Infectious

Ad Based Startups -- Bad Idea?

CPM rates have been falling. That's no surprise. What's been a surprise is the depth of the decline for remnant inventory.

An August study from the Interactive Advertising Bureau and Bain Capital found on average, CPMs on remnant ads ranged from $0.60 to $1.10. In my own recent informal poll, CPMs seemed to have cratered. Untargeted, non-search CPMs are around $0.10-0.15 and targeted ads are around $0.15-0.25.

If you're a startup focused on ad based revenue streams this is shocking news. A quick back of the envelope says it all:

Suppose you have a userbase of 1 mil users that visit your site 5 times a month and view 10 pages per visit. Even if a publisher were to sell 100% of it's inventory at $0.15 CPM the publisher would earn $90k per year in revenue. Maybe enough to pay 1 FTE.

What Factors Determine Your Adverstising CPM Rates?

Andrew Chen wrote a great blog post about 5 Factors that Determine your Advertising CPM Rates...here is the big takeaway:

Sites that are easier to monetize have high click thru rates because people are in a "transactional mode". Characteristics of these sites include an evergreen userbase, focus on a particular category, US based and significant traffic through SEO.

What about More Targeted Ads with Unique Formats?

Remnant inventory has been hit hard but have advertisers fled to quality? The IAB report suggests that better targeted ads have not been as hard hit as remnant ads. This means high quality vertical ad networks like Martini Media (which is an affluent based ad network) may be where some of the flight to quality action ends up. If you're a publisher you'll want to look at vertical ad networks that align with your userbase...they could provide a significant lift.

Ad Based Startup?

With the supply of remnant inventory so high it's hard to see rates increasing in the foreseeable future. So, unless you have a quality userbase that fit's Andrew Chen's mold you really need to look at alternative business models. In a nutshell, most ad based startups are bad ideas in today's market.

Will Freemium save Web 2.0?

Over the next 6 months I expect to see many of the Web 2.0 companies add a freemium model to their product in search of profitability. Will this model be the solution for the group of companies that have been focused on customer acquisition while delaying monetization?

The short answer is that Freemium is just a marketing tactic combined with a subscription business model. The free marketing tactic creates distribution, the premium subscription service makes the money. So, to reach profitability freemium requires a large user base that's inexpensive to support and converts well to a killer set of premium features. For many companies, freemium may not be enough. For these companies, take a lesson from players like Linkedin which have reached profitability by executing on 3+ different lines of business...each of which contribute equally to the bottom line.

Freemium Requires A Large Funnel that Converts Well

In a recent post by Don Dodge, he notes the following conversion rates at various startups employing a freemium model:

"The companies presenting at DealMaker Forum are seeing 1.5% to 5%, with most of them averaging around 3%. Doesn't sound like much but they are reaching tens of thousands of users...sometimes well over 100,000. Do the math. 100,000 free users convert to 3,000 paid users. They pay between $10 to $50 per user per month."

Lets use $10/month as an average premium user fee. For the 3,000 premium users that is $30K a month or $360K per year. A decent revenue stream for companies that typically have 3 to 5 employees. 

But is it enough to reach profitability?

Can You Cover the Cost of the Non-Premium User?

This may sound elementary but freemium models are built on the assumption that premium users cover the costs of the non-premium users. Better do your math because not all web service costs are the same. Rich media streaming and storage add significant costs. 

Building on the 3% conversion rate example above:

If it takes 32 free users to get 1 paying customer, you definitely can't ignore the costs.  If it costs you about $2/year to support a customer, that means the 97,000 non-paying users are costing you $194K per year. That means you're making $166k per year (360K-194K). Barely enough to cover the salaries of the 3-5 folks working on the project.

Explore other Business Models Beyond Freemium

I personally like the freemium model as one type of revenue stream but I'd also be looking at exploring others to reach profitability. Take Linkedin for example. In a recent article in the New York Times, Linkedin discussed 3 of its revenue streams:

"LinkedIn will get only a quarter of its projected $100 million in revenue this year from ads. Other moneymakers include premium subscriptions, which let users directly contact any user on the site instead of requiring an introduction from another member.

A third source of revenue is recruitment tools that companies can use to find people who may not even be actively looking for new jobs. Companies pay to search for candidates with specific skills, and each day, they get new prospects as people who fit their criteria join LinkedIn.

LinkedIn is set to undergo a radical shift in strategy to find other sources of revenue. Instead of catering primarily to individual white-collar workers, the site will soon introduce new services aimed at companies."

Which business models are you focused on to reach profitability?

How Will Cc:Betty Change the Way You Communicate?

As many of you know, I work with entrepreneurs to help turn their ideas into funded companies. I love the art of the start and working with great people. Beyond my 3 boys, it's what gets me up in the mornings.

So what's the latest project I'm working on? Take a look at Cc:Betty which is being masterminded by Michael Cerda and Ben Dean, who were co-founders at Jangl (now Live Universe).

If you stay tuned I'll be sure to give you the first heads up when things go live. But for now, feel free to go to the Cc:Betty splash page and add your email to the Beta list.

I'm certainly excited about Cc:Betty and think you'll find it useful as well.

Stay tuned for more!

Did you notice? Some Web Lead Gen isn't Slimy Anymore...

If you are like me and millions of other internet users you've receive a ton of spam from services like Myluvcrush.com. It starts with an e-mail that tells you "There are (4) people who have a crush on you. Click here to find out who". The service then takes you through a series of tactics that strips you of your name and cell phone #...all while charging your cell phone bill $9.99/month for a service you really never understood you were buying. Going through the process feels and is slimy.

Slimy Lead Gen Tactics were the Norm

Many online services have survived on these debatable tactics for a long time because it was enough to just bring consumers to the buyer. The problem with pure traffic arbitrage models, though, is that the focus of the solution isn't on what's best for the user. Instead, the affiliate focuses on what's best for themselves...even to the detriment of the service provider.

New Breed of Lead Gen delivers to the Whole Value Chain

Over the past few years I've seen the emergence of several Web 2.0 lead gen players that deliver value to the whole value chain (user, affiliate and service provider). The sites aren't the usual hit and run sites. They are well thought out services that strive for repeat users by building trust. In essence, these sites have added efficiency to the matching of consumer and companies by focusing on building real services for consumer. Here are a few examples:

Mint.com
Mint has built an online Quicken competitor that provides suggestions on financial services based on your actual household spending, saving and investment habits. Their design is slick and intuitive. Most interestingly, the lead gen is a component but not the primary objective of the service.

Billshrink.com
Billshrink is an online personalized financial advice engine for mobile phone and credit card service. By linking it to your services you get feedback telling you if there are less expensive alternatives. Again, simplified information for the consumer that can drive decisions. Billshrink gets paid to enable the decision.

In the end, I believe services like Mint and Billshrink are changing the face of lead gen and will be the ones that survive. I'd be interested in any thoughts you have in this area.