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Amway, derived from ‘American Way’ is an American company which deals in health, beauty, and home care commodities. The company owes its foundation to Jay Van Andel and Richard DeVos in Ada, Michigan, and roots back to 1959.

Formerly counted among the top companies by the Forbes Magazine, the dual principles of Amway Business Model – direct selling and multi-level marketing – have triggered flames of controversy in the past. Let’s discuss the business model of Amway before moving ahead to discuss whether Amway a scam or not.

What does Multi-Level Marketing (MLM) mean?

Multi-level marketing, popularly termed as Network or Referral Marketing, has always been in the news due to its seemingly contentious scheme of marketing. It involves selling of goods and services through partners and promoters. The earning from the sale is attributed not solely to the seller. The payment of the associates is through a multi-level system of commissions.

These salespeople work lower down the hierarchy. They sell products straight out to as retail distributors through promotional marketing schemes.  They are also entrusted with the job of recruiting newer dispensers down the hierarchy to expand the network by the day. Either they themselves sell the concerned products or sponsor its sale by someone else.

Amway Business Model

The Amway Business Model adopts a similar fashion of network marketing wherein each trader on top of the ladder engages other traders down the line, resulting in a network, and everyone selling the products of the company too.

How does Amway work?

Amway business model isn’t too complicated to comprehend. You –

• will be recruited by a distributor,
• will act as a distributor ( IBOs, or “Independent Business Operator”), and
• will sell the company’s products and get more people on board in order to earn profits.

The profits are earned as commissions when you or any IBO appointed by you sell company’s products. The IBO you appointed will be your downline and when they sell anything, you’ll get a bonus commission.

How is the Amway Business Model different from the rest?

Every company, even the one you are employed in, has a certain chain of command for its employees, in terms of power, responsibility and income. The ones on the top of the ranking (the ones who were recruited earlier) earn more than the ones below them (the ones who are recruited later). With the Amway Business Model, there is no such situation, though. Tradesmen down the line, that is the ones who are recruited later, can earn more than the former ones.

According to the Amway Business Model, the revenue of the distributors is directly proportional to their sale charts. Also, Amway provides real commodities to consumers. The distributors, according to the proposed model, are not paid for merely expanding the network by introducing new workers down the chain.

The Amway Model is acutely infiltrated into the market and that is what makes it unlike the others and appears as a sham to many. This is because the networking needs to keep on increasing for better results – more and more people are to be made to join hands and more and more people are to be talked to. They put to use a stair-step trade form for their sales, and a compensation plan for their earnings.

Consumers of Amway’s Networking Business Model

The reality of Amway’s networking business model is that besides the retail end customer, the very salespersons recruited or sponsored by the ones higher up in the network also act as end-user retail customers for Amway as they are required to pay an entry fee to join the network. Furthermore, a major part of the proceeds is obtained from the sale to partakers itself. Only a tiny fraction of the total returns actually owes its roots to non-participant consumers. This fact has no proof from the company, because of obvious reasons. The company wouldn’t want to disclose the number of participants actually responsible for the company’s turnover! Or maybe, they do not even differentiate between the sources of revenue to keep records at all!

If you still couldn’t decode the Amway Business Model, here’s a little cue for you. Imagine you are working at Amway. You need to buy a beauty lotion. Instead of buying it from a retail store, you buy it from yourself – that is you buy it as a participant of Amway. The company sells out one product, you spend money, yes, but you get the proceeds of income. Since this is not a very feasible form of earning, you would want to sell products to more non-participant consumers, or you would want to add further participants down the chain, whose sale proceeds (actually some part of it) would also come to you. The more you buy from Amway, the more you earn. The more you sell to others, the more you earn. The more participants you employ, the more you earn! They key is to find more and more down-levels so that you do less and earn more.

Is Amway a Scam?

No. It’s not.

The Business Model of Amway is one that has been subject to several controversies and objections. Its Network Scheme has been a case of constant conjecture. Back in 1975, its functioning was questioned by the Federal Trade Commission. It went against the proposition of its Networking Business Model, which was confused for a Pyramid Model. A pyramid model is one where people earn simply by recruiting new participants. This gives them the unjust advantage of earning through the appointment of friends and relatives.

It was held that the participants of Amway focused purely on recruiting newer ones down the hierarchy and not on selling products. Apparently, several fraudulent promises were made to lure people into the Amway network.

