FAB: A New Model for Enterprise Software

Published April 24, 2024

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New Model

A recent idea I have been thinking about is the possibility of constructing alternate business models in email and martech which make the core product free and better. We have seen this happen in the B2C world but not in the B2B world of enterprise software. I call this FAB, a model which challenges the traditional B2B enterprise software paradigm:

• Free, from paid
• Alternative business models, which help with monetisation for the software vendor
• Better, meaning that the free product offering is superior to the paid solution

“Free” challenges the conventional paid software model. Companies like Google and Facebook have demonstrated the viability of offering core services at no cost in the B2C realm. By leveraging user data and attention, they generate revenue through advertising and other indirect means. This approach can be adapted to B2B, where free offerings could serve as a gateway to a broader ecosystem of services, data insights, and monetisation opportunities.

“Alternative Business Models” are crucial for monetising free offerings. In the B2C sector, models such as freemium, advertising, and value-added services have proven successful. Similarly, in B2B, innovative monetisation strategies could involve tiered service levels, pay-as-you-go features, partnership models where complementary services are bundled, and even data-driven advertising or revenue-sharing models.

“Better” is perhaps the most transformative aspect of FAB. It is the premise that the free product offering must be superior to traditional paid versions. This has been demonstrated in B2C with products like Google Docs, which offers robust, collaborative office-suite functionality at no cost, challenging established players like Microsoft Office. In the B2B realm, this could manifest as free versions of enterprise software that outperform paid alternatives in terms of user experience, functionality, and seamless integration with existing workflows.

The success of FAB in the B2C realm provides valuable lessons for its application in B2B. Key aspects include:

1. User-Centric Design: Free B2C products often focus intensely on user experience, simplifying complex tasks and making technology accessible to a broader audience. This ethos can transform B2B products, making them more intuitive and easier to integrate into existing workflows.
2. Community and Ecosystem: Many B2C models thrive by building a community or ecosystem around their products (e.g., Android’s app ecosystem). For B2B, creating a community of developers, users, and integrators can drive innovation and add value.
3. Data and Insights: B2C companies use data from their free products to refine and enhance their offerings. Similarly, enterprise software products could leverage anonymised usage data to improve performance, user experience, and marketing effectiveness.
4. Innovative Monetisation: B2C has mastered the art of monetising free products through diverse streams, from in-app purchases to data-driven advertising. In B2B, innovative monetisation might involve tiered service levels, usage-based pricing, partnership models where complementary services are bundled, ads, and a percentage of the revenue upside.

To summarise: FAB presents a compelling opportunity for disruption and innovation in the B2B enterprise software market. By embracing the principles of free, alternative business models, and better offerings, companies can challenge traditional paradigms, foster user-centric design, build thriving communities, and unlock new revenue streams while delivering superior value to their customers.

Let’s begin by understanding how E3 and M3 are exemplars of FAB.

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E3

The E3 (Email 3.0) concept represents a transformative approach to email marketing, aiming to solve the challenge of low email open and engagement rates. It introduces the idea of separating the email content (HTML in E1 or AMP in E2) from a content wrapper (E3) that incentivises users to open and interact with emails through interactive elements, gamification, and micro-incentives (Mu).

The key aspects of E3 are:

1. Content Wrapper: E3 acts as a content wrapper around the actual email content (subject and body), working independently to drive opens and engagement. The insight: what marketers are sending is actually an ad which gets ignored by consumers, and thus there is a need for an envelope which persuades consumers to open and read the brand email.
2. Micro-Incentives (Mu): Users earn Mu by performing actions like opening emails, engaging with interactive elements (games, quizzes), and providing data. These rewards create a compelling reason to interact with emails.
3. Interactive Elements: E3 emails incorporate dynamic, engaging footers with games, puzzles, and other interactive content to capture recipients’ attention and encourage interaction. By customising this for individual users (N=1), it helps drive more opens and engagement such that no email is ignored.
4. Action Ads: E3 enables monetisation by allowing brands to include interactive ad formats within emails, facilitating in-email actions like form submissions or payments.
5. Email Media Network: E3 transforms email into an “email media network” where brands can monetize an engaged audience through these interactive ad formats, with revenue sharing between brands and email service providers (ESPs).
6. Monetisation Model: ESPs can move away from a cost per thousand (CPM) model to monetising the engaged traffic through ad revenue sharing, potentially turning email from a cost centre into a revenue generator for brands.

As I wrote: “E3 can work with content which is HTML (E1) or AMP (E2). It is the universal solution to ensuring every email is opened and engaged, thus taking email open rates from 10% to 100%. This is because the E3 packaging is made for the recipient, the person behind the email address. In doing so, E3 also creates a digital media network for monetisation of attention – just like Google and Meta have done. E3 providers can subsidise the cost of sending the email and in fact share ad revenue with brands (list owners), thus turning the traditional cost structure on its head and fostering a new era of monetised engagement, creating a new revenue stream for email senders (brands) and email service providers (ESPs).”

