Archive for March, 2007

Rule #10 – If no one will pay for it, it’s worthless.
March 30, 2007

Back in the 90’s one of the foremost principles of economics was on display when auction-site eBay encountered the Beanie Baby phenomenon.  eBay is a fantastic resource for valuing physical goods precisely because it demonstrates a pure economic lesson that beforehand had been hard for many people to quantify on a mass scale:  Things are worth what someone will pay for them.

There were newspaper articles and watertank conversations abound discussing how things like Beanie Babies couldn’t possibly worth $100 (or more) each.  This lesson extended to Pogs, comic books, coins, baseball cards, whatever.  People who didn’t collect or have interest in these niche goods didn’t understand the value of them.  However, a quick look at a random category on eBay did (and still does) demonstrate a lesson that is important to understand as you try and earn a living with a new product or business:  Things are worth exactly what someone will a pay for them.  Conversely, if no one will pay for the good or service, it worthless.

Some of you almost immediately must have thought, “Poppycock.  I don’t pay to use Google, and it’s not worthless!”  Of course not.  Google could charge people to use their search function and their other tools.  They would have fewer users, but there are plenty of people who would pay to use Google and its various services and tools.  As it turns out, their ad serving platform more than offsets the cost of giving you the search engine, GMail, Reader, etc. for free.  In the strictist sense, these products are “loss leaders”, getting you – the customer – through the door so you’ll buy something (click on an ad).   Google’s “product” for sale is AdSense.  And, in perfect economic fashion, keywords are worth exactly what someone will pay for them.  Funny how that worked out, isn’t it?

That said, what is your product worth?  Just as importantly, how will you extract that worth from your customers or clients?  I recently detailed why I think the advertising model is ridiculous, so it’s only fair that I give some ideas on how to generate revenue online that doesn’t include Ad-Sense code.   (Note:  I failed to mention in that prior post that another problem with the ad model is that unless you are doing able to sell the advertising independent of an ad network, you are going to likely lose a substantial cut of profits to Google, Federated Media, whoever.)

 Up Next – Making Money Online Without Using Advertising

Someone explain Twitter to me like I’m in 3rd Grade
March 28, 2007

If you’ve stumbled upon this blog, it’s probably because you saw me posting comments on a blog like Techquila Shots or TechCrunch. As a result, you’ve probably read some of their excellent postings about Odeo founder Evan Williams’s new app, Twitter. If so, I’m glad you are here because I have confession to make: I don’t get it.

It’s not that I don’t understand how Twitter works. I do. I also understand the value of being able to quickly communicate with friends and groups. 15 years ago, very few people had cell phones. Now, it seems that everyone is connected 2 or 3 different ways 24 hours a day. Fair enough.

That said, I guess I’m going to have to come to grips with the fact that either I’m either completely uninteresting or completely uninterested. The fact is, I don’t care if my friend is “Going to get coffee”. If my boss is “Heading to the office” chances are I’ll see him in a few minutes as I do every day. And so on and so forth. Similarly, I neither want nor expect anyone else to care if I’m doing something.

Twitter seems to be useful for two things, neither of which is strikes me as imperative to my life or the lives of anyone I know.

1. Twitter is useful for communicating short bits of info quickly to an individual. So is dialing the phone and speaking to the person. So is IM. So are standard text messages. Does Twitter make short 1-on-1 communication easier? Maybe, although typing on a mobile device is hardly convenient all the time. That said, there are lots of devices on earth that make a task easier, but that doesn’t make them valuable or necessary.

2. Twitter is useful for communicating short bits of info quickly to a group of people. This assumes that there is a group of people interested in what you have to broadcast. Maybe I’m anti-social and a dullard, but I can’t think of 2 people (much less more than that) who care if I am “having coffee” or “heading to work” or whatnot.

To show I’m not entirely close-minded, I do see some future uses such as communicating messages to a group of kids on a ski trip (“Bus leaves for the slopes in 5 minutes”) or organizing a flash mob (“Candidate will be at the courthouse in 10 minutes but is entering on south side. Move demonstration there.”) While there are TONS of services that already do this – from managing contact lists/groups to sending actual messags – Twitter seems to be benefiting from so much press that it would be easy to predict them as a winner in this space.

However, here is where the next problem of many comes in to play: How will Twitter make a dime? Are they going to start charging for messages? (That will go over really well with the early adopters who’ve been enjoying it for free.) Maybe they’ll introduce advertising? (“Pizza on special at Happy Dave’s!” is not the message you probably are looking forward to when sorting through friend’s messages. Or maybe they’ll hope that mobile providers will give them some revenue sharing, although that might be a hard sell since the providers are getting 100% of Twitter-generated revenue right now. Perhaps thir open API will come with the caveat that services piggy-backing their user base will have to pay revenue sharing or fees. That might work, provided someone crafts a service that takes an otherwise unnecessary product and refines it to being a necessary business.

So, if you can perhaps expand upon what I’ve touched on here or, more importantly, what I’ve missed about Twitter, I certainly would appreciate it. And to show that I’m forward thinking and realize I don’t know everything, I went on and registered twittergroups.com and twitmob.com this morning, just in case. 😉

Three Non-Monetary reasons to require payments from users.
March 26, 2007

Since I warned you earlier about the pitfalls of trying to slap ads on your website, it’s only fair that I offer some real ways to generate revenue.  My belief is, and always has been, that if a product is to truly succeed in any marketplace, users need to pay for it.  As such, I thought it prudent to take a bit of a detour from the “Rules” and share a quick snippet on requiring payments.