Amway has pondered on altering its business model in according to implications of restriction in countries like China, in order to continue marketing in the Chinese domain. An Indian court had questioned Amway India’s Business Model, in defence of which Amway cited the lack of a novel legal structure in the country. Amway has pleaded to ensure that monetary transmission policies weren’t befuddled with those of direct selling. The claim had been fruitfully accredited by top legal connoisseurs who approved of its Business Model in India.

Issues pertaining to the concept of Amway’s marketing model or those related to the class and cost of its commodities are justified enough to be raised and debated on. The blame of fraudulence on the company, however, seems a bit incredulous. FICCI, in India, had also supportively articulated for
Amway, stating that there were no alleged illicit or falsified activities involved in the Amway Business Model and hence such views and comments should be discarded.

Scamming is something that comes with human nature. Someone who catches hold of a novice in the profession would try to outdo him for his own good, through fraud and fake promises. The underlying fact is that the Amway Business Model is not a scam. Just that it is not really a pyramid model of business – all it relies on is a granted hierarchy of partakers who purchase, retail and further spread out this sequence to earn more proceed-fractions, which is more of a network than a pyramid.

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Twitter needs no introduction. More than a decade ago, its founder Jack Dorsey had famously typed out “just setting up my twttr” on the micro-blogging site as its first tweet.

Since then it has come a long way where it has the become the voice for many, including the current American President whose rants on the platform have landed him in many controversies (we are still trying to figure what #Covfefe is). Twitter’s impact on the world has been so strong that it has given birth to revolutions and brought down entire regimes (think: Arab Spring). Twitter won the Techcrunch’s Crunchie award for the Biggest Social Impact in 2012 as well as 2015. Many have called it the “Pulse of the Planet”, something so powerful and effective that even the biggest news agencies cannot match its pace and reach.

Yet for all its glory, hype and impact, its valuation is decreasing with time, its stock performance is abysmal and many call its business model “broken”. Twitter revenue model has remained unchanged over the years while it is still hoping to turn profitable but it has not been able to yet. So what exactly is the Twitter business model? How does Twitter work and how does Twitter make money (or not)? We are here to answer all your questions. So let’s dive right in.

What is Twitter?

Twitter was created by Jack Dorsey, Biz Stone, Noah Glass and Evan Williams in 2006. The company is headquartered in San Francisco, California, United States. Twitter business model is a microblogging platform which quickly attained worldwide popularity after its launch. Currently, Twitter has more than 328 million monthly active users, making it the ninth-largest social network in the world. Twitter has proven to be the largest source of breaking news time and again. During the 2016 Presidential Elections in the US, 40 million election-related tweets had been sent by 10 p.m. that day.

A social network’s valuation is dependent on the number of users and the engagement of users. Unfortunately, Twitter’s user engagement is decreasing and other social networks like WhatsApp and Instagram have left it far behind in terms of the number of total users. Though it was being touted as a serious competitor to Facebook in its early days, Facebook is currently the most popular social network in the world and is valued at a staggering US$ 485 billion with about 2 billion users while Twitter sits cosily at the 9^th spot in terms of users and an ever-dwindling valuation. Twitter is currently valued at US$ 15 billion, less than its valuation of US$ 18 billion at the time of its IPO.

Twitter Business Model

Twitter business model is similar to the business model of other social networks. It requires users to create a profile and then those users can post short status updates or “tweets” under 280 characters. Registered users can post tweets, but those who are unregistered can only read them. Users can post using the website, app or even SMS. It is also called “SMS of the Internet”.

The users can follow other user accounts and then they can view the tweets of the accounts they chose to follow. The users can share videos, images, and links through their tweets. The users can also directly message each other.

Of late, Twitter has been shifting its focus to video content and content creators, as video has far higher engagement than text or banner advertisements. To incentivize video makers, Twitter shares revenue with them, where the creators get 70% of the cut and the rest is kept by Twitter. This is better than the 55% cut offered by YouTube to content creators. Twitter, with the help of Periscope, has been trying to bring live-streaming into the foray. It bought the digital rights of NFL in the US for US$ 10 million in 2016. It wants to get exclusive digital rights to big events like NFL games, political debates, award ceremonies etc to enhance its business model. While it has a lot of competition from YouTube and Facebook, it can also be a boost to its decreasing revenues if the costs are managed well.

