Google is a search engine we use everyday of our lives. But did you know that Google founders Larry Page and Sergey Brin were finding it difficult initially to come up with a business model for the website as it gained in popularity?

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John Mullins, an associate professor at London Business School and most recently the co-author of Getting to Plan B: Breaking Through To a Better Business Model, tells DNA how Google tweaked its business model during its initial days to become the highly profitable company that it is today. Excerpts:

Why does the original plan of an entrepreneur, or Plan A as you call it, normally not work?There is a very funny British humourist called Ali G. He once did a very funny video segment about the idea of a glove that you would wear when you eat ice-cream in a cone. You and I might think that is a silly idea. But he said that it will keep your hands warm while you are eating ice-cream. The ice-cream cannot drip on your hands. And he was arguing that dripping ice-cream is a really serious customer problem.

Many entrepreneurs find that their idea seems just as silly to somebody else as Ali G’s problem of dripping ice-cream. So if we don’t find a way to stand back from the idea and get some real market data about that idea and understand why it really will or won’t work, we just go off happily assuming that it will.

Where does this belief come from?This belief in Plan A comes from the inherent optimism of entrepreneurs, which comes from the natural human excitement we have when we have an idea that is ours. And we don’t sometimes step back from the idea and look at it objectively or more rigorously to ask a different question, why won’t this work? And if we fail to ask that question, we are going to believe that it works, even though there might be some obvious reasons why it won’t.

Can you give us an example? The Google story is a fascinating story and it’s actually a good example of what we are talking about. Google began with Larry Page and Sergey Brin, two PhD students at Stanford. They were working on search technology and they thought you could build a better search engine than the ones that existed. So they got a sort of semi-finished version of that built and they put it up on some servers and said, well let’s see if people use it and see how it works and then we will learn from that. Well, people liked it a lot and started flocking from the other search engines that were already there to Google because it gave you more relevant results.

And why was that?Because the algorithm Sergey and Larry had developed was better. So, as people began to flock to the Google search engine, the PhD students had to buy more servers to carry this additional capacity. Of course they had some PhD grants that could fund some of the cost of doing this. Then they had to buy even more servers. It was getting expensive. So they raised a little bit of capital. And thought, maybe we got to figure out how somebody is going to pay us for something. They did not want customers to pay for search because the minute the search was paid for they thought it would be biased and fraught with not the best results. So they said, who would pay for better search? Maybe the other portals would pay because they have lots of web traffic and that needs to search. So maybe they would license our better search engine and let their users use it, and they would pay. So that was Plan B. Plan A had no revenue model at all. Plan B said, well let’s license this to portals.

What happened once they approached other portals?They went to several portals and tried to get licence fees for it, but they could not get any meaningful money out of the portals. So Plan B did not really work either. Meanwhile, traffic on Google kept growing but there was really no money coming in. So they said maybe we need a Plan C? How could we find somebody else to pay?

In Plan C they actually stole from a company called Overture in South California. Sergey and Larry were sitting in Northern California. Overture was another search engine that had a different kind of business model. They also had a different search engine that wasn’t nearly as good as Google’s. But they had an interesting idea.

What was the idea that Overture had?They said we will have objective research, we will also allow advertisers. So when somebody is looking for a tennis racket, we will allow sports goods companies to place an ad so that person can see it. Overture’s genius was they separated the two. So they kept the objectivity of the search, but on the other half of the page they said, here are the paid results. And you the user click on our objective links, and if you want to click on our paid link, you can do that too. And of course that’s where they got some revenue.

And Google copied it?Google saw that model and said, oh let’s steal that model. So that’s what they did. Now, that is not exactly a rocket science idea. It’s just to put objective search on one side of the page and paid search on the other side. And yet that simple idea was stolen from Overture — and they had to pay Overture, they got sued, but they settled. That simple idea became a business model that would actually work. So that was Plan C.

Very interestingly, where Google now makes half of its money is not in on its paid search, but it’s on placing ads on other websites and monetising that traffic in the same way. So Google’s really is on Plan D. And they have all these other things. They have Google Maps, chat and Google everything, some of them will turn into revenues as well.

One of the most interesting parts of your book is when you write about there being 36 basic literary plots in movies. What is it that you are trying to suggest there?It’s fascinating. We didn’t do the research on the movies. Somebody else did that research. But they looked at all the movie plots and said there are these 36 plots that have existed. And every new movie is some mix and match combination of plots that have gone before. Now in India I would argue that there are far fewer than 36 plots. Right. So how many?

Three plots… The point is interesting and what it means for entrepreneurs is that they don’t have to so inwardly look at their own idea. Somebody has probably done something before, which in some ways is like what you want to do. And if you can find that somebody and copy parts of what they do, that would give you some confidence that at least those parts are going to work because, after all, they worked for the other guy before.

It will also give you some of the numbers you need. One of the really tough things of entrepreneurship is trying to figure out if, at the end of the day, the economics is going to work. Are you going to have enough cash coming in to cover the cash that’s going to go out?

You can look at these other examples, other movies — in our setting it is other businesses — that have done something like you are going to do. From there you can borrow numbers, you can borrow costs, you can borrow ideas, and those will reduce some of the apparent inherent uncertainty in the new venture.Do they give you perfect predictability? Of course not. But they can reduce the uncertainty. So that’s where the parallel is with these movies.

