Monday, January 21, 2008

It's all about money

My sons are in to Run DMC. Their affection to date is benign and limited: It's Tricky and My Adidas cap their personal jukeboxes. In the near future they'll acclimate to Grand Master Flash (my first and favorite rap band), and we'll reach a father-son moment of societal dissonance: GMF, in The Message, claims It's all about money, ain't a damn thing funny. I can hear it: Dad, you said money's not important!

Until that day, I spend a lot of time thinking about how companies can make money. 'Tis the purpose of the corporation; the fundamental challenge is creating a business model that can consistently and sustainably make money. The variables for most businesses are limited; for contemporary content/media/Web companies, (to quote Run DMC) it's tricky.

Fred Wilson primes the conversation:

If you are building a media oriented business, particularly one that has low marginal costs, meaning you build it once and the cost to serve an additional customer is negligible, then you have the unique opportunity to focus first and foremost on building your customer base or audience.

Most web apps will be monetized with some kind of media model. Don't think banner ads when I say that. Think of all the various ways that an audience that is paying attention to your service can be paid for by companies and people who want some of that attention.

If the marginal cost to service an additional customer is negligible, then you can wait to monetize. If it's not, then you are going to have to focus on your business model earlier in the life of your business. It's really that simple.

Chris Anderson adds fuel to the discussion:
Both media and most online businesses are based on "software economics", where the cost of creating something of value is relatively high but the marginal cost of distributing it to each consumer is very low. So you can look at the web as the ultimate extension of the media business model to a wide range of other industries.
My brother-in-law Curt is working with a company that creates and sells specialized information. Over the weekend in a cursory brainstorm of a person to help build out the company's consumer business, we scratched the surface of vehicles (models) to monetize information. Our list was terse; Anderson and friends proffer more than two-dozen possibilities:
  • CPM ads ("cost per thousand views"; banner ads online and regular ads in print, TV and radio)
  • CPC ads ("cost per click"; think Google ads)
  • CPT ads ("cost per transaction"; you pay only if the customer brought to you from a media sites becomes a paying customer. Here's an example.)
  • Lead generation (you pay for qualified names of potential customers)
  • Subscription revenues
  • Affiliate revenues (think: Amazon Associates)
  • Rental of subscriber lists
  • Sale of information (selling data about users--aggregate/statistical or individual--to third parties)
  • Licensing of brand (people pay to use a media brand as implied endorsement)
  • Licensing of content (syndication)
  • Getting the users to create something of value for free and applying any of the above to monetize it. (Like Digg or our own Reddit)
  • Upgraded service/content (ed: aka "freemium")
  • Alternate output (pdf; print/print-on-demand; customized Shared Book style; etc.)
  • Custom services/feeds
  • Live events
  • "Souvenirs"/"Merchandise"
  • Co-branded spinoff
  • Cost Per Install (popular with top Facebook apps who can help others get installs)
  • E-commerce (selling stuff directly on your website)
  • Sponsorships (ads of some sort that are sold based on time, not on the number of impressions)
  • Listings (paying a time based amount to list something like a job or real estate on your website)
  • Paid Inclusion (a form of CPC advertising where an advertiser pays to be included in a search result)
  • Streaming Audio Advertising (like radio advertising delivered in the audio stream after a certain amount of audio content has been delivered)
  • Streaming Video Advertising (like streaming audio but in video)
  • API Fees (charging third parties to access your API)
Great list. Returning to home, yesterday my wife procured a new pair of sneakers for our oldest. As he bounced the halls in his shiny Adidas, I awaited a Run DMC impersonation and his standard question: Mommy, how much did they cost? The question did not surface; if it had, we probably would have said, "Scott, don't worry, it's not (all about) money." Unless you're building a business, of course.

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Post-script (23 Jan 08): My friend Redwood, a wonderful journalist and proprietor of an invaluable site, chimes in:
First of all however thank you for enumerating the many ways to monetize a website audience. I am familiar with all of them. And here's the deal - other than creating a premium content product that people will pay for, sort of a virtual newsletter where clientele pay oodles for a few pages of brilliant, unique and strategically valuable information to which they get exclusive access - there is no way to make serious money under the methods described unless your traffic is massive. Bottom line - content online requires traffic, somewhere between 10x and 100x the audience size compared to printed content for the same revenue. And print content is dying. And here's the clincher - there is now an INVERSE relationship between the value of the content, and how much someone with an audience has to pay for it. Analysts at investment banks give away extremely valuable content in order to get their name out and find clients. But the local journalist who reports on events on their community for a local newspaper has to be paid.
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Post-script (03 Feb 08): Caught the tail end of Car Talk on NPR this morning. It reminded me of my dad -- he loved the show, but despised cars -- and this post. Here are a few ways Tom and Ray Magliozzi have created a community to monetize their content through their parody of all things auto:
  1. Radio: Carried on 588 stations with, each week, more than 4.4 million listeners. Revenue: Licensing and sponsorship fees.
  2. Cartalk.com: Advertising, particularly their relationship with cars.com and several affinity companies.
  3. Merchandising: Name it, they sell it ("shameless commerce," they say), including CDs, books, calendars, swag, clothing, etc.
  4. Television: A new animated show on PBS, Click and Clack's As the Wrench Turns.
  5. Speaking appearances and events: These guys are good ... imagine they generated a nice bounty of speaking fees.
  6. Other: I would wager they make a few bucks through licensing their brand, affiliate (click-through and other) relationships, subscriptions, lead generation, and the sale of information (user demographics and the like).
What an institution.

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