Business Model Alignment

This involves continuously assessing and adjusting various components of the business model, such as target customer segments, revenue streams, and cost structures, to maintain a cohesive and efficient operation. Proper alignment can lead to improved customer satisfaction, operational efficiency, and long-term profitability, enabling businesses to adapt swiftly to changing market conditions and sustain competitive advantage.

This article builds upon Business Model Evaluation, so I highly recommend reading it first.

Teaching the World to Code

Codecademy is an online platform that teaches individuals to code, with the purpose of giving anyone in the world the opportunity to learn the skills they need to succeed in the 21st century workplace.

The Codecademy co-founders noticed a compelling problem among themselves and other students they were graduating with, and so they set out to build a solution. They were convinced that to become successful they would have to provide their product to as many users as possible at no cost.

The co-founders joined an accelerator program called Y Combinator that assembles a cohort of entrepreneurs and provides them with expert mentorship, resources, and opportunities to get funded. While at this event, they decided to launch their product and were shocked to find tens of thousands of people on the Codecademy website within the first few hours. And, after being featured as number one on Hacker News, the founders watched as the number of people signing up to use their product quickly rose in a few days to more than 200,000.

Codecademy’s initial buzz, its learn-by-doing approach to coding, and user-centric design also attracted investor attention. The startup raised a $2.5 million round of seed funding in October 2011. This funding allowed the team to further improve their marketing and product design for their users with the goal of continuing to grow their user base without having to charge them.

The following campaigns and features helped to fuel Codecademy’s growth: community, marketing, gamification, and referral traffic.

We have talked about the importance of business model alignment. Codecademy is a nice example of what can happen when all elements of the business model are aligned. By choosing not to charge users, they were able to drive adoption ahead of monetization. To reinforce this approach, they built a product that was easy to use and frictionless to sign up and engage. The browser-based interface provided an immediate and obvious benefit to users. Thus, once engagement occurred, the flywheel began to spin. More users led to more content, and more content led to more users.

But here's the big question for Codecademy and other freemium-based business models: at what point do you shift your attention from adoption to monetization? Adoption first is a great strategy, but when do you make that shift? Eventually, to create a profitable, sustainable business, you need to make money. But when and how do you do this without disrupting the experience for your target customers, and negatively impacting their value proposition?

Another decision they made was to focus on non-technical users who do not have a
technical background, but would benefit from learning some coding skills, as opposed to users who would need a robust technical skill set, such as a software engineer. They believed that this non-technical user persona is where he could provide the most value.

A Path to Monetization

Codecademy decided to focus on beginners instead of more experienced programmers, so they had a larger market to go after. And so they made the product incredibly easy to access and understand so that they could get more users, learn from them, clearly define their ideal customer profile and improve their product.

Their decision to hold off on monetization was a strategic move that helped them learn more about how they might achieve their mission of teaching the world to code. When should you push off monetization? What are the characteristics of companies that can execute this strategy effectively?

There are six important criteria that you need to pass:

• Are your network effects strong? If so, perhaps adoption first is justified, as driving more users helps create a more valuable platform.
• Do you have a massive amount of potential target customers? If so, driving adoption will eventually be worth it from a market hare and total value creation standpoint.
• Is your virality and organic demand strong? If so, you don't need to pay for more users once you get the user acquisition flywheel moving.
• Do you have ready access to inexpensive capital? If so, you can raise money to fund the adoption-first strategy before you need to maximize revenue.
• Is your marginal cost of production to service your customers nearly zero? Thus, you can scale in a capital efficient fashion and delay monetization for a while without burning out.
• Do you have an obviously high willingness to pay? If so, then monetization experiments are less of a concern because you are confident that eventually you can charge.

Codecademy had many of these elements. But when it came time to monetize, they faced a similar challenge, like Plastiq. If you make a change to one component, it can risk misalignment across the startup business model.

They began running low on funds, so they started thinking about monetization and designed an experiment to test a potential profit formula for their business model.

They believe that being able to launch a monetizable version of the product was dependent on having built something that had a chief critical mass. And so they were looking for millions of learners to have signed up, to have enabled tons of content to be created by our learners, tons of questions to be created and answers to be created and forum posts where launching monetization wouldn't harm the business and the product as well.

And about two years into the business, they started thinking, it's probably time to start monetizing. It became a perennial topic of conversation at every board meeting. Should they still be free? How much longer should they be free? Is there a point at which they should not be free? Despite discussing it in almost all of those meetings, they never made the concrete decision, like, they need to double down and start monetizing right now. Instead, it was always kind of 5%, 10% of their team's resources were on running these small modernization experiments to figure out what they should eventually double down on.

Early on, they had a lot of inbound from businesses who would say 10, 20 of my employees are learning on Codecademy. Is there a way I can get more of them to learn, or a way that I can buy a package of Codecademy? A lot of those requests were for in-person teaching, so people would say, well, they get it for free online. But can you send someone to my office to start learning with us?

