Okay, let’s talk about business models, and what it takes to make a venture successful these days. They say that 98% of new businesses fail, and some say 80% — well, whoever says that is probably very wrong. In fact, around 51% of small businesses survive their first 5 years. So take heart, entrepreneur, and dare to achieve!
Anyway, let’s start by considering the title of this post. Why do dating sites continue to charge their users, and get away with it, when free social networking sites like Facebook have been around for years? And for that matter, why do investors pour millions of dollars into companies whose services are absolutely free to use?
Choosing Your Market
The first thing to consider when you are running a business is where the money is going to come from. There are lots of sources but they all have something in common: they have a need that your business will fulfill. So before you start a business, you’ve got to nail down exactly what market you will be getting your revenue from, and what you will be offering them.
Next, look at the competition in that market, and see how people are being served today. What’s interesting that there is often a decade-long cycle. Some of the most promising markets to enter are the ones where there is one large, incumbent leader that you can disrupt by providing a fresh new approach or business model. That market could have been very crowded several years ago, but now that there is one leader, it could be the perfect time to make your move:
- The noise and cynicism about an overcrowded market has died down
- The incumbent is increasingly viewed as someone who should be challenged
- If you do things right (read: better for the users), you will get lots of favorable media coverage
- You’ll be compared to the leader and your main strengths will be constantly reiterated and inspire many people to engage with your product or help your company out
In short, one great place to look is a market where there are few players, and starting a lean, user-friendly competitor. Just think of the myriad examples in the last 10 years on the web.
Another great place to look is new platforms coming out. Just in the last two months there was the WebOS competition (where you could get a boost), Facebook’s Open Graph, Twitter’s ad platform, and just now, the iPhone 4.0 launch! Each of things brings tons of new opportunities for you to take advantage of:
- New forms of advertising. You can help develop this new content and get lots of clients.
- New languages and technologies. If the platform had a very well-publicized launch, and all your friends heard about it, chances are it will be in demand. Learning a new SDK is a barrier to entry, and experience has shown that the first people to cross that barrier are usually handsomely rewarded.
- Hire or attract developers! If you’re technically minded, this may be a good time to go solo. But there is a budding community around the new platform, and if you engage with it, you can quickly find ways to do profitable things in that space, even if you don’t do the development yourself.
- While some people are thinking about Business-To-Consumer models, you can do a similar idea and make it Business-To-Business to get a reliable revenue flow, like was done by Scvngr and Yammer.
Pick something you can be really passionate about and something that until now wasn’t possible. If you play things right, others will become interested. When you launch, you can get publicity, and be in a good position to raise venture capital in order to expand and dominate the newly formed market.
And if you ever become the leader, be careful Well, at that point you should refer me to your blog.
Spreading The Word
Funny enough, there are a few simple concepts that capture how successful businesses make their money. If you focus on nailing these points in your business model, you should make some serious money (unless something else goes horribly wrong).
Start by considering who is going to use your product or service, how they are connected to each other, and how and why they would deliver your message to others. Let’s see a couple of examples:
- You (and your employees) prepare high school teens for the SAT. How do high school teens connect to each other, and how will word about your tutoring service spread?
- Staffing companies post jobs on your job board. Job seekers browse your job board. How does word about your job board spread?
- You launch a site in 2005 that lets people post videos for others to see. How does word about your site spread?
- You make a site that lets people send messages to all their followers. How does word about your site spread?
Okay, so let’s say you’re making a dating site. Your target users are singles, presumably. The major challenge with making your site viral is that singles are a “sparse community” — out of all the social connections that your typical user would has, few of them are single. Or even if they are, your typical user doesn’t know which are and which are not.
Or let’s say you’re making an iPhone application. Your target users are iPhone users. Sure, there are 50 million iPhones out there but how does your typical user know which of his contacts has an iPhone?
Let’s contrast this with facebook. It started as a social network for college students in Harvard. That is a much more tightly knit social network. Each typical college student knows a lot of other college students. They go to the same school together. Thus, introducing facebook in the “niche market” of college students is a wise idea, because that niche market is a “dense community”.
The takeaway is that users of your product should come from a tightly knit community, until you reach critical mass. So you should strike partnerships with communities where your potential users congregate. Each community means lots of users and word of mouth about your product. Once a few communities sign up, supporting your case for raising money should be straightforward.
The key to entering these communities is to differentiate yourself from others trying to do the same thing. You can do that in all the ways I described in “Choosing Your Market”. Additionally, you can offer incentives to the community itself, by cross-promoting with it. As long as you can do this in a way that benefits your users, you will have a win-win situation all around. This is a great foundation to start a business.
If we look at popular social products that grew exponentially — ICQ, AIM, Skype, Facebook, Twitter — we find something common to all of them: the product enabled users to communicate in a way that they really wanted, and in order to do that, the other person had to get the product, too. Eventually, if the desire was great enough, whether due to actual usefulness, peer pressure, or just “coolness”, a person would get the product. Then it became a question of user retention. But the most important thing that retains a user is not the product — it’s the way other people use the product to create information that the user eventually sees. That is what is useful to the user. Design that properly, so that people use it in natural ways, and you will have a great product.
So what does this have to do with business models and the title of this post? Everything. Just because you make a website, or open a store, doesn’t mean you will become profitable or even gain a local customer base. In order to engage with its customers, a business must first attract them. And the ways to do that involve some combination of the following two things:
- Word of mouth
- Direct advertising
These two things usually lead to different business models — although you might wind up with a hybrid. Direct advertising means that your business has to spend a certain amount of money to acquire a user — the user acquisition cost. You could take out superbowl ads, or print flyers and hand them out, but at the end of the day you’ll have to advertise yourself on some level, if only to your initial userbase. Word of mouth is the means by which existing users recruit new users to your product or service. This leads to the “viral coefficient” I described in my earlier blog post — the magic number that can reduce your user acquisition cost by 10, 100, 1000 or more.
On the other hand, anytime you are doing advertising, you should get that money back in actual revenue. Otherwise, when you scale up your advertising campaign you will lose a proportional amount of money — which can quickly get prohibitive. The easiest way to guarantee you’ll get the money back is to charge the customers you acquire some amount that will at least cover the cost of acquiring those customers. Another way is to get publicity — by doing something cheap that will get a lot of attention. But if you start mixing in word-of mouth, taking out small buckets of advertising, tracking the viral links, and measuring the response — you will be able to use this data to get bigger and bigger growth spurts for the same amount of money, until eventually, your business is seriously growing.
So if we take a look at dating sites, the reason most of them charge their users a monthly fee is that they are not getting most of their customers through word-of-mouth. And that’s because singles are a “sparse community”. If you wanted to make a dating site that was viral, you’d try to cross-promote with organizers of singles events, and you would be able to undercut pretty much every paid dating site out there. Throw in a couple more features (I’ll leave them to your imagination), and you’ve got yourself a real modern business model for dating. That’s one of our products that will be coming out this fall, actually. Investors, you know what to do