The social web revenue inflection point
Note: This article derives from a paper I co-authored in 2007, “Understanding Key Success Factors for Social Web Ventures”. It won first place in the Insightory.com competition. You can view the entire paper here. This blog entry is part of a series of entries covering social web ventures.
Metcalfe’s Law says the value of a network equals the square of the number of its users. Larger networks create network externalities, leading to competitive advantage. Users post on YouTube because there are more visitors. And visitors come to YouTube because there are more videos to watch.
Therefore, network size is key to a successful social web venture. More users and content than your competitors means more consumer value, which in turn creates a snowball growth effect.
But when should you start monetizing your traffic? Critics suggest that many startups wait too long to start monetizing. However, until we find revenue models that do not reduce consumer value, the wisest strategy is to hold off monetizing your traffic at least until you reach an inflection point (e.g., second derivative hits zero).
Most revenue models, such as advertising, reduce consumer value. Metacafe, which has long had relatively intrusive ads, launched nearly two years before YouTube, but continues to trail far behind the market leaders.
When a site starts monetizing its traffic, it reduces consumer value, which can give your competition an advantage. Therefore, sites should delay monetizing until they reach the point of diminishing growth… as they come closer to their long-term stable size. This suggests that the larger the potential market for a site, the longer you should wait to monetize.
Once you get big enough (like YouTube), you may have the breathing room to capture some of the user value without reducing your net value proposition below that of the competition.
Heavy.com has done a great job of monetizing traffic without hurting consumer value too much. Of course, the best solution would be to monetize while increasing consumer value. Brickfish.com is doing a fantastic job of that by melding user generated content and revenue generation into one unit [disclaimer - I have performed consulting services for BrickFish in the past].
Do you have any comments, or ideas are for monetizing while enhancing consumer value?
April 14th, 2008 at 8:26 pm
Interesting post. I agree wholeheartedly with your assertion that social media sites should wait until they have some significant traction before pursuing monetization. The unfortunate consequence to users is that they are almost led on to the fact that their experience would be unencumbered and as soon as it gets fun to use, because everyone uses it, they force ads down your throat. I think what is not often studied by start-ups is really understanding where the extra value lies in their product and charge those who are seeking the out of the ordinary value, such as extra features. Also, I’m curious why web contests hasn’t taken off like it was predicted? I still think that avenue is not explored to the extent that it could be and is one of those features that provide significant value that could be extracted by advertisers, and provide value for the user base.
April 14th, 2008 at 8:43 pm
Good point, Emile. I think that balancing the revenue generation with continuous enhancement of the value proposition is critical. Facebook has had challenges instituting certain revenue generation initiatives, and I think this will continue to be a problem for many social networks.
For an example of site that utilizes contests very effectively, check out Brickfish.com. I mentioned that site in the post, but did not point out that one of their key ingredients is contests.
April 16th, 2008 at 3:09 am
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