So the product that they tested monetizing was giving Codecademy accounts and kind of enterprise management of those accounts to big companies, as well as supplementing that in some cases with in-person training where folks at those companies would learn online. And then once a week, they'd have someone come in as a trainer and help answer questions and make sure to keep everybody on track, generally, with a directed learning goal, learn HTML, learn CSS, and a target population to do that.

They did a pilot with a couple of early companies and early clients that bought Codecademy to train their employees. They were getting a lot of pull from the market and from companies that were interested in paying them. And they thought they should listen. They focused on building these custom solutions for early clients instead of focusing on building something that was scalable. Because the pull was so strong and people were writing checks and paying more than zero, it was more than their consumer learners were doing at the time. And so they considered how much they should be building in enterprise.

Their enterprise model was a B2B solution focused on special account management for large companies. These companies’ employees would use the existing free content on Codecademy but receive extra support, including weekly in-person training sessions. 

Alignment in Action

After the initial experiment with the enterprise model, they learned that while the customer experience may be good for the employees at the enterprises they were working with, it required too much customization and the profit formula was not efficient enough to allow them to continue to grow.

They built a model at the time that was not scalable. It was learners on Codecademy as well as people in-person learning, but wasn't something that they thought they could replicate and build into a $100 million revenue business that had the types of margins that they wanted, the types of recurring revenue that they wanted, and weren't really native and core to what they were, which is high-margin, scalable technology business.

Early on, they really dedicated a lot of the company to one thing, which was building the consumer product. And then one or two people on the side without engineering resources were building the monetization experiments. And they learned that with 15 or 20 people, it's really difficult to split your focus and to do two separate things at once.

So they doubled down on growing the free side of the business because it was clear that it was more scalable. If they look back at the journey to monetization, it would have been really top of mind much sooner. They were fortunate that they continued to grow their user base for years without really dramatic monetization focus.

And in retrospect, they would have had a certain part of the company really focused on this from very early on, from a year in, a year and a half in with the space to run a really iterative process to figure out what people would pay for and then start to allocate more resources to that as their conviction increased, so after the failure of some of these early experiments, they went back to building the consumer side of the product and focused on that for a while.

In late 2015, with only nine months of cash left in the bank, they started to focus on do-or-die monetization. And they ran a lot more experiments, but they did it in rapid succession. They surveyed their learners as opposed to companies. And they found out that what their learners wanted was more content, extra help, and certification.

Then they launched Codecademy Pro which was their freemium subscription product, which had three main value propositions for learners. The first was unlimited access to content. So they kept their courses free, and they launched new practice content in the form of quizzes and projects. They also launched Immediate Extra Help, so a service they called Advisors at the time. And lastly, they launched certification. So they gave people a piece of paper when they graduated that signified that they had finished a course.

Codecademy today is a thriving community of more than 50 million learners who have taken courses, a successful business with tens of millions of annual revenue. And in early 2022, they were approached by a public company named Skillsoft to acquire Codecademy. In April 2022, they sold Codecademy for $525 million where their team will hopefully continue the work that they're doing under the umbrella of a bigger business, that is the leader in corporate digital learning.

They made a strategic decision to stop focusing on corporate enterprises and training departments. The enterprise customer had different requirements than the company's initial B2C model. And shifting to enterprise would have been a cultural shift for the company, which until that point had been focused on the user experience. Moving to an enterprise sales organization would shift focus away from the end user.

Note that every startup has to follow its own unique path when it comes to target customer selection and business model. For example, focusing on B2B made sense in the Plastiq case because those customers benefited most from its value proposition. Whereas in the case of Codecademy, the individual consumer has a strong willingness to pay because of the impact of learning to code can have on their careers and their earnings power.

The Codecademy business is a very high-quality one. A strong CVP that enables users to upskill, transform their careers, and ultimately earn more money, an efficient go-to-market that allowed the business to scale fast, a technology and operations model that was relatively simple with digital content and attractive scale economies and yet no profit formula. No monetization, no revenue. Were there conditions in place such that they could afford to delay monetization? In retrospect, yes, but only up to a point.

Ultimately, they delayed monetization too long. Perhaps, charging users would have forced the company to grow up and become more commercial and thus more successful faster. A half a billion dollar outcome is nothing to sneeze at, particularly for a company that only raised a total of $80 million in its lifetime. But could it have been even more successful if they had pursued monetization earlier and more aggressively? Perhaps, this is why it's so important that you as a founder, joiner, or investor, know how to identify high-quality startups and know what key questions to ask for each of the business model components.

Wrap Up

The challenge, but also the exciting thing about startups, is that there are so many
different variables and so many different pathways to success. We have to develop our pattern recognition skills to answer these questions:

• How can you design an attractive, compelling startup business model?
• What experiments can you run to achieve product-market fit on your way to scale and success?
• How do you successfully finance your startup to give you the runway to achieve a profitable, sustainable business model?
• How can you do all of this in the context of an evolving startup ecosystem, with all the biases and ethical challenges contained?

In upcoming articles, we will dive into how to design the experiments for each component of your business model to test, learn, scale, and succeed.