When looking at the marketplace and start up’s today you have to think to yourself – “What are these companies thinking, and moreover these VC’s.
How do they plan to make a profit?
The truth is that most start up’s have no clearly defined revenue plan. You wouldn’t believe how many times I have heard “Advertising” when asking a client how they plan to make money with their start up. Scarier yet, most of them are working with less than 25K and no programming experience.
They see all the hype behind the latest VC investments and think they can be the next Facebook or You Tube.
The fact is that the Facebook’s of the world (all those big start up’s with no monetization plan to speak of) are simply a fluke. They basically hit the lottery. It is now a widely held opinion that every one of these sites is way overvalued.
Don’t get me wrong – I am not missing the logic behind the investors.
Pool thousands of people in the same place and then charge advertisers for the privilege of talking to them. The more people you have on your site the more valued your ad space.
It is basically the same principal of Network TV advertising. The more popular the show, the more the networks charge you for commercial ad space.
There are two fundamental problems with that. First, for the most part the biggest ad agencies are still not convinced by web impression based marketing. They put part of their client’s ad budget into it, but not nearly to the levels they do for print, billboard or television.
Second, the click through rates for web impression ads are being reported on as terrible. Truthfully, they aren’t that bad, but TV advertising conversion has been inflated for years. Web analytics have done a decent job at measuring ad campaigns, and in comparison have the web stats looking terrible on a balance sheet.
The Simple Answer is to Not Start Up a Company without a Clear Path to Profitability.
I realize that my standpoint may seem a little dismal, but not all hope is lost.
There are at least 3 ways to rake in the profits on the web.
1. Software: Develop a piece of software that people could be helped by using and then charge them for the privilege. Seems simple right? You wouldn’t be the only one.
Our research shows that there are currently over 2000 software start ups. 800 of them
in India alone. This is still an area where there is money to be made, but look for a very small target market and keep your costs way down. Take your planned monthly subscription fee and multiply it by a thousand. ($39.00 X 1000 = $39,000 per month)
If this covers your expenses and puts enough money into your pocket to keep you out of a cubicle for life, then go for it. Otherwise, I would think twice about your venture, as the math suggests there are at least 3 other start up’s with the same roll out.
2. Service based: This is an area we have invested in heavily over the past year. The advent of the internet has not only improved the viability of online ventures, but it has drastically reduced the cost of operating businesses that would operate offline. Sometimes without a website at all. Every time I talk to a partner or client about investing into the design of their website. Design being something I feel very strongly about. I ask them to go down to their part of to where their “expensive” stores are. Here in Philadelphia, that is Walnut Street. I ask them to tell me what they see. The answers is almost always the same – “People looking in the windows.” I explain that window dressing is all about viability. People don’t care that the products in that store probably were produced right next to a pair of jeans from Wal-Mart. They want to feel comfortable. In the business world today, your website is your store front.
When discussing the structure of a website. Something I refer to as interaction points to clients, I refer to their favorite restaurant or one they may have been to in the past. I point out the growing trend of kitchens that are open to the dining room. I explain that this too is about comfort. Transparency that allows the person to accept the good feeling they have about you and your services. Remember that we are sceptical people by nature, but also good hearted. We want to like you but you have to convince us why you should.
3. Niche Sites: This area is really our focus. Find something that a certain group of people are crazy about and give them a place to talk about it. Pool those people and then market your own services or go directly after advertising partners that appeal to your base. There are roughly 1.5 billion people active on the internet today, and that number is up 290% since last year. There are major investments in technology in Asia and India. The global market is truly upon us. All of the sudden, having 100K users is not such a competitive market.
Should you agree or better yet disagree with any of my statements, feel free to contact me and let’s kick some thoughts back and forth.