Startup companies that offer free services to their users in the hope that an ad-based model will bring enough revenue should reconsider their monetization plans.
The ad-model model takes too long to deliver revenue – building a network of users is a time-consuming business, and, in many cases, roulette (will the users click on the ads, or are they banner blind?). Although ads will always have a role in marketing (putting a brand in front of a customer), the declining success of ad-based campaigns has been documented since 1997 by many analysts.
The only ad-model that still works is textual advertising on search engines (for example Google sponsored results). Including ads by Google on sites might also bring revenue, provided that there is enough traffic – but ads by Google make a startup look cheap (like many MFA sites) and unprofessional.
Take Wikia Search for example (now closed) that tried to compete against Google, but run ads by Google on its result pages – this lowered Wikia Search’s credibility. Later, Google came with a Wikia Search clone branded Google Search Wiki (which is probably a silent agreement between Google and Wikia anyway). This is how startups that don’t carefully plan their roadmap and monetizing model go out of the market, and business.
Not many online users are fond of paid-for services; they rarely opt for a service that doesn’t also offer a free version. Basically any type of online service you may think of already has a free option: free hosting, free music, free movies, free email, free analytics, and so on. While free for the consumers, all these services cost a lot to run and maintain; customer support is almost inexistent – and bad customer relations often destroy a brand.
Startups owners should also consider that users are very selfish: they do not care about the financial needs of a service; they do not care whether these get VC funding. All that the users care about can be summarized in one sentence: “what’s in it for me?”
The users don’t like ads, and they often react negatively to change, for example, when a service changes TOS or tries to implement a new feature that affects user experience in any way – it happened to Twitter, StumbleUpon, digg, etc.
So, if the current ad-models are broken and users do not like paid services, what else is left? This is a difficult question, but not a question without answers. Shozu’s CEO Chris Wade thinks that consumers will pay for applications. The company has an iPhone app that sells hundreds of copies per day at $4.99 per download. Wade is convinced that the users will pay for high-quality apps, but where does this leave companies that are on the Internet for other purposes?
It takes some business intelligence and understanding of what the Web users really want, to come up with a monetization model that works online, while still offering free services.
Dell, for example, has a hardware product that covers a need: for the company it is relatively easy to take a service like Twitter and exploit its marketing potential to the fullest. But, Dell is not a startup, and it definitely does not offer anything for free; however, the marketing model used by this company to boost ROI via social networking is an interesting example.
Twitter, which is already mainstream, can hardly be regarded as a startup now, but their new proposed model of monetization could actually prove very lucrative. The New York Times reports that Twitter plans to open a shopping portal on the site. E-commerce, including links to products and turnkey payment mechanisms will probably be one of the revenue streams for Twitter.
“Twitter would couple e-commerce with advice from other shoppers, an element that most search engines do not offer. Shopping on Twitter could also potentially be useful on mobile phones, on which it is more difficult to surf the Web.”
These are just a few examples to give new startups some ideas on how to plan their monetization model. Of course, there are many other alternatives and possibilities, and we will discuss these in a future article. In the meanwhile, probably the best piece of information in this article was already related in the title: VCs will soon refuse to invest in startups without a solid monetization plan. The next important tip is that current ad-based models can only work for sites with heavy traffic. Statistic click-through is in the 1% range, meaning that 99% of the people seeing an ad will not click on it. So put on your thinking hat, and try to figure out a monetization plan that will persuade potential VCs without negatively effecting the users’ experience on your site.