In terms of value proposition, Twitter offers its various stakeholders the following benefits:

• User Benefits – Users share content with the world, get real-time and relevant content in return and also get to participate in conversations with people through tweets or messages.
• Advertiser Benefits –  Viral global reach, unique ad formats, real-time connect with the audience.
• Data Partner Benefits – Access, search and analyze data and generate insights to monetize.

Twitter has always tried to strengthen its business model through acquisitions and partnerships instead of internal user or revenue growth. Some of its acquisitions and partnerships are listed in the next section.

Twitter’s Acquisitions and Partnerships

Before we move on to answer the question of how does twitter make money?  and discuss Twitter Revenue Model, it’s important to know more about Twitter’s acquisitions and partnerships. The company has made many acquisitions in the past to enhance its business model – 54 to be precise. Some of its most prominent acquisitions are:

1. Crashlytics – Crashlytics is a crash-reporting and analysis mobile tool. It was acquired by Twitter in 2013 for US$ 100 million.
2. Gnip – Twitter acquired Gnip, a social media application programming interface API in 2014 for $134 million.
3. Magic Pony Technology – Twitter acquired Magic Pony in 2016 for US$ 150 million to enhance its machine-learning capabilities.
4. MoPub Advertising Solutions – Twitter acquired MoPub for US$ 350 million in 2013. It hosts the world’s largest mobile advertising server with real-time bidding exchange.
5. Periscope – Twitter acquired Periscope, the live-video streaming start-up in 2015 for US$ 100 million. It acquired Periscope to improve its video capabilities further, including the offering of real-time broadcasting services.
6. TapCommerce – Twitter acquired Tapcommerce in 2014 for US$ 100 million. It helped Twitter improve its mobile installation and engagement advertisements.
7. TellApart – This was Twitter’s biggest acquisition. The US$ 479 million acquisition digital advertisement platform increases Twitter’s advertising revenue which is generated by ads resembling tweets and urges users to perform a particular action.
8. Vine – Twitter acquired Vine in 2013 for US$ 30 million to strengthen its video-sharing services.
9. Zipdial – It was acquired by Twitter for US$ 30 million. It is an Indian company founded by Americans. It focuses on response collection technology and missed call marketing.

Twitter has partnered with DoubleClick, Google’s ad serving platform which would bolster Twitter’s ad serving and revenue earning capabilities. But this also means that Twitter would have to share its revenues from advertisements with Google, which could further reduce its profits.

How Does Twitter Make Money?

The answer to how does Twitter make money? and What is Twitter’s revenue model? can be given primarily by explaining two of its strong suits: Advertising and Data Licensing.

How does Twitter make money through advertising?

Almost 85% of Twitter’s revenue comes from advertising sales. Twitter annual revenue from ads came out to be around US$ 400 million in 2015. An individual or company can advertise on Twitter by either

• Promoting a tweet that will appear in people’s timelines
• Promoting an entire account
• Promoting a particular trend i.e. a hashtag-driven topic (e.g. #NotInMyName) that is popular at a particular time

Photos and video previews are displayed in the posts alongside the text thus enabling the advertisers to present their content to the target audience better. Before 2013, users had to click on the links posted to view the content.

Twitter charges the advertisers based on the amount of interaction that the tweets generate. While the budget is set at the beginning of the campaign itself, the advertisers pay on per-click or per-retweet basis. Advertisers can also participate in bidding to place their content in a particular space. More than 65% of Twitter’s advertising revenue comes from mobile devices.

How does Twitter make money through Data Licensing or “Firehose”?

What is data licensing? Well, Twitter sells its public data that it calls Firehose and that amounts to around 500 million tweets each day to various companies. Companies can utilize this data to analyze consumer trends and generate insights about brands and companies. Since the tweets are public, consumers can also access this data. Because of the volume of the data, companies can learn about their users in a detailed manner, something that a normal user would not be able to. Of course, the data analysis tools have to be sophisticated enough.

With sophisticated analysis, companies can learn detailed and specific information about their users that, because of the volume of data, an ordinary user or company would not be able to get. Though there is a slowdown in the advertising revenues, the high-margin data licensing business is growing. In 2015, Twitter generated US$ 32.2 million of revenues from data licensing.