Can you give us an example? Pantaloon is a great example. It saw the rapidly growing middle class in India and said, there is a need to organise the retail sector in India and perhaps we should be the people to do that. But of course there was very little large-scale organised retail in India at that time. So how do you know it’s going to work? Well you don’t right. You go study how organised retailing works in other countries — Marks and Spencer in the UK, Wal-Mart in the US. And you can copy those models, at least in parts. You might not copy it exactly and pick it up out of North Dakota in the US and set it down in India. But you can copy parts of it that you think will improve your model here. And that’s what Kishore Biyani did.

I think what’s most interesting about what Biyani did is he didn’t copy it exactly, and he was very willing to experiment when he copied. So, for the very first stores, he copied more than just the backend supply chain things from Wal-Mart, where Wal-Mart buys directly from the producer rather through the middleman that raises their cost. He copied the front end as well. A very neat clean, organised store, wide-aisles and all that kind of stuff. What he discovered was that Indian consumers were not accustomed to that. Surprise, surprise. They were accustomed to the bazaars and the more chaotic shopping environment.

So what did he do?He actually had to comeback and introduce some clutter into the stores, to make it more familiar to Indian consumers. And, to this day, what Biyani does is, when he or his team get ideas for new retail concepts, they test them. They say, let’s do a little experiment. Let’s put that in one of our Pantaloon stores. Or let’s open a small store in a mall to see if it works to test this new idea. If it works, great. If it doesn’t, we close down the test and we haven’t lost a lot of money.

So total copy-pasting of a model doesn’t work?There are lots of successful businesses all over the world and people in one place can go observe that, pick it up and tweak it and use it. When Howard Schulz of Starbucks went and took a vacation in Italy and saw the coffee bar culture there, he came back to Seattle, where he was working for Starbucks, and said, gee we could change the stores we have — stores that are selling really good roasted coffee for consumers to take home and brew at home — into coffee bars. He didn’t copy the coffee bar concept from Italy exactly. For example, in many coffee bars in Italy you can get coffee, but you can also get alcohol. But there is no alcohol in Starbucks. They just took the coffee part of the coffee bar culture as well as the kind of community experience. So, you cannot pick up an idea and copy it exactly, you have to figure out how you will change it to meet the needs of your consumers.

You talk about gross margin nirvana in your book. What is that?Gross margin is difference between the price at which you sell something and what it costs you to sell something, not counting your overheads. Gross margin nirvana is having gross margins of 100% i.e. to sell something that cost you nothing to produce. It is like a little kid going to the beach with some jars, scooping up the sand and selling it to tourists for Rs 100. It costs him nothing for the sand, its Juhu beach sand in a little jar, and he can sell it to a tourist for something.

Can you give us an example? eBay is a good example. Their genius was how they set up the system. They thought there was an opportunity to use the web to bring buyers and sellers together because there was already a very large market of people running classified advertisements for things they wanted to sell that were used and that they had. How do you do that? The way it used to work was, you run a classified ad in the newspaper and maybe you would find a customer. Pierre Omidyar, the guy who founded eBay, said maybe we could be more efficient here and use the web to organise the market place. It turned out there was another web-based business called Onsale doing this. It sought to ensure that the things bought and sold were of good quality. So had a warehouse where they clean the stuff, checked it and then shipped it on.

But that would have cost a lot of money?Yeah that cost a lot of money. So there gross margins were maybe 10% at best. eBay said, what if we do this without a warehouse. Could we build some kind of web-based system to ensure that there is enough trust, that the buyer would know that, even though we have never looked at the goods, there is a system built in to ensure that there will be trust and that the goods you receive, Mr Buyer, are actually goods that are working. They put in place customer feedback systems so that, if they were fraudulent sellers, other buyers could warn, and that would weed out any bad seller from the system. And because now they did not need any warehouse they didn’t have all those costs. eBay’s only cost is to facilitate a transaction between you and me. You want to sell your kids’ bicycle because they have outgrown it and I want to buy it because it’s the right size bike for my kids. eBay’s only cost is to host that ad on their website, which costs practically nothing. And to push the electrons back and forth when we communicate with each other in the auction and close the sale. eBay’s costs are practically nothing and of course they take a little money from the seller when he lists it and from the buyer-seller transaction when the deal is closed. The cost of that sale is pretty close to zero for eBay.

What kind of gross margins do they have?Nearly a 100%. There is another very interesting gross-margin model that we talk about in the book. It’s a company called Shanda in China, an online multiplayer game company. They used to charge their Chinese consumers to play the game. So you go to an internet cafe in Beijing or Shanghai and you would sit down on a terminal and you would pay a scratch or something to play the game. Well, they said, what if we could make the game free to play. Maybe we will get lots more consumers playing. But how can we get the revenues? So, instead of charging people to play the game, let’s charge them for the weapons that their avatar uses or for costumes their avatar needs or for other things. All of these things are purely digital in nature. So the cost of selling that digital something to the game player is essentially zero. It’s what they call today virtual goods. It costs virtually nothing to sell that but the consumer is willing to pay something. That’s another example of close to 100% gross margin.