In the traditional product/service world, monetization is quite straightforward- a company makes a product/provides a service and charges money for the product/service but in the Web 2.0 world, monetization usually takes back seat. The general philosophy in this Web 2.0 world is “Don’t worry about monetization; find a way to bring traffic and monetization will follow later”. The analogy for this thought process is – let us bring customers into our store first and soon we figure a way to sell something to the customers coming to our store. This operating philosophy had worked very well for big companies like Google, MySpace, Facebook and many more. The multimillion dollar question is: will it work for everyone? Will this approach of not worrying about monetization work for other small companies? This blog tries to explore what it takes to make $1M in revenue/year through various models.
Basic Pricing models
For simplicity, we can divide the business into B2B and B2C. If you sell a final product/service directly to a customer, then we will consider it B2C for the purpose of this blog post. Your customers can be either individuals or companies. And if sell end products/service directly, we will consider it as B2C for this Blog. We can have three basic monetization models in B2C – onetime charge, subscription and ad based revenue. (Companies innovate and find new ways of monetization that combines these models).
We should acknowledge that in Web 2.0 world, companies that look and feel like a B2C company can turn toward B2B for monetization overnight. For instance, Facebook, which is a true B2C company, has become a platform provider and has plans to charge for application developers to certify their applications. This makes them a B2B company. On the other hand, Myspace.com which is similar to Facebook, still remains B2C and is making investments to sell songs to customers.
Let us do a simple math to understand what it takes to reach $1 Million in revenue per year through various business models.
1) One-time product/service fee
Revenue = Price * (Traffic per month * (% people visit of the people who downloaded) *(% users willing to pay of the people who downloaded))
Let us assume, we will charge $20 for a basic download of the software like MS Word or signup for service such as Twitter. Number of users needed to get $1M will be 50K users. Let us assume that 5% of the customers who download your product will like the product and will be ready to pay. If we think 5% is realistic number, we need 1M downloads per year or ~90K downloads per month to get $1M per year. Not all visitors who come to your site download. If you want to achieve 90K downloads per month, you need to generate much more traffic than 90K. If we assume ~10% of visitors come to a site download your product for testing, then you need ~1M visitors per month.
If you would like to increase your revenue you have four levers 1) number of visitors coming to your site 2) % of visitors who download 3) % users who are willing to pay and 4) price. Of these four, relatively easier levers to pull are increasing visitors to your site and price charged for your product. Assuming other things remain unchanged, to increase your revenue by 50%, you can drive traffic to your side by 50% or you can increase price by 50% or upsell some more software or service to existing user.
2) Subscription Based Revenue
Revenue/year = Price per month * (Traffic per month * (% people visit of the people who downloaded) *(% users willing to pay of the people who downloaded))*12
The major difference between onetime and subscription model is that price is recurring instead of onetime fee (duh?). Assuming that people are more likely to pay one time than to a subscription model, conversion rate from download to paying will be 1% compared to 5% conversion rate in case of onetime pricing model. By making the above assumptions, by charging $10 per month, you will need 830K downloads. For simplicity, let us assume that % of visitor who will download will be independent of pricing model. You will need 16.7M visitors per year or 1.4M visits per month.
3) Ad Based Revenue
Revenue/year = Visits * % of people who click on an Ad * Price per click
where Price per click = Gross Merchant Value that merchants got from the traffic sent by ad * Merchant’s willingness to spend in marketing.
Total Gross Merchant Value (GMV) that merchants (such as eBay/Amazon) sold to the customers those clicked on ads in your site decides how much they are willing to pay for in ad revenue. If the visitors that you sent to eBay didn’t buy $10M worth of items from eBay, then you become very expensive source of marketing for eBay to justify $1M ad spend on your website. If you were to generate $1 Million in revenue from advertisement, you must provide at least $10M in GMV.
Expected ad revenue = $1,000,000 per year
Required GMV (value of goods sold by merchants who place ad in your site) = $10,000,000 per year
Assuming each customers buys $100 worth of items, number of customers needed to reach $10M GMV= 10,000
Let us assume conversion rate is 1%. i.e. 1% of customer that you referred bought $100 worth of items in eBay. Number of referrals that you must send to make 10000 users is = 10,000/.01= 1,000,000
Lets us assume 2% of users visiting your website click on an ad. To generate 1,000,000 referrals, you need a traffic of 1,000,000/(.02)=200,000,000 per year, which is close to 1.8 million visits per month. In the above discussion we assumed each converted customer buys $100 worth of items. If items sold are T-Shirts or something smaller in value (assume $10), then visits needed per month increased from 1.8M increases to 18M.
If we assume users will visit 10 (twice a week) times a month then number of customers needed to reach 1.8M visits is 180K. 1.8M users if you were to generate 18M visits.
These aren’t the only business models, companies use combinations of these models applied in variety of different ways. Apart from combinations of these models, we can also observe companies use a barter method to get something back from customers that can be monetized.
In the next blog post we will see
- Why ’Free’ is key part of the strategy for any Software / Service (and)
- How combinations of these models are being used