Of all the companies that have been acquired by Twitter, there are some which have been absorbed, some which are open source and some which generate revenue for Twitter and add to its topline. Absorbed companies are those which have been discontinued for the general public but their expertise and capabilities in a particular technology are being leveraged by Twitter in its own product with the support teams from these companies. The companies which generate revenue for Twitter do so either through subscriptions or views. These make money through freemium models or through advertising. Open source companies do not make any money for Twitter and are accessible to anyone. Some examples of each group are as follows:

• Absorbed – Magic Pony Technology, TapCommerce, Peer, Zero Push, TellApart, Crashlytics, Summify, Hotspots.io, Mesagraph, Cloudhopper
• Generates Revenue – MoPub, Zipdial, Vine, Periscope, SnappyTV, TweetDeck
• Open Source – Adrenaline Mobility, Clutch.io, Fluther

Future of Twitter

Some of the major issues that Twitter Business Model is facing currently are:

• Smaller User Base vis-à-vis competitors
• Low User Engagement
• Negative Profits

• Crippling stock market performance with an overvalued stock

Is Twitter Business Model profitable? No. Rather, it has seen negative profits every year and even after its stock fell 60% in 2016, its share price is still considered overvalued. If the business model is not tweaked or changed, the losses will continue. It’s a hard truth that monetization has been a struggle for Twitter and speculations are rife that companies like Disney and Salesforce might acquire Twitter.

One of the changes it can make to its model is the introduction of tiered pricing, where users are charged annual subscription fees and provided extra services according to the tier they are in. But that is possible only when it is positioned as a media company and not a social network, as the other social networks like Facebook will always remain free.

There is no doubt that Twitter is a very effective means of communication but it does not have the stickiness for the average person. It is based on individual’s sharing information rather than individuals in a social network of friends and thus is not as personal as some of the other social networks. It is the best at what it does and thrives during live-events by making use of real-time internet the best. Only time will tell if minor tweaks to its business and revenue model are enough to bring it to the path of profitability or a complete overhaul is needed lest it be acquired by another player.

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Gone are the days when getting a taxi to the office was a nightmare. We no longer need to wait on roadsides trying to spot a taxi and fervently waving at it, only to see it being hacked by another client. We don’t even remember having to be refused a ride in the dead of the night or on late evenings. All this – and much more, with the advent of online cab providers, through which a user can book a ride in a matter of a few minutes.

Uber, an emerging business giant, is one such ridesharing company that disrupted the industry in 2009. If you’ve ever wondered how Uber works, and more importantly, how it earns money, without you tipping anything extra, or with the prices usually cheaper than taxis, read on to decode Uber Business Model – a taxi aggregator.

What Is Uber?

Uber is an on-demand cab aggregator that operates on a smartphone application and lets you book a cab to get from point A to point B, pre-calculating the fare, estimating the time of arrival, and offering an option to split the cost with co-riders, all with a few taps on the app.

The company disrupted the entire cab industry in 2008 when the founders were not able to find a cab on a cold winter evening. It all started with a simple question – “What if you could request a ride from your phone?”

Today, the company is estimated to have over 100 million monthly active users worldwide, is a unicorn valued at ~$60 billion, and provides ride options from affordable bikes and scooters to Uber Air.

• UberX: The basic Uber ride.
• Uber Pool: Shared rides.
• Uber Comfort: New cars with extra legroom.
• Uber Green: Electric vehicles.
• Uber Black: Luxury cars.
• Bikes: On-demand electric bikes.
• Scooters: Electric scooters.
• UberXL: Vehicles with carrying capacity of up to 6 people.
• Uber Transit: Real-time public transport information.
• Uber WAV: Wheelchair accessible vehicles.
• Uber Lux: Luxury vehicles with top-rated drivers.
• Uber Black SUV: Luxury SUVs with top-rated drivers.
• Uber Taxi: Local taxicabs partnered with Uber.
• Uber Flash: A specialised taxi system designed for HongKong.
• Uber Auto: On-demand auto rickshaws.
• Uber Air: Flying vehicles.

Uber Business Model

Uber brought the concept of the aggregator business model to the world. This is a unique business model that involves building partnerships and let the partners work under your brand rather than building and developing the offering on your own.

In simple terms, Uber doesn’t own any cars. It aggregates or collects cab drivers, who drive their own cabs but work under the Uber brand name. While the actual service is provided by the partners, Uber makes sure that the service standards are met – the cabs reach on time, are clean, take the right route, and ensure the safety of the customer.

