Rethinking Business Models for SMS Based Services
Submitted by John Boxall on March 3, 2007 - 12:35am.
World wide text messaging revenues for 2005 are estimated to be a cool 75 billion USD. To put that in perspective, if text messaging was a country, it would have the 65th highest GDP in the world (sorry Syria). And while we are still waiting for the 2006 numbers to roll in, I'm going to use my amazing powers of deductive reasoning to predict they will be similarly outrageous. Even mobile challenged Canadians are catching on, sending over one million text messages a day. With so much money trading hands over SMS in Canada, is it possible to construct a self-sustaining business model based purely on providing SMS based services?
SMS business begins with a Common Short Code (shortcode). In Canada, shortcodes are five or six digit phone numbers to which text messages can be sent. When a shortcode receives a text message it generates a custom reply based on the message received. This is an SMS based service. To realize revenue, SMS services can choose to between two pricing models, standard or premium. Standard messages charge customers only the base text message price set by their telecommunications carrier. This money goes directly to the carrier. None of it is seen by the SMS service provider. Alternatively, the SMS service providers can choose to can charge customers for premium messages. This means in addition to being charged the standard text message fee, users are billed an additional amount for premium content. In Canada, this fee can range anywhere for $0.15 to $5.00. The SMS service provider receives a portion of this revenue while the rest is again taken by the carrier. To see any direct revenue per message, an SMS service provider must choose to charge a premium price per message. For a generation weaned on free Internet content, charging a premium rate for text messaging is akin to jumping out a high flying plane with a backpack full of bricks.
The fundamental problem with premium messages is that the average person cannot justify the cost anything greater than the standard messaging rate for a 160 character text message. The result of this conclusion was a pathetic first run of SMS based services focused on providing cheap, weak content (think jokes, horoscopes and sports scores) for a hugely inflated price, hoping to attract enough uninformed customers to realize a profit. After novelty of SMS based services wore off customers quickly deserted these services, weary of being ripped off again.
To be successful, the next generation of text messaging services must be provided at a common, transparent price point to consumers. This means opting for the standard priced message and consequently realizing no direct revenue per message. As each SMS also costs the SMS service provider a fee, this presents a difficult paradox for operating a self-sustaining SMS service. The Internet has evolved into a complex ad supported business model. Is the same model feasible for text messaging? As a medium, text messaging is inherently limited not only by the nature of the message but also its the size and cost to deliver. Whether location based information can be leveraged to add value to SMS marketing remains to be seen.
I believe the key to establishing a self-sustaining SMS based service will be to chase message quantity by providing standard priced messages and realizing revenue on razor marketing profits. Under this model, even a million message market will only support a small number of dedicated SMS based business. SMS's simplicity and timelessness are amazingly powerful and currently unmatched by any other service in Canada. Balancing the strengths and weakness of text messaging to create an SMS service is undoubtedly a challenge, but also an amazing opportunity.
-jb
SMS business begins with a Common Short Code (shortcode). In Canada, shortcodes are five or six digit phone numbers to which text messages can be sent. When a shortcode receives a text message it generates a custom reply based on the message received. This is an SMS based service. To realize revenue, SMS services can choose to between two pricing models, standard or premium. Standard messages charge customers only the base text message price set by their telecommunications carrier. This money goes directly to the carrier. None of it is seen by the SMS service provider. Alternatively, the SMS service providers can choose to can charge customers for premium messages. This means in addition to being charged the standard text message fee, users are billed an additional amount for premium content. In Canada, this fee can range anywhere for $0.15 to $5.00. The SMS service provider receives a portion of this revenue while the rest is again taken by the carrier. To see any direct revenue per message, an SMS service provider must choose to charge a premium price per message. For a generation weaned on free Internet content, charging a premium rate for text messaging is akin to jumping out a high flying plane with a backpack full of bricks.
The fundamental problem with premium messages is that the average person cannot justify the cost anything greater than the standard messaging rate for a 160 character text message. The result of this conclusion was a pathetic first run of SMS based services focused on providing cheap, weak content (think jokes, horoscopes and sports scores) for a hugely inflated price, hoping to attract enough uninformed customers to realize a profit. After novelty of SMS based services wore off customers quickly deserted these services, weary of being ripped off again.
To be successful, the next generation of text messaging services must be provided at a common, transparent price point to consumers. This means opting for the standard priced message and consequently realizing no direct revenue per message. As each SMS also costs the SMS service provider a fee, this presents a difficult paradox for operating a self-sustaining SMS service. The Internet has evolved into a complex ad supported business model. Is the same model feasible for text messaging? As a medium, text messaging is inherently limited not only by the nature of the message but also its the size and cost to deliver. Whether location based information can be leveraged to add value to SMS marketing remains to be seen.
I believe the key to establishing a self-sustaining SMS based service will be to chase message quantity by providing standard priced messages and realizing revenue on razor marketing profits. Under this model, even a million message market will only support a small number of dedicated SMS based business. SMS's simplicity and timelessness are amazingly powerful and currently unmatched by any other service in Canada. Balancing the strengths and weakness of text messaging to create an SMS service is undoubtedly a challenge, but also an amazing opportunity.
-jb
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