Currently most institutional Web 2.0 investors still seem to think of advertising as the key revenue driver for any type of web-project. Considering the advertising market being a rather volatile one, to me this still seems to be a quite strange move for someone basically caring for someone else’s money to multiply in foreseeable ways.
So what to do, if you are about to start a web business and going the vc-funded, giving-it-all-away-for-free, over-hyped, profit-through-exit way is not an option to you ?
Chris Shipley and Jens Kunath discussed the need of alternative approaches to generate money from the companies’ business on their blogs these days.
But, as you can see from the comments they got on these posts, there are not too many people agreeing with them, that enough web users would be willing to pay for an online service.
Scenarios are, there would always either be a well-funded competitor giving it all away for free or the service would likely start cannibalizing itself by offering a great share of its value for free in order to attract more ‘future’ paying customers to the particular site.
As we should probably ignore the IMHO foolish aspect of the latter approach for a second – what else than giving away your product for free to all and trying to sell it to some at the same time may drive people crazy enough to consider paying for an online service ?
Subscription or sponsoring have not really been powering the big success stories these days…. Revenue sharing has been huge with eBay or Google and also taken grip with German companies like my current employer Spreadshirt or (more recently) laying the foundation for the success for the physical-media sharers at Hitflip. Though it needs a huge number of customers to provide a steady flow of income for the service provider.
When considering various business models for SemaWorx I’ve come up with the following (admittedly quite manageably sized) list of approaches on how to get people to pay real money for an online service and especially to provide a reliably contnuous cashflow for the venture itself:
1. Sponsorship of Membering (though not exclusively… ;-))
Ever visited a website living (either in part or even entirely) from Sponsoring (where I will leave out common keyword adversing) ? Usually a variety of more or less well known firms offers discounts on their products inside a dedicated section of the site.
Did you ever take them on such an offer ?
Many of these are quite typical examples of advertisers and platform operators thinking way more of their own comfort, rather than providing additional benefit for their customers:
Wrong target audience
Does anyone log-in to a business networking portal (like e.g. LinkedIn or XING) in order to rent a holiday car ?
Seemingly crooked offerings
Is a 10% discount on rental car fees a ‘gain’ for a German business network’s members, if the competition advertises a 30% rebate to any Automobile Club member (the vast majority of German car drivers) ?
Ridiculous fine print
You all know these from your mobile operator’s € 0.0x offerings: The advertised product is astonishingly cheap, but the catch is, it is only available in combination with expensive services or warranty trade-offs.
Cheap, aggressive messaging
Undoubtedly the infamous ‘You Won It All!!’-fake advertising banners probably won’t support you building a reputation among business people as well…
This is just plain WYSIWWPTSY.
So how can sponsoring on a Web 2.0 platform be successful, if everything is being customized or self-adjusts to the users needs, only the business model unfortunately doesn’t ?
Sponsoring for online services needs to be directly related not only to the target group and their oucomes, but also to the company it finances and the business relationship it has with its customers.
Companies living on sponsors’ wallets should avoid backers providing no value to their target groups as these on the other hand won’t deliver the expected returns to the financiers, if they are disappointed or even annoyed by their offerings. The additional value delivered needs to be immediately obvious to the particular online services’ customers. What does it help e.g. being Premium in a so-called Social Network, when the ‘average’ user get’s the same offerings !??
Good examples on the opposite for outcome-related privileges provided by sponsors may be free welcome snacks or a "special treatment" upgrade for hotel chains, shorter check-in intervals for airlines and last not least sponsored premium memberships for the corresponding online services.
Mostly any kind of cross-subsidized offerings as described in Chris Anderson‘s editorial essay in WIRED perfectly fits in here as well.
2. Be Your Own (Cashflow-)Bank
The Fuggers did it. The Mafia did it. And, of course eBay did. And most recently they did it as well: Setting up an own payment infrastructure, that is.
Isn’t that cool: You own the money, before you own it !
Simply do it like the big Casinos have been doing it all the time — let yout users cash-in the money even before they have actually spent it. This very cleverly camouflaged version of pre-payment is the method to secure your cashflow. Call your virtual currency 'Game Dollars', 'Flips', whatever you like — or simply leave the bucks named €uros or Dollars.
It’s just important, your company is trustworthy enough to make your users pay-in early and (hopefully) not wanting to be paid out again – at least not until your cashflow has grown to some reliable steadiness. And, of course, you will also need to keep an eye on the inflation of your lit(t)erally self-mad(e) richness…
3. Create Value-Sharing Communities
The porns did it first ! If you are a lonesome man, admit it: You have noticed these eye-catchers on your lonely, nightly roundtrips on the web. The 'Gold Card' networks promoting flat-rate access an often quite huge set of porn portals (obviously equally often run by one and the same person…) spreading across red light advert-farms everywhere – always trying to lure your credit card details into their databases for 'later' deployment, while promising a lot of instant fresh flesh in return.
May their concept occasionally be lewd — the promoted business model isn’t so at all.
On the web it’s currently a bit like back in the early days of loyalty cards; you needed to keep a separate one for every shop or store causing your wallets and, yes, occasionally even your pockets wear out faster then they were used to before.
But it needed some both wise and influential store-managers to recognize the dilemma and come up with one card to pay them all: Welcome to the first credit card.
Even though the need for standardization nowadays is a wide-spread word on the net, talk lacks a lot of action as mostly all existing approaches have either security leaks or require at least a minor degree in information technology to be used.
Greed at upstart young ventures (originally out to provide reasonable solutions to the issue) and big corporation trying to prevent establishing an open system in favour of their proprietary solutions have each had their share that we are to re-sign all payment and delivery details with every damned vendor we are going to do business with over the web.
If anyone of you can come up with a proper solution to this, please drop me a hint and I will be proud to be one of the first to join.
4. Franchising ?
"That’s for the big guys only…", is what reportedly Fred DeLuca throught either, back in the early days of one of what has become one of the worlds biggest franchise food-chains: Subway.
Especially being a young company one cannot be everywhere in the world out there and much less finance rapid growth from a just freshly inflamed cashflow.
Why not let this be financed by other people’s businesses who are already in the market, providing an entire bunch of customers waiting to be served by your product and, in return, leaving the franchisees their share of the earnings while keeping to what you can do best: Care about, develop and improve your product.
This may be one of the few ways for truly rapid expansion without taking money from investors or being a millionaire yourself in advance.
5. Product Placement
And finally, for those who really dare to jump onto the advertising bandwagon, what about the still rarely deployed flavour of product placement ?
Selling computer games ? Shoot the advertisers’ product to dust. That guy is selling food ? Throw it at your mates ! Selling trips to Florida ? Create them a baggage-packing game. Let them name it !
Hopefully my guesses could spark your own thoughts on how to make reliable money from your own Web 2.0 app. Any ideas, critics or suggestion I missed ? Leave me a note in this article’s comments and I will be happy to start exploring any new approach.