And since it was the pioneer, this specific business model is also called Uber for X business model.

How Does Uber Work?

Uber works on a two faceted operating model. One aspect focuses on getting as many cab partners on board to deliver a seamless experience to the end consumer, and other aspect focuses on marketing Uber as a great ride-hailing application to the customers, that can be used to book a cab with a few taps on the smartphone.

Here’s how Uber works from the end consumer’s point of view –

The Application

Application is the first touchpoint where the customer enters the point A and point B details. They also review and choose ride options for vehicle size, price, and estimated drop-off time; chooses the option that suits their demand; and confirm the pickup.

The Background Algorithm

This is the backbone of the offering. The application algorithm informs all the nearby available drivers about the request who can then accept or decline the same on their own will.

However, to ensure no biasness, Uber does not show the information about the destination to the drivers before they accept the ride.

Once accepted, the rider is notified about the driver and the time it’ll take for the driver to reach the departure point.

The Cab Ride

This is where the standardisation and security aspect of the brand comes into play. Even though the cab is owned and operated by the cab driver, Uber makes sure that it carries its brand identity.

Once reached on the departure point, the rider and the driver verify each other’s names and the destination. This is often done using two-factor authentication (pin received by the rider).

The driver makes sure to follow the instructions provided by the rider.

Also, in luxurious rides, there are entertainment system and WiFi installed for the riders to use during the course of their ride. This helps in brand building.

Besides this, Uber makes sure that the rider is taking a safe ride. To do so, Uber does an in-depth background check of all the drivers that partner with the company.

Even the riders have to verify their accounts using their phone number and/or social media accounts.

And if there’s an emergency, Uber has emergency assistance for both the riders and drivers where they can call 911 (or other emergency numbers) directly from Uber app the app displays their live location and trip details that can easily be shared with the emergency dispatcher.

Other than this, there’s also an option to share the trip details and live location with other friends and family to ensure safety.

Payment

The payment policy on Uber differs for different geographies it operates in. Whatever the case may be, the payments are usually deducted after the ride is completed. It is provided in the form of cash, debit card linked to the app, credit cards, bank transfer, or wallets.

The Social Validation

This is an operating model aspect added by Uber to make the offering more community-friendly.

After every ride, both the rider and driver get to rate each other. This rating, when aggregated with other ratings they get from other riders and drivers, is shown to the other party whenever they book or accept the ride.

Moreover, the social validation system helps the company keep a check on its drivers and make sure that they’re following the standards to keep the rider pleased. Also, a rider that doesn’t follow the terms of service is also banned, to fulfil the promise made to the drivers.

How Does Uber Make Money?

At a glance, Uber looks very similar to any other taxi company. In reality, however, it’s operating and revenue model differs from usual ride-hailing companies substantially. Since it doesn’t employ the drivers, it doesn’t own the money generated through rides.

In fact, Uber’s revenue model is a commission-based model where it charges a 20-25% fee (that differ for different geographies and class of vehicles) on all fares for the use of its brand and services by the driver.

In simple terms, Uber brings in customers to the drivers, provides their customers with payment options (like credit cards, wallets, etc.), a good application with maps, directions, ETA; and charges 20-25% of the ride fees plus other fees (like safe ride fees, booking fees, etc.) for the same.

Moreover, it’s not drivers who get to decide how much they’ll charge for the ride. Uber follows standardised prices per kilometre/mile for different classes of rides/offerings. For example, in New Delhi, a 4.5 km journey can cost from ₹21 to ₹380 depending upon the type of Uber you choose.

This brings us to the next section – how is this fee decided and how does uber make money through other sources than commissions?

Revenue As Commissions And other Fees

The commission of 20-25% that goes in the pocket of Uber is decided on the price paid by the customer. But how is that price calculated and what all does it include?

Well, every ride fare includes the following factors –

• Base fare: The pick up and drop price.
• Time: The amount of time spent during the ride.
• Distance: The distance the vehicle travelled during the trip (excluding the distance travelled to pick the rider up)
• Booking fee: A flat fee to help offset the administrative cost (background check, overhead, etc.). This fee goes directly into the pockets of Uber.
• Surge variable: If there’s more demand than supply, a price multiplier kicks in that increases the price.
• Tipping: A value input by the rider if he wants to tip the driver.

