It’s relatively easy to become an internet phenomenon with a large user base when you’re offering something for free, especially if it’s a social interaction tool. Ask Twitter. Or Instagram. But it’s hard to convert users accustomed to a free service into paying customers. You’ll get some, but you won’t get most. Ask Spotify.
That’s why so many internet business models are built on wrapping paid ads around their user base-building free service – and it can be very effective. Ask Google. But there is no guarantee having a massive user base will convert to advertising revenue. Ask Facebook.
In fact, Facebook’s difficulty in converting its user base into revenue shows the challenge faced by social networks as businesses generally: they tend to be entirely dependent on advertising to make them viable. (Yes, I will of course be one of the happiest men alive if we ever get near their current revenue – and, like everyone, we advertise on Facebook too.)
Despite some very high-profile successes using this model, it’s a significant weakness of social networks from a business perspective. Separating the core offering to users from revenue generation creates an either/or scenario for social networks and other ad-dependent platforms: the forced choice between revenue growth and user growth.
Ultimately, like all businesses, online platforms and networks depend on their ability to generate revenue greater than their expenditure to continue, and to grow.
I always wanted to create a business that generated revenue directly, by transacting with users directly. I like offering users something they want so much they’ll give me their money to have it.
It’s a tough path. You need to have a product or set of products that users want so much that they hand over their hard-earned cash. Online products become much less attractive when there’s a price attached.
Building a mass user base for a service that requires users to hand over money is difficult, but it can certainly be a model that works. Perhaps eBay is an example.
This is the thing that Groupon, despite recent concerns about their business model, at least deserve some credit for: they rapidly assembled a huge user base with a model that required their users to hand over money in exchange for a product.
It’s a simple-sounding proposition, but one that’s not easy to achieve online, even with a massive advertising spend. While I’m not endorsing their overall model (few would), there are not many internet-only companies that got big fast and generated direct transactions at the same time.
This is something I had to keep front of mind, and in our investors’ minds, as we re-launched our own platform, and as I plan for just how much human and IT infrastructure we’ll need as we grow.
Platforms which require financial interactions with their users grow more slowly than those which provide a service for free. They acquire users steadily rather than exponentially. That’s the trade-off for earning revenue from every user right from the start.
And it means you need to clear a high trust threshold with your users, too. Especially if you’re selling people physical objects, they need to know when they hand over their dollar that the transaction will be handled smoothly, that their financial data is safe, and that their purchase will arrive promptly.
That means you need a more sophisticated back end than you do for an early-stage social network – and for sophisticated here, you can read ‘expensive’.
Choosing the path of transacting with your users directly takes discipline and perfect delivery. You need to accept that you probably won’t explode onto the internet like the next Pinterest.
But, if the core product is good enough, and you learn the right lessons as you grow, you might just become the next Amazon.