Why do companies exist?

I was recently invited to a lunch meeting with a group of Entrepreneurs who are some of the leading engineers of the Washington DC metro area. In my conversation with them, they keep on talking about the exploration of technology. For nearly all of them, technology is used as a Research and Development tool to expand the human reach while the business aspect is secondary. They never talk about how this technology will impact their growth, but rather see it as a self-discovery in reaching the limits of engineering. When I ask them, how is this company going to monetize (make money), they keep on answering, “I don’t know, it’s still too early!”

This leads me to ask, “why do companies exist?” What is the point of a company if it is not there to make money? Peter F. Drucker famously stated, “The purpose of a business is to create and keep customers.” What is the point of developing products that are not financially sustainable? Yes, each business can challenge the common concepts of technology and move society forward, but it must first and foremost be able to survive financially.

Technology firms and R&D

Companies such as 3M and Dow Chemical, spend hundreds of millions of dollars in Research and Development, but they have learned to systemize it and don’t allow it to jeopardize their entire  corporate structure. However, technology firms’ views are that we have ample resources to waste as long as we are doing any research and development. A company like Zynga has spent about $916 Million dollars on Research and Development in the past four quarters, yet their new games have yet to capture the attention of the market. Zynga’s survival is currently at stake. They cannot continue burning through capital at this given rate. They have already decided to shrink their company size by 5%.

Why Monetization matters?

Technology firms are not immune from the concept of monetization. The only way they can “create and keep customers” is by selling their product/services to them. If the company does not understand how it is going to monetize their business venture than it is truly a non-profit. Giving away a free product is not hard to do, but having a customer pay for your service/product is very hard to accomplish.

The concept of a “freemium” product is two-fold, namely to have your customers fall in-love with your product/service and convince them to pay for it and secondly for the company to obtain feedback from a larger market segment. However, most customers never move to paying customers, because the value proposition is lacking. The product/services are rarely Street tested (elementary market testing before going to market) to see whether they are viable products with market demands.

Pricing yourself to sustainability

In a recent growth consulting engagement we found that the client never developed a sustainable pricing model for their business. They would arbitrary increase the price of their application believing that most customers would stay. They had to keep increasing pricing because their growth strategy required more capital. They were always behind in raising capital, and thus used the price increases to self-fund the enterprise.  However, as more and more existing customer fled, others did not fill the void. The client found that price elasticity had a real effect on their business’s sustainability. Had the client developed a financial model from the outset and planned for various outcomes they would not have been reactive to the market space but rather pro-active.

Conclusion

Ultimately, it does not matter if you are a brick and mortar business or an online cloud computing firm, your ultimate goal is to create and maintain paying customers. If you cannot monetize your business that means your value proposition is incomplete and hence customers do not see a value in your offering. Reframing your product line, and realigning your value propositions will become empirical components in revitalizing your customer base and moving them from “freemium” to premium paying customers.

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