I’m not sure I like the ‘Ubiquity first, revenue later strategy. It can definitely work but I fear most of the time it does not. There are really only 3 ways to make money on the web: by selling stuff (like Amazon or Netflix), by taking ‘a cut’ on stuff (like Uber or Airbnb), and by advertising stuff (like Facebook or Google). Of course, your revenues can be a combination of these (like LinkedIn). If you have to revert to advertising only, this may not be the best route to riches unless you can earn a lot from it (by being highly targeted and efficient) and / or by reaching *massive* scale.
Consumers have become so accustomed to the ‘free web’ paradigm that it is hard to reverse the trend. Now there are other and successful business models on the web: membership, micropayments, crowdfunding, freemium / premium, etc. I believe startups should think before sacrificing monetization for ‘virality’. The problem is that you can waste a lot of time and effort with no valid monetization scheme in sight. A lot of startups simply rely on user growth and push the monetization issue to a later time. It’s one thing to amass users when your product is free, but would they pay for it? Is that a good idea? Bear in mind that once it is free, it becomes harder to have users pay later…
If you don’t have a good monetization strategy you may have to resort to advertisement-based revenues. This is hard and ads don’t pay much. “Yeah, but Facebook makes a lot of money from advertisement!” But it has a lot of users too: 1.35 billion, which comes down to yearly revenues of about 8$ per user, or a little less than two lattes at Starbucks. I tried to compile the revenue per user in the table below, although the number of users and the monthly traffic are not perfect metrics. Either you acquire a huge amount of users, either you somehow make your ads worth more by better targeting. Can you target better than Facebook? How much is it worth? Can you monetize these users at a significantly higher level than their cost of acquisition?
I read a great article recently by Ethan Zuckerman, the director of the Center for Civic Media at the MIT Media Lab. In it, he talks about the ad-based business model from which the web has evolved, starting from companies such as Tripod.com. Is this business model sustainable? Are we ready to live with the data gathering and surveillance that come with it? Zuckerman talks about a lecture by Maciej Cegłowski in which he describes investor storytime:
“Investor storytime is when someone pays you to tell them how rich they’ll get when you finally put ads on your site. Pinterest is a site that runs on investor storytime. Most startups run on investor storytime. Investor storytime is not exactly advertising, but it is related to advertising. Think of it as an advertising future, or perhaps the world’s most targeted ad.’’
According to one set of startups post-mortem, the one reason why most startups fail is that they weren’t able to profitably monetize their product. Startups often use the freemium model but they focus their resources on the ‘free’ part. There are many possible business models for the web. Advertisement can be a part of it. But it may be wise not to push the monetization part for later and follow the ‘URL strategy’. Define a business model from the start, implement it, and validate it. Try to earn money as soon as you create value. As Ramli John so brilliantly puts it:
“One of my mentors once told me, “you’re not a real business until you get paid.”
Pre-revenue, your “startup” is just a hobby. If your startup is venture-backed and a registered business but has no paying customer, then it’s just a glorified, well-funded and registered hobby.
Find paying customers as soon as possible. As Henry Ford once said: “It is not the employer who pays the wages. Employers only handle the money. It is the customer who pays the wages.”
No customer. No money. No business.’’