Your ad-supported Web 2.0 site is actually a B2B enterprise in disguise

Doing a B2C is more fun than a B2B right?
A lot of folks are doing consumer internet startups because they think Web 2.0 startups are more fun. You can focus on the end user, make them happy, get traction, and go from there. Enterprise software companies (or their equivalent brethren, SaaS companies) are perceived as annoying because:

• You have to hire a big, inefficient sales team
• Your numbers depend on closing key deals (usually at the end of the quarter)
• You have to deal with annoying suit-wearing people who don't talk geek
• You have to make your product better not through superior technology, but often through superior PR, sales operations, or other non-geek issues

Turns out that ultimately, you can't escape all of the above, even in the consumer internet world. Let's talk about why:

A quote from a guy who's been there, done that
Ted Rheingold, CEO of Dogster and Catster, recently commented on post How NOT to calculate ad revenues:

I can still recall our early heady days when we forecast revenue based upon our (over-calculated) pageviews and our expect (also over-calculated) network CPM. You can imagine our frustration when the network CPM was half what we hoped and they could only server us a fraction of the impressions we requested. Note to anyone: only sites with massive page serves can run a business on direct response ads.

In other words, unless you are a ridiculously huge consumer internet site, you have to build up your revenues through brand advertising sales. It's very hard to just use ad networks like Google AdSense to sustain yourself - just do the math using 10 to 25 cent CPMs and you'll quickly see why.

And brand advertising sales looks and feels exactly the same as enterprise sales, and has all the same annoying characteristics, including:

• You have to hire a big ad sales team, potentially with an expensive office in New York
• A small percentage of advertiser/agency relationships will supply a large chunk of your revenues. This means that "key deals" matter, and you will jump if they ask you to - for example University of Phoenix was worth $200MM/yr for AOL
• Everyone you talk to in the ad industry are not nerds - many come from traditional media backgrounds, again with a NY bias
• And fundamentally, brand advertising isn't a tech game - it's one based on great execution and great teams - so Silicon Valley tech companies often are at a disadvantage

The key thing here is: The users of your website are not really your customers.

Instead, the entire process of gathering eyeballs is just to sell to your ACTUAL customers, who are the ad agencies and advertisers. Get it? Your Web 2.0 consumer startup is actually a B2B that sells inventory to brand advertisers.

All your hard work is just to create B2B ad inventory
At an extreme, all the love and effort you put into your consumer internet product ultimately generates a commodity. All it does is generate ad impressions, which are sometimes rare enough to be sold at a premium to ad agencies. While many companies are able to exit with the monetization potential there, but not fulfilled (i.e. YouTube), for most companies that want to hit it big, they have to focus on the transition point between generating ad inventory and monetizing ad inventory.

This transition point is a big sticking point for companies, because the folks who are best at creating product specialize in consumer-centric skills like user experience, technology, and operations, whereas the skills needed for successful B2B ad sales revolve around issues like being able to sleep on airplanes, schmoozing with advertisers, speaking at panels, and other soft-skills.

How to avoid this mess
Of course, one way to completely sidestep these issues is to directly monetize your users - this is pretty hard, because you have to deal with transaction processing, coming up with something so compelling people will pay for it, and a number of other problems.

Net/net, the approaches here that align you directly with your customers are business models like:

• Subscriptions
• Virtual goods
• E-Commerce
• etc

While putting off ad monetization might be the easier thing to do in the short-run, the above business models may have useful characteristics of their own in the long-run.

Comments

[Cyndy Aleo-Carreira]

I LOVE it! You absolutely nailed it, but no one in Web 2.0 is going to agree.

[Jesse Farmer]

I'm constantly surprised by how few people realize this. On Facebook, especially, people want to build apps, not brands, and then wonder why their SocialMedia ads aren't making them millionaires.

[Vivek Bhaskaran]

Finally someone got it right!

One other strategy, that we've used fairly successfully is to have a B2C (Free) service that feeds a more monetizable B2B service or a another service that people are more willing to pay money for.

Example:
MicroPoll - Is a free polling tool.
QuestionPro - Is a paid service for Surveys.

MicroPoll feeds into QuestionPro.

Basecamp (37 Signals):
Tada-List feeds into their other services that people are willing to pay (but no one really is willing to pay for an Online TODO list)

Mozy (EMC):
Mozy free feeds into Mozy Pro as well as with the recent acquisition of giant EMC feeds into Mozy Enterprise (Enterprise backup) also...

[Adam Schoenfeld]

100% agree Andrew... why kid ourselves... (free) consumer internet companies at some point have to move beyond pageviews and traffic and start behaving like media/marketing companies. I think that means at the end of the day we need to be looking for ways to create interesting (and high value) brand advertising that goes way beyond display ads as we think of them today.

[vanguyafo]

But not all big consumer sites have a big ad sales force. Digg uses MSN where MSN pays them a guaranteed revenue stream per year.

[Leo Chen]

Goes to show why you can't just be a great hacker in order to build a successful web application. Too many people are measuring success with a false metric - "traffic", what happened to the good old "profit" metric?
Nicely done Andrew...

