Friday, May 01, 2009

The Three Goals of the Web

With the internet economy clearly in only the strong survive mode, I think it is helpful to review the internet business model at its most basic. Those executing this plan well will make money and survive. Those executing it poorly will fail.

1) Get people to your site.

2) Keep people on your site.

3) Get paid for the people who visit.

The first two items require capital expenditure and labor in the form of ads, SEO, page design and content creation.

The revenues generated by #3 need to exceed the expenses incurred by #1 and #2 or you will fail. There are three ways to generate this revenue.

1) People buying something.

2) People leaving the site by a paid channel..

3) People watching something with an ad.

The third way is the hardest to achieve, but the most ideal in terms of revenue generation. If your content is so good that people will stay and view ads, advertisers may pay you regardless of the click action. This means you do not have to pepper the site with paid exits nor do you have to worry about surfing away. As long as people get to your site, you get paid regardless of whether they buy something or leave.. This model is the equivalent of TV advertising. Most internet sites don't harvest enough attention span to survive on this model. Sites with video content and the better magazine sites may be an exception.

The second way is the easiest to achieve, and the least ideal in terms of revenue vs. cost. If you can't make money by selling something and you can't make money just on ads viewed, then you need to make money whenever someone leaves your site. This means that they better not close their browser, enter a new address, or click a bookmark. They need to leave by clicking on your page. The eternal problem is that you can't get users to your page without some kind of quality unpaid content. Therefore you need to find the magic balance between paid and unpaid to make your site attractive and yet try to make sure that the bulk of the exits are paid. Search engines of all stripes use this model. The problem is the margins are so small and a small miscalculation in the mix of expenditure to attract people, the quality of the content and the paid exits will spell failure. The pure play here is the domain park. All click exits are paid and the cost of entry is buying a domain name that people will type or mistype into their browser off the top of their head. But domain parks suck and only pure arbitrageurs are really interested in that game.

The first way is just the old brick and mortar model. Build a better mousetrap, hire a better mousetrap marketing team, or sell all the best mousetraps in one place and people will pay you while they are on your site. The problem with this model is that the building and marketing require huge capital expenditures with high risk of failure. Selling other's products on the other hand is cheap to start but the revenues are only good at volume. The barriers to entry are so low that this business either gets diluted in the long tail or dominated by the volume players like Amazon. Companies that have overcome these obstacles and succeeded include Netflix and Zynga.

Making a little money on the internet is easy, making lots of money on the internet is hard and making money while creating something durable, beneficial and lasting is really hard. But first you have to remember the basics:

Get Them + Keep Them < Get Paid

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