A parable about Wi-Fi monetisation.
Imagine that you are the owner of a bakery. Maybe a small shop in the central business district of a city or town. Let’s assume that it is reasonably successful and that you have sufficient regular customers to sustain your business.
As the business owner, you understand your fixed and variable costs quite easily. You know that your ovens, facilities and staff are capable of making a maximum number of loaves per day and you know what that cost is. You also know the quantity of raw ingredients (water, flour, salt, yeast), and of gas and electricity that are used for each loaf.
In this model you can quite easily work out how much to sell each loaf for, to achieve a specific revenue, or profit. In this scenario let’s pretend that you have done the math, and you sell each loaf of bread you bake for about $1.00 (USD).
OK so now we are setup for this story.
I am a bakery-monetisation vendor. I approach you and tell you not to worry about selling the loaves of bread anymore. I tell you that restaurants give bread away for free, and the time for selling bread has come and gone.
I tell you that the right strategy for your business is to give the loaves of bread away for free. It’s what the people want. It is what they deserve! I propose to you that you should instead stamp adverts on the underside of the loaves of bread, and make your money from advertising instead. Or maybe you can hand out a survey with each loaf, that customers can fill in for external advertisers. Perhaps, I even quip, you could ask people for their contact details and sell those to people who want to message your customers about their products.
The only problem, I tell you, is that we can’t get $1 per ad, completed survey, or set of contact details. We can realistically achieve numbers that are about a hundred times lower. But don’t worry, I tell you, you can make up for it with VOLUME!
If you simply make a hundred times more loaves of bread, you can achieve your original revenue, albeit at a much lower profit.
[At this stage, all of us should be clear on the problem here, but let’s continue with the story.]
You agree to the new scheme. You think passing out free bread to anyone who comes past your shop will improve your brand, and will increase your customers and reach. I install the bread advertising stamping machine, and you start handing out the free loaves of bread.
The first month doesn’t go so well.
First of all, your staff and your ovens have now worked overtime to deliver the necessary quantity of bread to feed the crowds gathered at your shop each day. This has caused a dramatic increase in your costs and will likely mean future upgrades and maintenance to your oven and other facilities are required. The quality of the bread has also dropped dramatically since you are now just trying to serve as many loaves as you possibly can with your existing equipment and staff, instead of a making a product people want to buy.
Second, when it comes to the revenue, it turns out that advertisers have become accustomed to things like print adverts, that have colours and a much higher resolution. They aren’t willing to pay the relatively high rates for on-bread advertising, and they complain that the reach of the ads is also too small. Advertising sales are not going well.
Ultimately, I do find you an advertiser, but the sell-through rate on the ads is only about 50% and I could negotiate only half the original price. So you are now only making 0.5c on the dollar, and only about half of the time when I can find advertisers.
As the bakery owner, you have given away an enormous amount of bread, incurred dramatically higher costs, lost your ability to deliver a quality product and your return on investment has been negative. If you continue in this fashion, you will most likely go bankrupt faster than if you simply closed your storefront, and kept paying your staff.
In the next post, I will talk about another business that gives bread away for free, yet remains profitable, and compare it with our bakery.