Dynamic Pricing Explained

During times of heavy demand (like during downpour, sporting events in the city or holidays, etc.), Uber applies dynamic pricing to its offering to ensure that riders can always receive a quick and convenient pickup.

Dynamic pricing is a technique that focuses on setting the price of the product taking into account different factors such as demand & supply, inventory, competition, locality, and other market conditions but in a smaller time frame.

It is a simple game of markup economics. With more demand, you get a lot of options to sell your limited offerings to, so you develop an algorithm that increases the price using a markup multiple that is positively correlated with the increase in demand.

For example, if the demand is doubled, your markup multiple can be 2x. That is, a ride where the rider used to pay $10 will now cost $20.

Since Uber has to fulfil the demand to maintain its brand image, dynamic pricing mechanics helps it to manage its inventory better by bringing in more drivers to the place of surge pricing in a lookout for more money per trip; all this while making more profits.

Promotional Partnerships

Uber, because of its huge user-base, is a huge attraction to bigger brands who are looking for partnerships as a part of their marketing strategies. Besides revenue as commissions from drivers, Uber business model also includes revenue generated through promotional partnerships. The company has been seen partnering with the following brands in the past – Pepsi, Hilton, BMW, Starwood, Spotify, etc. These collaborations result in a win-win situation for all the parties as-

• Customers benefit from marketing campaigns run by other brands (Uber passengers in select cities were treated to free trips in the BMW 7 Series to promote the new car),
• Uber gets the money.
• Brands get the audience.

Future Of Uber

Even though the company has a truly disruptive business model, its revenue model hasn’t proved to be profitable yet. The 2019 gross bookings totalled $65 billion, up from $50 billion in 2018. This brings in the net revenue (~25% of gross bookings) in 2019 to be $16.25 billion.

Still, Uber operates in a loss.

But seeing the trends and increasing demand for on-demand services, it’s sure that the company will be profitable in future.

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What started as a simple platform to offer mattresses and home-made breakfast has today revolutionized the way people travel. Airbnb business model is unique, profitable, and has evolved to such a level that the brand is now the world’s most loved hospitality brand.

What is Airbnb?

Airbnb is a community based two-sided online marketplace that helps connect travelers with local hosts. What started as a problem for their founders when they could not pay rent, snowballed into this massive venture. They had built a simple website with a map offering mattresses and home-made breakfast. As more and more people started pouring in, they refined the website with money they earned from selling cereal boxes during the 2008 presidential campaign. The click rates improved too as the images of the rented space kept getting better.

Today, Airbnb is present in 34,000+ cities across 190+ countries. The company has 1.5 million listings and has served more than 35 million guests till date. Airbnb sees 140000+ people staying at its home-stays every day. In 2012, it overtook Hilton Hotels in number of nights booked. The company was valued at $31 billion in March 2017 and the personal fortunes of its three founders, Nathan Blecharczyk, Joe Gebbia and Brian Chesky were an astounding $1 billion each. It is headquartered in San Francisco, California, USA.

Airbnb Business Model

Airbnb utilises a Aggregator Business Model, like Uber or the Indian company Oyo Rooms. It does not have a linear business model like the traditional hotel chains such as Marriott, Hilton etc. The traditional hotel businesses have to invest millions in building and maintaining their properties. Airbnb’s key resources are people and therefore does not have to do any of that. This enables it to grow incredibly fast at zero marginal cost.

People can list their available space on the platform and earn extra money from what they get as rent for their properties. As a platform, it also enables travelers to connect with local hosts and book home-stays instead of expensive hotels, saving them money and letting them “live like a local”. Personal profiles and rating/reviewing systems help travelers make an informed decision about the hosts and what is on offer. Hosts too can choose who to rent out their space to. These help to build trust and reputation in the community.

Besides the travelers and hosts, Airbnb business model also includes a huge network of freelance photographers in all major cities of the world. They visit a property and get high-definition photographs of the property. These high-definition photographs improve the click-rate and help in getting more responses. Airbnb pays these photographers directly.

Airbnb vs. Uber vs. Oyo Rooms Business Model

On the surface, Airbnb, Uber and Oyo Rooms all employ the Aggregator Business Model but the differences arise when dug deeper. Uber has simplified the ride-hailing process, reducing the uncertainty of when and what type of car would arrive.Uber’s business model is such that it acts as a middleman between the drivers and riders assuring an expected level of service. This is different from Airbnb business model which thrives on discoverability. The level of service is not standardised. The travelers are free to choose any listing of their choice after going through its reviews. While Uber too has ratings for both drivers and riders, neither are they as elaborate as those on Airbnb nor can a customer choose a particular driver of his/her choice. The most Uber can do is bar a driver or rider if his/her ratings are too low. Uber pays its driver partners through a fixed rate of commission for every ride.

