January 2, 2008

It is simple but not easy

There have been quite some discussion about business models, Twitter's specifically, and value of size (number of users) on the blogs of, among others, Allan Stern, Jason Calacanis and Mathew Ingram. It is the "Dollars always follow eyeballs" mantra of former-former Yahoo CEO Tim Koogle vs "You need to bring in revenue now" mantra of the bust all over again.

The basic business models, or rather revenue models, of Internet companies are pretty simple. Either you finance your business with advertising or you have users pay for your service.

However, in the implementation of a specific business model the devil is in the details.

There are big differences between having a model driven by selling high-CPM advertising to large brand advertisers, a model reliant on primarily low-CPM advertising networks and a model selling highly relevant traffic on a CPC basis.

If you charge your users, do you charge for access or for enhancing the experience? Do you charge an upfront membership fee or have a pay-as-you-go system? How can members pay?

Do you have a pure model with just one of these options or a mixed one bringing in different types of revenue?

A large general or social network-type web site with a pretty standard advertising revenue model (a mix of premium and run of site ads from advertising networks) will likely, in the near-term, bring in about $5-10 per year and unique user once the sales operation is up and running (I looked at Fox Interactive, Yahoo, Viacom and Aftonbladet for a ballpark revenue per user figure).

If you are able to increase the value of your visitors to advertisers, for example by having a lot of search activity or good targeting, you could increase revenue per user significantly.

Given revenue per user of $5-10 for social network-esque sites, building companies worth hundreds of millions of dollars, which is what most venture capitalists are aiming for, with less than 5-10 million users is really difficult. Thus the talk about getting to scale before finding the specific implementation of a business model.

If you haven't seeked VC financing, having a site, driven by non-paid for traffic, with a few hundred thousand to a couple of millions users bringing in anything near 10 dollars per user would, of course, make a really nice business.

1 comment:

Peter said...

Thanks, very interesting!