OnStartups

Back to Basics: User Generated Revenue As A Business Model

Posted by Dharmesh Shah on January 4, 2007 21 Comments



In 2006, we saw a lot of energy and interest in user generated content.  Many companies like MySpace, Facebook, YouTube and others made the headlines in both traditional media and the blogosphere.  It’s not surprising to see all of the enthusiasm for these companies.  They created billions of dollars of value and made those involved pretty wealthy.

Here’s how I think about the business models behind these types of companies:
  1. Startup develops software
  2. Users use the software for building content and/or community
  3. The user content/community drives traffic (i.e. captures “attention”)
  4. This user attention gets monetized (usually with advertising)
  5. Startup makes money


There’s nothing particularly wrong with this model.  But, I think it has its limits and challenges.  For one, we’re competing for people’s time and attention (of which there is a limited supply).  Also, the model is based on large economies of scale (i.e. the volume of traffic generated has to be really, really large in order to exceed the costs to develop and support the software).  Finally, as software developers, we are faced with balancing the conflict between the end user and the advertiser.  The end user wants to get something done, the advertiser wants to interrupt what is being done and convey a message.  This is a relatively new phenomenon for us software people.  Back in the “good old days”, we developed software for end users exclusively.  There was a symbiotic relationship between end user and software developer.  Both could work together to improve the software and help it solve the users problem better.  Everybody wins.  Now, this “virtuous loop” is interrupted to some degree by the advertiser footing the bill for everything.

As such, I’m going to go out on a limb and say that many software entrepreneurs should avoid the common trend of building software that makes money through “user generated content”.

I’m hoping 2007 is the year of user generated revenue
 
There are lots of good things that come out of the classic “user generated revenue” model:
  1. Your customers/users and you have mostly aligned interests.
  2. You don’t have to bet the farm on getting the required scale before the cash runs out.
  3. Even if you are not a spectacular success, you can at least have a chance at a modest success (which beats a fantastic failure, in my book)
  4. Though users have limited time/attention they have a near infinite number of needs.  Instead of competing for their “attention”, I think it’s more fun to collaborate with them to help solve their problems.
  5. Though paradoxical, It’s easier to keep a paying customer than it is a non-paying user.  
  6. Revenue is the new black.  Don’t knock it till you’ve tried it.  When you deposit your first customer check (or process your first credit card payment), you’ll experience the unique thrill of actually making money.


What do you think?  Have I gone off the deep end?  Is writing software that solves real problems that real people are willing to pay real money for old-fashioned?  Would love to hear your thoughts in the comments.  Until then, I’m going back to work on my user generated revenue startup.