Oyo Rooms’ business model is based on standardization. Though both Oyo and Airbnb are in the business of providing affordable stays for travelers, Oyo itself does not strive to be the Airbnb of India. Its founder Ritesh Agarwal has time and again emphasised that he wants to build the Uber for hotels in India. Just like Uber, it guarantees a certain level of service to its customers. Customers book the rooms with the brand Oyo and not with the individual hotels. Unlike Airbnb business model, Oyo books a part of the hotel’s inventory beforehand and organises those rooms under its brand. Oyo Rooms has also started leasing of hotels where it has the full control over the day-to-day operations of these establishments. Airbnb has no such control over the quality of the homestay. Also, while Airbnb’s revenue model includes income mainly through commissions, Oyo earns through a take-up rate. Since they hire a part of the inventory of a hotel, they pay for it upfront and then offer these rooms to customers at different set prices. It also means suffering losses in case of unbooked inventory. Oyo focuses mainly on hotels and guest houses whereas Airbnb focuses mainly on homestays and allows people to rent out their house or part of their house to travelers, thus earning some extra income for themselves and enabling the travelers to experience the local culture of the place.

How does Airbnb Make Money?

The property owners are provided free listings by Airbnb and the travelers then browse the various properties in a particular location as per their requirements and budget. The booking and monetary transactions are carried out on the Airbnb platform. The company gets its share of revenue from these transactions through two sources:

Commission from Hosts/Owners

Airbnb deducts a flat 10% commission from hosts for every booking done through the platform. Hosts also have to pay a 3% fee for the processing of the payments of the guests.

Transaction fee from Travelers/Guests

6-12% of the booking amount is set as service fee by Airbnb for travelers for every confirmed booking. This fee is non-refundable.

Airbnb reasons that people can save money on booking fees if they book in large numbers.

Depending on the tax laws of the area, users are also charged a value-added tax (VAT). VAT is calculated on the final value of the goods and services. The tax laws vary from country to country and thus Airbnb does not charge VAT for every booking. Moreover, guests who pay in a different currency than the host has chosen are subject to varying exchange rates determined by Airbnb. Hosts are charged VAT based on the income earned from different bookings.

Airbnbmag

Airbnb has a vision to make travelers feel that they belong to the place they visit. This vision has made them add a new product to their business model – Airbnbmag, which is more than just a normal guidebook. This $15 dollar magazine is a result of partnership between Airbnb and Hearst and is designed to bypass the tourist stomping grounds and help the traveler uncover the place through the eyes of a local.

Business Travel

Airbnb business model also includes business ready homes that fulfill certain requirements for home type, amenities, check-in, reviews, responsiveness, and host commitment. This feature is designed especially for travel managers of the companies to provide better transparency and more accurate reporting for their company.

Challenges

Trust

In spite of providing insurance, trust remains the biggest challenge as the community keeps getting bigger with time.

Regulations

Many cities and countries have started bringing new regulations against renting of properties as they are being misused to avoid paying taxes.

Imitators

Local competition is a big threat and since local players understand the culture better, they have a slight advantage. They also have the first-mover advantage if they respond quickly to Airbnb’s expansion.

The Future of Airbnb

Airbnb is a huge company today with presence in almost all the countries. The unique business model of Airbnb has proved to be very strong as people prefer Airbnb over hotels for affordable and comfortable stay in new locations. People get to experience local culture while paying significantly less. Airbnb has used technological innovation to build a platform that connects individuals across the world. It is the largest chain of properties today, without earning a single property. Airbnb’s revenue continues to grow as the bookings keep increasing every day though it charges a minimal service fee.

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Founded in 1997 by Reed Hastings and Marc Rudolph to use the internet to rent movies on DVD, Netflix – the stream your movies and shows online company today outranks cable TV in the US. The company’s subscriber base is so huge that it accounts for more than a third of internet traffic during its peak hours. With these facts and figures about the company, the questions like ‘how does Netflix make money?‘ and ‘what is Netflix’s business model?‘ are sure to arise on your mind. But before moving on to these questions about the business and revenue model of Netflix, let us first discuss Netflix’s operating model.

