Business Ideas – The Revenue Equation

Marathoners have a saying, “Anyone can run twenty miles, it’s the last 6 that count”.

Ideas can take a long time and a lot of resources to develop, but eventually you will have a product or service. The real trick is making your idea pay.

Why Internet Businesses are Not Like Vegetable Stands

If you own a vegetable stand, your income comes directly from the sale of the goods. The vegetables can arrive in the morning and turn into cash by the end of the day.

Online businesses rarely operate like vegetable stands.

veggie stand

 

Photo Credit:  Kathy

Internet Business Models

Complex Internet business models decouple the cost of producing a good or service from the revenue. When Google charges an advertiser for a sponsored link in a search result, Google has spent hundreds of millions to develop the search system.  But Google earns pennies from your search. There is virtually no relationship between the cost of the service and the revenue it generates.

The problem can be illustrated by examining two Internet business models:

1. Freemium

We’ve all used “Free” Internet services that offer remarkably comprehensive features. The service provider usually builds these systems in the hope that a tiny percentage of users will upgrade to a “Premium” (paid) version of the service.

In these cases, users pass through a sales funnel that starts with the user learning about the service, adopting the Free version and in some cases graduating to the Premium (paid) version.

The average time and expense required to sell Free accounts and convert some of the Free users to Premium accounts can vary depending on the nature of the business. Some Feermium services have compelling forces that drive users to pay, while others don’t.

MondoPlayer (my latest venture) will be adopting a Freemium business model. Aside from the cost of acquiring new users and hopefully convincing some to pay for an enhanced service, we’re also faced with the challenges of the “network effect”. Many Freemium services require a large user base before they can start to charge. For example, Facebook couldn’t earn ad revenue until it had a large user base advertisers wanted to reach.

2. Software as a Service (SAAS)

In the SAAS model, customers “pay for play”. These services are often more complex and expensive business solutions that require a significant degree of learning and integration before the customer can benefit from the product.

My Experience with an SAAS Business

I’ve run a SAAS business for 20 years. In our business we carefully tracked users from the time they first checked out our website until they bought our service and started paying usage fees.

It took 18 months for customers to decide to use our service and another 18 months to fully integrate the technology. On average, we saw a 3 year cycle from ” first contact ” to the moment users actually paid us a dime. In many cases, we faced a further delay before the user built up usage of our SAAS application and produced significant revenue.

Imagine, waiting 3 years before you see the first revenue from a client you meet today!  Now you have some idea of the business risks facing many SAAS businesses.

Key Questions to Ask

When you’re looking at an Internet business idea, ask yourself these questions:

  1. How will it make money?
  2. How long will it take to start making money?

Otherwise you risk being the marathoner who spends too much energy too early in the race and then hits the wall.

 

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