Web 2.0 Revenues: Charge Early, Charge Often

About This Blog

This site is for  entrepreneurs.  A full RSS feed to the articles is available.  Please subscribe so we know you're out there.  If you need more convincing, learn more about the site.

Community

Google+

And, you can find me on Google+

Connect on Twitter

Get Articles By Email

Your email:

Google

Blog Navigator

Navigate By : 
[Article Index]

Questions about startups?

If you have questions about startups, you can find me and a bunch of other startup fanatics on the free Q&A website:

Answers.OnStartups.com

Subscribe to Updates

 

30,000+ subscribers can't all be wrong.  Subscribe to the OnStartups.com RSS feed.

Follow me on LinkedIn

OnStartups

Current Articles | RSS Feed RSS Feed

Web 2.0 Revenues: Charge Early, Charge Often

 


I came across this article on Dead 2.0 this morning:  YCombinator Says YProfit?  Besides the clever title, and I’m a fan of clever titles, I think some of the points were dead-on.  This gave me the needed push to write an article that I’ve been mulling about in my brain for some time now.

Web 2.0 Revenues: Not An Oxymoron

My background is primarily technical.  I’ve been developing commercial software products for all of my professional career.

In the software development world, many of us have discovered the value of the “release early, release often” approach.  This is based on the experience that given the choice between trying to write detailed specs and requirements and then building a product around it (often months or years later), the odds of actual success go up if you can get something out there early, determine what your users have to say and then adjust your product accordingly.  The beauty of this approach is that you end up investing in features that people actually use and care about (and hence complain about).  I’m a big fan of this approach, for one simple reason.  It works.

I think too many Web 2.0 businesses decide to “aggregate users now, worry about making money later”.  With all due respect to Paul Graham, who advocates this to startups (and who I have a lot of respect for), I don’t think this is the right idea in most cases.  Like a software product and it’s features, I would argue that a business model and its execution also needs to be “experimented” with and adjusted.  The sooner you can get your business model “out there” the sooner you can figure out what works and what doesn’t (and do something about it).  

For the same reason you shouldn’t keep your product away from the market for too long, as the feedback is crucial, you should not keep your business model to yourself too long either.  Simply relying on the “we’ll make money on advertising” is not enough.  What kind of advertising will work?  Will you invest in finding individual advertisers – or go with one of the larger platforms?  Do you need something more exclusive – or will one of the large platforms like AdSense work for you?  What’s the CPC/CPM or other metric going to be?  How much traffic will you need (based on your users) to make any kind of money?  The point is that even advertising has its nuances (and this is coming from a layperson that knows almost nothing about advertising-based revenue models).

My advice to Web 2.0 startups:  Charge early, charge often

Don’t let the fear of scaring your early users away (because of things like advertising).  If 95% of your users are not willing to stay on your site if you put ads on it, that should tell you something.  

The most common counter-argument I expect to get is:  “But we need to build up a certain critical mass.  It’s easier/smarter to do this by not charging anything, and not putting any ads up.”  We can then figure out the best way to monetize after we hit this critical mass”.  I’ll concede on that point.  If you’re smart enough to be doing this as a strategy and you have at least some knowledge of how all this works, more power to you.  But, I’m guessing that most Web 2.0 startups are deferring discussions of business models and revenue simply because they’re clueless or it’s convenient to do so and they are working under the misguided belief that it’s not necessary.  It is.  Always has been.

Posted by Dharmesh Shah on Mon, Sep 04, 2006

COMMENTS

I agree with pretty much all that you are saying, but you are only looking at one type of startup. The "we think 80% of people will pay for our product".

I work for a company that makes up a different segment., "we know that 80% of companies will buy our product" bevause it is niche based and very useful.

posted on Monday, September 04, 2006 at 1:10 PM by Chris Jones


Thanks for the advice, we just launched our startup (shameless plug -www.LoudIsRelative) and couldn't decide the right time to start placing ads...

posted on Monday, September 04, 2006 at 1:52 PM by Loud Is Relative


All good points, but what bothers me about the "controversy" around Paul Graham's comment is that it's really putting the emphasis on the wrong thing.

What matters is making a product that someone is willing to pay for (customers, advertisers..). Figuring how they will pay for it is really a much easier problem. That's how I understand Paul Graham's position and it's not the same as saying revenue models don't matter.

posted on Monday, September 04, 2006 at 7:25 PM by cedric


Darmesh--

I felt compelled to comment, because I couldn't agree more with this statement:

"Like a software product and it’s features, I would argue that a business model and its execution also needs to be “experimented” with and adjusted."

For MyPunchbowl, we've spent a lot of time working with potential customers, showing off the product, and adjusting our thinking. One critical point you missed (in my opinion)....whether you implement your business model in the early going is very different from whether you are actually thinking about it and strategizing. For us, it makes sense to wait to implement until we have worked out all of the product issues that would prevent us from actually experimenting with our business model. LIke UI comps, we're testing by showing-- and getting good data that will help us hone our eventual business model.

Great article (again).

- Matt http://www.mypunchbowl.com

posted on Monday, September 04, 2006 at 9:17 PM by Matt Douglas


I agree with cedric's comment, having customers willing to purchase your product is the ultimate litmus test to your long term viability.

However, the significant marketshare that can be achieved when a product is made available for free is not to be ignored. This is the main goal of shareware, and it worked for Doom and Winzip.

Of course it wasn't the shareware model that was the sole reason for the success of these products - one of them addressed the problem of limited capacity of storage media, and the other - became a legend. :)

So no matter how you promote your product it must fill a need/solve a problem that customers will be willing to pay for.

Scott

posted on Monday, September 04, 2006 at 10:27 PM by Scott Carpenter


I agree with the need to have a business model at the back of your head from day 1. I am sure though that in many circumstances applying it from day 1, is not a good idea.
Many startups follow the "grow organically" approach. When you release early, especially an innovative service, you have a lot of adjustments to make. Your users are your consultants giving you feedback and enabling this process. Helping you to focus on the right things and get rid of the wrong ones. Evenmore they are your salesforce, helping to spread the word of your new service. Would it make sense to charge them at this stage? They are probably offering you a greater service than you to them!

posted on Tuesday, September 05, 2006 at 3:45 AM by Harry


I agree with the charge early, charge often vs. the big bang approach.

For a software company, having one key, referenceable, paying client in a vertical you are targeting is critically important. It decreases your need for funding, establishes a beachhead to target other firms in the vertical and as Dharmesh indicates, you build a better product.

The Critical mass issue is important for media companies as large advertisers and agenices need a certain amount of volume in order to make it worth their time. Establishing relationships, analyzing users, performance and billing issues cost time and money. If your site can't deliver enough volume to large advertisers than focus on smaller, niche advertisers until your volume grows.

Alternatively, enter into an agreement with an ad network like Tribal Fusion for banners or Google Adsense or Quigo for contextual CPC ads. You gain the benefit of their sales resources and technology in exchange for a revenue share.

Young media firms need to fully understand their user metrics and ad performance in order to adjust their sites for optimal revenue. Delaying this will just cost more money and time later.

Chances are you already spent the money on Quickbooks-- you might as well use it for revenue and expenses!

posted on Tuesday, September 05, 2006 at 9:28 AM by Mike


Comments have been closed for this article.