What is Netflix And How Does It Operate?

Netflix is a streaming content provider that allows subscribers to watch TV shows, movies, documentaries and more on a wide range of Internet-connected devices. The company also provide DVD rental plans where it supplies the shows and movies on DVDs.

This video streaming on demand company operates on a subscription-based model. The users pay for a monthly subscription plan and are given access to stream shows, movies, documentaries and other content available on Netflix in the quality (SD, HD, Ultra HD) they pay for.

Netflix Business Model

Let us look at Netflix’s business model for a clear picture before moving on to answer the question of how does Netflix make money.

Target Audience Of Netflix

Netflix is the world’s leading internet television network with over 100 million members in over 190 countries enjoying more than 125 million hours of TV shows and movies per day. The company’s target market includes males and females between the ages of 17-60 and households with income levels of $30,000 and up. With such huge disparity among the people belonging target group, it can easily be inferred that Netflix segments its users based on psychographics and not on demographics.

In terms of psychographics, users are segmented in 3 basic groups –

1. people who are too busy to go out and shop for movies,
2. people who are frequent renters and movie buffs, and
3. people who want to get the most value for their money.

Value Proposition Of Netflix

Netflix gives you a legal access to a huge movies and TV shows database and the best-personalized suggestion algorithm and a seamless service without the interruption of advertisements. The service is supported on a widest range of devices including PCs, TVs, mobiles, and gaming consoles. One of the differentiating factor of Netflix is that it releases new and exclusive series as full seasons and not one episode at a time which keeps its users hooked.

How Does Netflix Make Money?

The primary source of revenue for Netflix is subscriptions. That is, subscribers pay to access content on Netflix and to get DVDs delivered to them and that is how the company makes money.

The Only Revenue Source Of Netflix – Subscription Fees

The company offers 3 different plans for users based on the streaming quality of the content provided. The plans are –

• Basic – content can be streamed in Standard Definition.
• Standard – content can be streamed in High Definition.
• Premium – content can be streamed in Ultra High Definition.

The costs of these plans differ in different countries.

Similar operating model is adopted for the DVD renting service where the monthly membership fees which depends on the number of Disc out-at-a time and Discs per month. The DVD rental and streaming membership plans are two different services and cannot be clubbed as one.

However, the question of how does Netflix make money cannot be answered without stating the cost of revenue. There are many expenses and expenditures which the company has to incur to get those profits.

Cost Of Revenue

Licencing Cost

In order to stream your favourite shows and movies in a legal environment, Netflix has to bear a cost to licence and acquire content which differs for different content.

Production Cost

Netflix introduced Netflix Originals in 2013 in order to evade licencing costs and as a part of their marketing strategy to produce Netflix exclusive content. These original series involves huge production costs. This huge expenditure on the production of new exclusive content has made Netflix as one of the biggest spenders in media in the category.

Marketing Cost

Netflix isn’t the only content streaming website on the internet. It has to compete with many new and established players like – Amazon Prime, Hulu, Hotstar, etc. which involves a lot of marketing expenditure. Marketing costs primarily include advertising expenses, payments to affiliates and device partners, and the first month fees of every user which comes on board (the first month of every new subscriber is free).

Research And Development Cost

Netflix is a very keen investor in its research and development department. It’s because of this department that it has made it this far and is still leading the market with its subscription-based business model.

Technology and development cost

There are millions of users which stream content on Netflix at a time. To make their experience lag proof and seamless, Netflix has and will keep on partnering with hundreds of ISPs to localize substantial amounts of traffic with Open Connect Appliance embedded deployments. These partnerships involve huge costs.

Technology and development costs also include streaming delivery technology costs, expenses involved in designing application for new devices, and other infrastructural costs.

General and administrative cost

These costs include payroll and other expenses on the human resource of the company, as well as professional and partnership fees related to the administration of the company.

Miscellaneous cost

There are many other miscellaneous costs that are incurred by the company. Some of them are –

• payment processing fees,
• DVD postage cost, and
• amortization of the streaming content library, etc.

Netflix Stats & Facts 2018

• Netflix will spend up to $8 billion on content in 2018.
• The company now has a market capitalisation of more than $100 billion.
• It now has more than 118 million streaming subscribers globally.
• Netflix has its customer base in 190 countries.

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