The E3 concept is an excellent example of the FAB (Free, Alternative Business Models, Better) approach:

1. Free: E3 makes the core email product free for brands – from some CPM to “Zero CPM”.
2. Alternative Business Models: E3 introduces an alternative business model for email marketing via an “email media network” that generates revenue through embedded interactive ads (built around 4P: PII, push, in-Place, Payments), and thus democratises access to quality email marketing for brands of all sizes.
3. Better: E3 enhances the email experience by making it more interactive, personalised, and rewarding that drives higher open rates and more actions. Footer AMPlets, which include games, quizzes, and interactive challenges, along with the daily habit of engaging emails sent at consistent times, significantly improving customer delight.

E3 is a win-win for consumers who find something useful in every email and for brands who can now build hotlines with their existing customers and thus reduce their dependence on adtech for customer acquisition and reacquisition. It is an excellent example of the FAB approach in action, particularly in the B2B space, where such innovative models are less common. By offering a free, engaging, and superior user experience, E3 challenges traditional email marketing paradigms and introduces a new way for businesses to connect with their customers. The alternative monetisation strategies within E3 not only benefit ESPs and marketers by creating new revenue opportunities but also enhance the user experience by making emails something to look forward to, rather than just another message (or more correctly, an ad) in the inbox.

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M3

The Martech 3.0 (M3) concept presents a disruptive shift towards making B2C martech solutions free for users while establishing alternative revenue streams to ensure vendor profitability. Martech solutions are typically priced based on MAU (monthly active users) on the web and app. In some cases, there are additional charges for events – the actions performed by users which are captured and processed in real-time. Unlike E3, there is a significant cost the martech vendor has to incur for computation, data storage, and AI models. So, the challenge is much greater to make martech solutions free and superior to their paid counterparts.

In the same way that the advent of a novel email format can catalyse the emergence of E3, the inception of Martech 3.0 (M3) demands a foundational innovation that redefines its landscape. Envision an M3 ecosystem where each customer is mirrored by a digital twin, constructed through the sophisticated amalgamation of AI models and the cutting-edge capabilities of Gen AI. This ‘AI Customer’ is not just a static representation but a dynamic, evolving entity that intuitively adapts to each individual in real-time, predicting the next best actions with unparalleled precision. It embodies the ambition to not just understand but anticipate the needs of every customer, crafting personalised experiences that navigate through every omnichannel touchpoint in the customer journey. The digital twin thus becomes more than just a digital replica; it evolves into a sentient confluence of past interactions, the collective wisdom gleaned from analogous customer behaviours, and a continuous feed of external data integrated into the M3 framework. It is this intricate synthesis that breathes life into the concept of maximising shopper Lifetime Value (LTV), making every customer engagement not just a transaction, but a step towards an ever-deepening relationship. This paradigm shift towards treating each customer as an individual ‘segment of one’ heralds a new era in martech, making M3 a beacon of personalisation and predictive engagement.

To bring digital twins to life requires an ever-evolving mix of human insight and AI models. Most marketing teams are not suited to this kaizen-like demand for continuous improvement. A “Progency” is the answer: a product-led agency which is compensated based on performance and thus has skin in the game to ensure revenue (and margin) maximisation from every shopper. Targeted ads could complement revenues for the M3 vendor.

M3 thus can improve the efficacy of retention programs, reducing AdWaste and improving profit margins. It capitalises on the increasing importance of first-party data and brand-owned channels in the face of data privacy regulations and the phasing out of third-party cookies.

M3 thus becomes an embodiment of the FAB principles. For brands, it provides access to advanced martech tools at no cost, enabling them to focus on creating more personalised and effective marketing campaigns without worrying about software expenses. In fact, M3 can create the single person marketing department of the future! For consumers, a less wasteful and more relevant experience is on offer, thanks to the sophisticated targeting and personalisation capabilities of M3, leading to more meaningful engagements with brands. For martech vendors, a new business model opens up an uncontested marketspace of diverse revenue streams beyond direct software sales, tapping into the lucrative digital advertising market and transaction fees, aligning their success more closely with the marketing outcomes they enable for brands. M3’s FAB focus promises a win-win scenario for brands, customers, and martech vendors by fostering better customer experiences, driving profitability, and unlocking new revenue streams.

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Principles and Checklists

For those enterprise software vendors considering going down the FAB path, here is a distillation into seven key principles:

1. Free Core Offering: Transition from traditional paid models to offering core services or products for free, eliminating financial barriers for users and broadening market accessibility.
2. Innovative Monetisation: Develop innovative, alternative revenue streams that sustain the business without compromising the free user experience. This could involve advertising, transaction fees, premium features, data insights, or strategic partnerships.
3. Better Experience: Enhance the value proposition by ensuring that the free offering is not only comparable but superior to paid alternatives in terms of functionality, user experience, and overall satisfaction.
4. User-Centric Design: Continuously improve the offering with a focus on user needs and preferences, ensuring that the evolution of the product or service remains relevant and valuable to the target audience, driving more engagement and loyalty.
5. Sustainable Scalability: Build scalable business models that can sustain the free offering while ensuring long-term profitability and growth, balancing user acquisition with effective monetisation strategies.
6. Ecosystem Building: Cultivate a thriving ecosystem around the free offering, enabling third-party developers, partners, and complementary services to contribute and generate value.
7. Inbound Magnetism: Through a mix of talks and writings (or even a B2C offering), build awareness and drive inbound at scale to reduce marketing expenses and generate word-of-mouth. For example, in the case of E3, a consumer newsletter can help showcase the new email format.

