2.0 communities are addressed, without the intention to be exhaustive.

Web 2.0 Services
Web 2.0 technologies are used to develop and offer different Web 2.0 platforms and services that can be used (or “consumed”) by users and usually evolve to various kinds of Web 2.0 communities. Services can be classified, depending on the type of content as well as the functionalities they offer into

• Wikis
• Blogs and Blog spheres
• Education / Information
• Social networks.

From the Business Model perspective the services (= value propositions according to the Business Model Canvas) that are used to establish a co-creation-relationship with the community are of importance. The Web 2.0 services usually provided are:

• Services focusing on content and services for collaborative creating and sharing of content (text, videos, pictures, links)
• Trust building services like ratings, voting and similar
• Automatic update procedures evaluating user input and creating new common state of knowledge and content

These services can be offered as platforms or tools that can be used to utilize or even establish communities (e.g. blog platforms), as collaboration tools and most importantly as community services, unifying users through common objectives. Apart from the target group specifications of the firm that intends to use an existing community or to establish a new one, the quality and the size of the community’s knowledge pool depend on the number of active users and their participation intensity. The form of participation drives the culture of the community as well as the user acceptance and the loyalty. The general principle is that the easier the participation, the higher the participation. On the other hand, a low entry barrier affects the quality of the content.

Customer Segments: importance of content
Next to validation (e.g. through voting), content contribution of users (text, video, audio, photo, etc.) is the most common (and probably most important) form of community participation. The users’ benefits are often reputation, feeling of belonging or to fulfill themselves (= needs / Customer Segment in the Canvas). In that sense, basically any Web users are potential customers; important is the – for the target segment - interesting and the specific content, the collaboration and communication around which the community can act or evolve.

Financial Streams: Revenues and cost
Usually, participants of Web 2.0 services are investing their time and knowledge for the sake of the community without remuneration. They benefit from reputation as well as from knowledge they can take out of the community. In co-creation activities initiated by a firm it might however be justified and efficient to remunerate participants in a form that is considered to be appropriate by the community members. Revenues for the service providers operating the platform can be membership fees, advertising, commissions from service partners, contributions of sponsors, fundraising, public contributions. Typically cost are incurred for personnel, office, development, maintenance and for special projects and activities.

Best Practice…

... to maintain or develop and grow an Online Community

• Set realistic objectives for your organization

• Make sure they can be achieved with a community approach
• They have to be understood by all stakeholders

• Manage resources and expectations

• Collaborate with and respect existing administrative bodies of the community
• Internal understanding how communities evolve
• Right skills to understand the target segments
• Budget allocation

• Analysis of Target Segment

• Identification of real interests

• Conceptualize

• Decision about type of Community or target group within the community
• Identification of benefits participants will receive

• Develop platform

• Identify highly used features in similar platforms
• Develop functional specification; only essential functions in the beginning

• Establishment

• Write content about the community
• Organize events and activities
• Use referral techniques

• Maturity

• Optimize social density of the platform
• Ensure the community is influential within its sector
• Grow and manage the volunteer team

• Mitosis (from a certain size on)

• Identify common sub-niches
• Create places for people that share these elements to interact

... further experience

• Narrowing the Community Focus boosts activity per member
• Demographics: Approaches to build a community have to be different for different age groups (since attitudes, behavior, etc. are also different)
• Communities are built by strong common interest, not through expensive marketing
• Symbols: to attract a certain audience, symbols have to be used that have a specific meaning for them