Pay-in-advance models have been around practically forever and are the most straightforward of the five customer-funded models. Most service businesses run this way. Do you want to remodel your kitchen? You’ll pay at least part of the fees to your designer and builder in advance, to help them cover their costs for the project. Do you want to fly to Denver next Tuesday? You’ll pay for your airline ticket today.
Thus, implementing a pay-in-advance model is as simple as finding a good reason why a customer would be willing to pay in advance — at least in part — and having the courage to ask for the money.
Take Bangalore’s Vinay Gupta, who founded Via in 2006 and proceeded to build it into a giant in the Indian travel industry. How? By asking India’s mom-and-pop travel agents for a $5,000 deposit in return for real-time ticketing capability and better commissions than the airlines were giving them. Signing up 200 agents in the first few months gave Mr. Gupta $1 million in cash, his customers’ cash, with which to start and grow his business. Last year, Via generated a reported $500 million in revenue, serving travel agents in India, Indonesia and the Philippines.
Decades earlier, Mel and Patricia Ziegler got Banana Republic started by getting their customers’ money up front — $1 for the Banana Republic mail-order catalog, please — and setting up 30-day credit terms with suppliers. The business took off when media personalities, including WOR radio’s John Gambling, got intrigued enough by the merchandise, and Mel’s vivid and quirky prose, to talk about the new catalog on air.
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Krishnan Ganesh started TutorVista in 2005 with three Indian teachers and a VOIP Internet connection reaching American teens who needed help with their homework. He quickly learned that $100-per-month subscriptions for “all you can learn” — paid monthly in advance — were just what the teens’ parents wanted. When renewal rates after the trial period quickly materialized at north of 50%, growing the business was simply a matter of adding more fuel. Venture-capital funds provided it, and the business took off.
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Today’s matchmaker poster child is Airbnb. Brian Chesky and his co-founders put the site together in 2007 as a way to pay their rent, by offering up space in their own San Francisco apartment for local conference-goers. By narrowly focusing on events that were too big for the local hotel inventory, they built their business one step at a time until they landed a CNN interview at the Democratic National Convention in Denver in 2008. They won a spot in Y Combinator, and landed venture capital, allowing the fledgling business to ramp up its growth, and the rest is history: over 1 million listings in over 190 countries.
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Consider vente-privee.com’s Jacques-Antoine Granjon and his partners, who created the flash-sales phenomenon in 1985, and then moved online in 2001. The company offered a limited quantity of goods — unwanted or overstocked inventory from Parisian designer-apparel makers — at discounted prices in three-to-five-day sales.
The business collected immediate credit-card payment from “members” but didn’t buy stock until it had already been purchased by members. That meant Mr. Granjon didn’t need any additional capital to grow what became France’s most popular fashion brand.
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Bill Gates and Paul Allen got started by writing customized software for most of the early PC makers, which I would call a service business. Then they made the transition to a product business when they started selling Windows, Word, Excel and the rest in shrink-wrapped boxes. That’s when Microsoft’s value really took off, as selling millions of copies of software-in-a-box is far more scalable than writing operating systems one at a time. The cash earned from the original service business largely funded the development of the application software.
Claus Moseholm and Balder Olrik launched GoViral, a viral-video production company, in 2003. They funded their company’s startup and growth with the proceeds of one successful campaign after another. Two years later, a new partner, Jimmy Maymann, helped steer the company out of video creation and turned its attention to building the necessary technology platform to host such content and to effectively measure the reach each virally distributed video achieved. In 2011, GoViral was sold for $97 million.
Dr. Mullins, an associate professor at London Business School, is the author of The Customer-Funded Business: Start, Finance, or Grow Your Company with Your Customers’ Cash.
Needs proportionate list of like businesses that failed.
Not really Alrenous.
If you’re looking for a model of how you can succeed then a model that allowed a bunch of people to succeed is a pretty good example.
There are infinite potential reasons for failure.
Taking it as a guarantee of success would be foolish though.