Here is a checklist for buyers (enterprises) and sellers (software vendors).

For Buyers

1. Evaluate Core Needs vs. Premium Features: Assess which features are essential for operations and which are nice-to-have. This will help in taking full advantage of the free offerings without overpaying for premium features that might not be needed.
2. Understand the Monetisation Model: Get a clear understanding of how the vendor sustains the free model. Ensure that it aligns with privacy policies, data security standards, and overall business ethics. Also remember there is no free lunch!
3. Assess Integration and Scalability: Consider how the software integrates with the existing tech stack and whether it can scale with business needs, ensuring it remains a viable solution for the long-term.
4. Look for a Better User Experience: Prioritise software that offers a superior user experience, facilitating adoption and productivity within the team, thereby maximisng the value of the free offering.
5. Consider Long-Term Viability: Evaluate the vendor’s track record and the sustainability of their business model. Opt for solutions that show promise for long-term stability and ongoing support.

For Sellers

1. Clearly Define the Free vs. Premium Threshold: Establish a clear distinction between what is offered for free and what (if anything) requires payment, ensuring the free offering is compelling enough to attract users.
2. Innovate with Alternative Revenue Streams: Explore and develop creative monetisation strategies that complement the free offering without detracting from the user experience. Digital advertising, with annual spending of $500 billion, is a good opportunity given that half of it is being wasted.
3. Invest in User Experience: Prioritise the design and functionality of the software to make it better than paid alternatives, focusing on ease of use, efficiency, and user satisfaction to drive adoption and retention.
4. Foster a Community and Ecosystem: Build a community around the product to enhance user engagement, provide support, and encourage feedback, while also developing an ecosystem of integrations and partnerships to add value.
5. Communicate Value Alignment: Be transparent about the business model, how data is used, how there is an alignment of KPIs, and how the free offering is maintained. This builds trust and aligns expectations with potential customers.

Summary

In the red ocean of enterprise software, FAB offers a blue ocean for bold vendors looking to stand apart. By providing core services for free, innovating revenue streams, and prioritising superior user experiences, FAB disrupts the status quo. It not only broadens market access but also fosters loyalty and differentiates offerings in a crowded market, offering a win-win for both vendors and buyers in the journey towards value-driven enterprise solutions.

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Business Plan

Using the framework outlined by Lenny Rachitsky, I asked ChatGPT to answer the following questions for both E3 and M3.

• Mission: What are we trying to achieve?
• Vision: What does the world look like when we’ve achieved it?
• Strategy: What’s our plan for achieving it, i.e. what’s our plan to win?
• Goals: How will we measure progress?
• Roadmap: What do we need to build in order to get there?

E3

Mission
To revolutionise the email experience by transforming it from a cost center to a revenue-generating platform, enhancing user engagement through personalized, interactive content.

Vision
A world where every email is an opportunity for engagement and monetization, with users looking forward to opening their inboxes and businesses benefiting from every interaction.

Strategy
Implement the FAB model by offering core email functionalities for free, introducing alternative monetization methods like Action Ads, and continuously improving the user experience with features like AMP, Atomic Rewards, and interactive footers.

Goals

• Achieve near 100% email open rates through engaging content wrappers.
• Substantially increase user interaction with emails, measured by actions taken within emails (clicks, conversions).
• Generate a new revenue stream for businesses through in-email advertisements and premium features.

Roadmap

1. Develop and launch the E3 platform with basic free functionalities.
2. Introduce interactive features like AMP and dynamic footers to enhance engagement.
3. Implement Atomic Rewards to incentivize user interaction.
4. Roll out Action Ads and premium features for monetization.
5. Gather user feedback and continuously iterate on features and user experience.

M3

Mission
To democratize advanced martech solutions by offering them for free to businesses, thereby driving retention and maximizing customer lifetime value through personalized, AI-driven insights.

Vision
A future where businesses of all sizes have access to sophisticated martech tools at no upfront cost, enabling them to deliver seamless, personalized customer experiences across all touchpoints, ultimately driving growth and profitability.

Strategy
Leverage the FAB model by providing basic martech functionalities for free, exploring new revenue channels such as transaction fees and targeted in-app advertising, and ensuring a superior, data-driven user experience with the help of AI-powered digital twins.

Goals

• Significantly increase adoption rates of martech tools among B2C companies.
• Enhance customer retention and repeat purchase rates through personalized marketing strategies.
• Open alternative revenue streams for martech vendors, reducing reliance on traditional subscription models.

Roadmap

1. Launch the M3 platform with core martech capabilities available for free.
2. Integrate AI technologies to create digital twins for hyper-personalized customer interactions.
3. Develop and introduce a new, non-intrusive ad unit for in-app actions.
4. Establish a Progency model for outcome-based transaction fees.
5. Continuously refine the AI model and user experience based on feedback and evolving market needs.