Friday, November 17, 2006

Monetizing the Consumer Web

I love the consumer web, I think there are real problems to be solved for consumers, but lot of good ideas stopped short of becoming businesses or got washed away with the net bust in 2001.

I am happy to see the energy of new entrepreneurs, many new and young, with no history or rather baggage of the past, which is the beauty of the startup world.

Even climbing on the shoulders of fallen giants gives a better vantage point over standing alone. So, heres my take on lessons learnt from the past about consumer web monetizing that startups today need to build upon.

1. Consumers are spoilt, they like stuff on the web for free. More important, consumers have become skeptics to understand that nothing is really free. They read about stories of young college graduates drop-out and build companies which they sell for millions (atleast on paper) within 2 years. Sure, there are that band of entrepreneurs who startup to exit, not exactly to build a viable business. This impacts consumer behavior on the web when they look at any new startup.

2. I find new consumer companies follow one of three paths today:
a) Its about building a community, with no idea about monetization. Some dream to get ad revenue eventually.
b) It has a core product for free with added features available for a monthly subscription usally in the order of $10 to $40.
c) Mostly content sites offer free previews and offer the content as a DVD or download, for a purchase from an online store anywhere from $1.99 to $10

I met Simon Clay Michael of Isabont, the career management site for consumers y'day at Boston Startup Meetup Dinner. He is very passionate about helping the job seeker manage job search across different sources of jobs with a CRM like system.

Isabont offers a free service with advanced features available for a monthly subscription and has a following of people who have paid a subscription fee. This was a viable model in web 1.0, but I am seriously convinced it does not make economic sense today. But Isabont has compelling value to its consumers which can be monetized by getting revenues from some other party interested in the same consumers.

Sites that offer everything for free, when offering a really cool product or a compelling value to a specific segment draws a decent community. When you see a site offers value for a fee, the American consumer who is trained everyday to shop for value, tends to shop for comparables and only a small percentage of users very passionate to the site's ideals signup. Even then there is no loyalty for long, so it cannot grow into an economically viable business.

Agreed, today the cost of hosting such a site is very minimum, software is virtually free, so many consumer sites claim to breakeven fast. They do not include the opportunity cost of their people's times.

I believe that the last phase of the web brought ephoria with everyone who was getting online and finding the beauty of the web believing that everyone else was online and would change behaviour to buy all products and services online. It scares me to see such a ephoria back with social networking sites started by young founders who believe the whole world is like them.

The businesses who has solid fundamental values with capital to sustain them during the recession survived. Sadly, many of them morphed out of consumer play into new products to survive.

Main street America, and all the S&P 500 was built one brick at a time, bringing one customer at a time. They survived past the Internet crash, they did close down their over optimistic Internet ventures.

I'd categorize the successful businesses of the web into:

1.Ecommerce (like Amazson), where the net access added clear value over going to stores, with the added ingenuity of Amazon to tempt the user with clean merchandising of all kinds of wares past the initial books they started. Lets not forget the New York Times full page Ads Amazon spent to build brand and ean eyeballs. That era is over, but they've planted ecommerce success on the web.

2. Auctions (like Ebay), essentially ecommerce of smaller scale, among people selling their own wares. There are a whole sleuth of players offering exchange of products on the web. Ebay behaved like a clear merchant and said,I am the middleman, I take my cut and hence they are here to stay.

3. Media (Google)/Content (Google, AOL, CNET etc) play, after they have gained eyeballs, from building brand, purchasing eyeballs from otehr players all are vying for the ad budget of a set of companies.

My advice to the new consumer web companies is to accept the reality of businesses who have built their loyal customer base and go up the food chain and find companies who can use your site technology as a co-branded hosted play to add value to the same base of consumers you are targeting. This is a win-win because you get to stitch your company into the web ecosystem, get the eye-balls and generate a recurring revenue stream while the other company gets to generate more revenue and built loyalty from the same base of users.

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