Financial transactions put the onus on the user to reciprocate the relationship you are trying to create.  It requires that they commit a small, yet very crucial, amount of trust, openness, attention, and time to you.  It requires that they give thoughtful consideration to your product, and decide for themselves if it has real worth to them.  It requires that you be treated more like the butcher then the piece of meat.  Even if the cost is small, the benefits to your site are innumerable if a user has participated in a financial transaction with you.  The following is a list of non-monetary reasons that a financial transaction benefits your site and product.  (The next post will cover how to fit payments in to your application)

1. Requiring payments filters passionate users from casual users.  Casual users are great if you want to brag about page views.  You will soon find, however, that page views aren’t likely to cover hosting costs, much less fill up your coffers with coin.  Folks that have no vested interest in your product will cost you more money then you can imagine as you try and manage inactive accounts and bandwidth spikes.  Having paid users will allow you to more accurately predict how much bandwidth you need, how much support staff you require, where to concentrate your marketing efforts, etc.

2. Requiring payments tells you more about your users then you would get for free.  Some will disagree, saying that people are as likely to lie in profile pages and surveys with a pay service as they are with a free service.  Although my experiences are contrary to that, I’ll grant that there is no iron-clad way to elicit honesty from complete strangers.  However, some very valuable information can easily be taken from pay users even if they are hell bent on filling out their personal information dishonestly.

For starters, credit card payments almost always require an address to complete a transaction.  (Make sure and choose a gateway that requires an address, if for no other reason then as one more level of fraud security.)  Right away, you know where your customer lives or works.   Similarly, if your service is geared towards the enterprise/professional space, required payments exponentially increase the chances of gathering accurate data about your users as many customers will use business/corporate credit cards to make their purchase.  For example, the data harvested from finding out that Joe Smith from widget-maker “ABC Industries” in Toledo, Ohio is paying for your book-keeping application is worth considerably more then learning that “Grim Reaper” from “The Dark Side of the Moon” likes your free check-book balancing service.

Real backend user data helps you with marketing, promotions, sales, and measuring the effectiveness and appeal of what you are doing as a business.   It’s hard to put a price on that.

3.  Requiring payments filters the customers you want from those you do not.  Once the user participates in the initial transaction, you can safely assume they are comfortable with making purchases online.  While this may seem obvious, the benefit is hard to overstate:  while you might lose a customer here and there that can not or will not purchase something online, you are benefiting significantly from the reverse as you build a client/user base willing to spend money on the internet.  Even more, they have already shown a willingness to spend money with YOU, thus laying a groundwork of trust that will benefit you going forward (provided you don’t abuse it).  Inducing the first transaction is the hardest.  After that, as long as your product delivers, the possibilities will be near endless for you to introduce additional revenue streams with existing customers.

Up next, I’ll tackle some of the non-Advertising ways of making real money with your application.

Rule #9 – “Building community” and plastering it with Ads is not a business strategy
March 16, 2007

What could be easier then building some cool web 2.0 product that attracts people far and wide? They come to the site, hang out, conversate, post things, share things, so on and so forth. Then, once they are hooked, you’ll start introducing subtle advertising powered by Google or AdBrite. Maybe, with the right luck along the way you can find advertisers on your own and charge thousands of dollars for their banners to appear. You know, Yahoo!’s front page top banner reportedly goes for a million dollars a day. A MILLION A DAY! With a million a day, you no doubt could build the most awesomest web site ever.

Despite what you might have heard, relying on advertising to power an internet based business is akin to thinking that you can ride a rubber dingy across the Atlantic just because it floats. The fact that advertising in all of its various forms is capable of generating revenue does not mean it is capable of generating all the revenue you need to keep the power on, much less make your company profitable.

In a future post, I’ll offer some alternatives to the ad model, but first we need to understand the problems with the “build community, plug in some ads” strategy:

1. The Monetization of Advertisements is painfully low. If you do not know this lesson yet, you will learn it soon, and it will likely put you in a very bad mood. Advertising is most often measured by CPM, or “Cost per 1,000 impressions.” A pretty standard return for a web-site serving Google Adsense (the most popular and arguably most effective ad-serving platform) is about .10 CPM. In other words, 1 MILLION impressions would net you $100. Free accounting advice: make sure you don’t spend it all in one place. Furthermore, there is a nasty double-edge sword at work against you: if you build a huge community or readers/users/viewers, the chances are great that advertising will be less specified and thus less effective. If you build a niche site that can serve more expensive, well-received ads, you likely won’t have enough users to see it really pay off. So, a million impressions at .10 per thousand or 10,000 impressions at 1.0 per thousand, you still won’t end up very far in the black.

2 . If you’re still reading, take heart! Things are about to get much worse for your ad-supported community. The effectiveness of advertising diminishes over time if your community remains stagnant. In other words, the more someone visits your site, the less likely they are to continue clicking on the advertising that is provided to them. After a while, they may well become “blind” to the advertising on the page in the same way that people instinctively channel-surf or get up to get something to drink when a commercial break comes on television. This presents a problem no matter how you shape it. If Google Adsense ads never get clicked on, you won’t earn a dime. If you have paid advertisers and can’t demonstrate that their ads are making an impression, they’ll quit advertising on your site.

Some of the most trafficed websites on the internet – Facebook, digg – reportedly find themselves struggling to monetize their user base through advertising. The point is that having lots of users is no guarantee that they will respond to advertisements.

Can a website become profitable – VERY profitable – via advertisements alone? Absolutely. Sites like TechCrunch reportedly garner close to 5 digit prices for a month’s advertisement in the sidebar. Other sites no doubt have found money in advertising. That said, these example are few and far between and thinking you’ll some how buck the trend of thousands upon thousands upon thousands of sites that have failed with the ad model is naive. Yes, there are exceptions to the rule. Just don’t forget “the rule” got to be “the rule” for a reason.