[Jesse Farmer]

vanguyafo,

Digg making a deal with Microsoft is a B2B transaction. It makes sense for a company of digg's size because (1) it guarantees some level cash flow and (2) lets them keep their sales team small.

IOW, they basically outsourced their sales team to Microsoft.

[Tony Wright]

Great post Andrew-- you might ponder referencing:

http://lsvp.wordpress.com/2007/02/26/three-ways-to-build-an-online-media-business-to-50m-in-revenue/
(Three ways to build an online media business to $50m in revenue)

It's another great post on the topic.

This is why I'm not a huge fan of B2C plays (other than the "freemium" route). Every single free web site (without exception) has degraded as they shift focus from serving the user to serving the advertiser. Look at any 3 year old B2C play and it's inundated with craptacular ads.

[Simon]

That's a long long post for a short short well-know truth - am I wrong ? But it's well written I must say !

[Ginger Makela]

I agree with what you said in many ways, but I disagree with you about sales being "soft skills". Being a good sales person takes practice. It means learning how to listen intently, solve problems on the fly, know everything you can about your product, and be honest with people. People only buy things (or should only buy things) from people they trust. Being good in a room takes a lot of experience and practice. It's very much a skill. You've probably just been around lousy salespeople.

[Sean Tierney]

how is this on Techmeme and Hacker News right now? Not bagging on you Andrew. It's well-written but is this really a "eureka" moment for anyone?? If you have an ad-based model your customers are the ones that buy your ads and whatever else you do to generate eyeballs is just manufacturing. I guess I fail to see the novel insight here.

sean

[Leo Chen]

Sean, the point is that most B2C web startups focus too much on getting eye balls without figuring out a well differentiated platform to directly serve ads for advertisers. You can't be profitable on a simple CPM model, just look at Facebook, they're still trying to figure out how to be profitable. Every startup says they want to do "targeted advertising" but very few have actually come up with a compelling value prop for advertisers. Why? Because they're only focusing on traffic. Most web startups have one mission: get traffic, get acquired. The odds of this happening is only getting lower.

[Richard Giles]

Great post.

Rheingold's story sounds a lot like the one we had with Scouta. We built out our social network first, and then launched out B2B offering.

It's surprising how many web companies don't realize that you still need to focus most of your energy on traditional business values. Sales being a very important one. Although I'm CEO of the company, I spent almost all of my time as if I was a traditional sales person.

[bobafett]

can someone please explain to me what Andrew Chen is saying in plain english? (none of this technology speak please).

if I am a website owner, what must I do in order to act on Andrew's' advice?

[paul]

So perhaps big media networks, with their competencies in ad-sales and media creation, ARE fairly well placed after all..:p

[DJ Chang]

Hundreds of advertising networks are emerging to sell the brand advertising for you.

http://adecon101.blogspot.com/2008/02/list-of-adnets.html

Some cost 30% to 50% of revenues, but it allows the web 2.0 project to stay focused.

[Chris Yeh]

There is a lesson to be learned here--if something is easy, it's probably not worth doing.

If monetization were simply a matter of plugging in ad networks, everyone would be rich. Monetization (B2C or B2B) is always hard work, and anyone who thinks they can avoid it is deceiving themselves.

[Rob Grady]

100% agree. If you did a value chain mapping, the product being sold is CPM to advertisers (business). While you need page views (and people) to make the product compelling, it is ultimately the advertisers that pay.

[Christian]

Andrew, you should start turning your stuff into an ebook and sell copies as your own freemium model :-) You'd definitely find some buyers.
Regarding the post, you definitely need to sell to the advertisers because they pay the bills... And you also need to do it yourself because the ad networks don't necessarily have the same incentives you do. We've worked with one of the vertical networks and so far it's not been what we've hoped for - so we are building up the good-old sales force...

[Douglas Galbi]

Nico Nico Douga, a Japanese video sharing and social networkworking site, is a great example of the freemium model. As of Jan. 2008, after a little over a year of operation, it had annualized revenues of about $25 million USD. Two-thirds of that is from premium membership. An interesting aspect of its success is that premium members account for only about 3% of its total members. So, good news, free users have value even apart from pummeling them with ads! For details and links to sources, see my post on purple motes:
http://purplemotes.net/2008/04/06/success-in-online-video-sharing-and-social-networking/

[Elad]

Another option is to monetize using affiliate links, which is a more direct way than ads.
If (and only if) your content is very relevant to some kind of product so you can actually drive customer traffic to an online vendor (e.g. a music recommendation engine with affiliate links to iTunes/Amazon), you can probably make a pretty buck without the salesforce and other hassles that Andre mentions.

[Deborah Block-Schwenk]

Andrew, great post. I'm sorry to be so late in replying. What you are describing is a two-sided market (or what my company calls a "catalyst company"). The transition from a simple one-sided model (get users) to a two-sided model (we need enough users to make the advertisers happy and enough ads to pay the bills without being so annoying that users leave) is often rocky. As you describe so well, it also involves a new mindset and skills that may not be present in the company.

Our site www.catalystcode.com looks at web2.0, mobile and other industries from this two-sided perspective. Please take a look. Feedback is welcome.