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ABSTRACT:
The world is witnessing great revolution on every front. It may be political, social, financial or
the business. Though the game is same, strategies to play is changing all together. So to sustain
and grow in market space, one has to dive in the ocean of opportunity to get valuables out of it.
The terminology of business is also changing and getting expanded from market share to
customer valuations. Business is becoming more customer-centric, customer relationship
oriented and seeking to individual contribution in terms of value.
INTRODUCTION:
Human beings are continuously engaged in some or the other activities to satisfy unlimited
wants. And so, ‘business’ has become an essential part of our modern world. Business being an
economic activity related to relevance of production and distribution of goods and services for
fulfillment of human wants; its traditional approach was ‘profit maximization’. So earlier it was
just a ‘Profit based model’. But with time, business evolves and it starts touching lives of
customers. Customer values are being internalized in an organization making it ‘value based’
rather than only ‘profit based’ one. Also, the world around us is changing. We being an integral
part of ‘VUCA’ world (Volatile, Uncertain, Complex, Ambiguous) to be able to sustain in
market for a long run; customer acquisition, competitive advantages, market share and individual
contribution in corporate world matter a lot. With longevity of business come modules such as
‘cash burn’ and ‘cash earn’. While only one rigid model cannot fulfill the timely demands of
market.
Figure 1: Business and customer
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Cash Earn Burn Vs Cash Burn:
CASH EARN
To be able to understand the dynamics of ever-changing business world; the sole of business that
is its purpose and goals should be given priority.
‘Cash earning’ i.e. Profitability is the primary goal of all business ventures. Without
profitability the business will not survive in the long run. So measuring current and past
profitability and projecting future profitability is very important. Profitability is measured
with income and expenses. Income is money generated from the activities of the
business. Expenses are the cost of resources used up or consumed by the activities of the
business.
A ‘cash earn’ model is a framework for generating revenues. It identifies which
revenue source to pursue, what value to offer, how to price the value, and who pays for
the value. It is a key component of a company's business model. Without a well-defined
profitability model new businesses will more likely to struggle due to costs. By having a
clear revenue model, a business can focus on a target audience, fund development plans
for a product or service, establish marketing plans, begin a line of credit and raise capital.
These revenue models and profitability models are built meticulously, taking care of the
numerous external and internal variables that are important contributors to customers’
value. Customer revenue worth, or profitability, drives important decisions in sales and
marketing, product management, operations and financial functions of the business.
Being nascent risk taker, this approach insists on having a brand image to impress,
generated over a period of time through warehouse and a manufacturing setup (if it is
required) which becomes mandatory. When there are large investments involved and the
breakeven point is a few years down the line then the conventional method requires
sustained growth for 5 - 10 years in the direction outlined by the business plan.
What if there are new opportunities emerging down the line? What if the current ones
begin to diminish? What if market trends shifts in some other direction? All of this makes
the ‘cash earning’ method quite inflexible. And it becomes more inclined towards
‘financial management’ with respect to relationship management.
We need to forget about that 1970s mindset, that the purpose of a business is to maximize
shareholder value (shift of profit maximization to wealth maximization). That's not a
purpose; that's an outcome of creating customers. Being customer-focused and customer-
centric translates to shareholder value.
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CASH BURN
Due to which came an alternative model of ‘cash burn’. Startups in India seem to be
following this path. They burn money to acquire customers, support technology with
money and attention, and pay for the ever-expanding teams. Needless to say, consumer
acquisition has become extremely expensive and inflated advertising and marketing costs
do not help either. As startups eye 200 to 300 percent growth year on year, cash burn has
become the norm. To support this, an example of online video platform You Tube can be
considered (launched in 2005). Within a year, it gained as many as 100 million views per
day. After it was acquired by Google in 2006, it took another year for YouTube to start
advertising and earn revenue from it. Before that, Google was focused on growing its
market and all tools for growth -- from technology to strategy -- were focused on that.
In fact, few or no startup has ever made money within two years of business. Examples of
Paytm, Chumbak etc. Cash burn model can be looked upon by splitting it as; one
“companies where core business is losing money with a negative operating margin. A
business with a negative profit margin often seeks financing through unsecured channels,
such as credit lines and credit cards. Having a negative net profit margin can have a
positive impact on your tax liability. Because your business pays taxes on net profit,
failing to earn a profit entails having no income tax liability. The market has also become
competitive where there are a large number of technology backed services and solutions,
each trying to occupy the coveted market leader position.
Companies with ‘cash burn model’ with much capital on hand have the ability to expand
rapidly, saturate different markets and effectively block out competitors without worrying
about getting into a liquidity crunch. By undercutting prices and heavily investing in its
technology, Uber may suffer losses now but it has competitive future advantage of
combining its business format with driverless vehicles. This strategy only works in
markets with natural monopolies (the largest player captures the entire market). In other
words, if WhatApp starts charging users a non-trial fee, they can easily switch to Viber,
Line, Skype, WeChat, GroupMe etc.
The Freemium: Companies employing a freemium pricing model bet on the fact that
once a consumer starts using their product, they will see enough value in it and upgrade
to a paid, more advanced version of the product at some point. The freemium model
works well in markets with strong network effects because the value of the network
increases for paid users even as you get free users in the system. LinkedIn, for example,
has executed beautifully on the freemium model.
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The Platform: Take Facebook, for example, it connects content creators, content
consumers, advertisers, app developers and third-party sites (FB Connect). Building a
multi-sided platform requires investing in building critical mass for each part of the
network – obtaining users, app developers, and so on.
Not all cash burn problems are money losing, and not all money losing companies have a cash
burn problem. Looking at the definition of cash flows should give you a quick sense of why you
get high cash burn values (and ratios) at some companies. If your company is and has been
losing money or generating very small earnings for an extended period and it sees high growth
potential in the future (and invests accordingly), your cash flows will reflect that reality.
Figure 2: Standard business model
CONCLUSION:
In order to convert a customer need into product, business module serves as a platform. To make
journey of business less dynamic, gaining trust of customer is equally essential. With models like
‘cash burn’ which touches lives of customer and gains trust of customer by providing values first
rather than asking for money, acquires not only market share but also a brand image in the minds
of customer. So the combination of these two modules can be a new way ahead for business
planning. Like Reliance Ltd., with one of its subsidiary Reliance Jio has come up with ‘cash
burn’ model while others are going with ‘profitability model’, balancing liquidity and customers
to expand business across sectors.
