Tuesday, February 9, 2010

Subscriptions as the future of online business models

Recently, Dave McClure posted an entry about Subscriptions as the future of online business.  I couldn't agree with Dave's sentiment more.  He asserts that "The default startup business model from 2000-2009 was based on growth (aka acquisition) and CPM- or CPC-advertising".  There's no doubt that there's a lot of money to be made in the advertising model.

But, here's the rub.  Advertising based businesses always require a truckload of traffic.    CPC (AdSense) is not a big money-maker for most businesses.  The number of clicks are usually proportional to the number of page views.  CTR is usually pretty low - like a few percentage points.  And the money you get from each click tends to be pretty low.  So, sure you might get a couple hundred bucks each month for some decent traffic.  But, that's not a huge money-maker.

So, what about CPM revenue?  Well, advertisers don't care about the vast majority of sites.  Think of it from their perspective.  Imagine that your site gets 1 million pageviews per month, have 1 ad on each page, and you charge $3 CPM.      So, your 1M pageviews are 1000 "m"s.  For a single advertiser to buy ALL ads on your site for the month is $3000.  Most ad campaigns will have at least $50,000 if not more than $100k to distribute.  So, if I'm looking to spend $100k, why the hell do I care about your site which gives me just 3% of my total for 100% of your traffic?  Moreover, in all likelihood, your site's pages aren't all good.  Only some are really worth the $3 CPM.  So, not only does it take me (the advertiser) time to negotiate the deal, but I fulfill only 3% of my total and I get at least some slop ad positions/pages.  That's not a really good deal for me.  Also, you (the entrepreneur) have worked super hard to get 1M pageviews per month.  And your business reward is a mere $3000.

Even if all your traffic is organic (that is, you didn't buy any traffic), you made just $3k!  That's not really a great amount of revenue.  How many businesses can make their business model work with just $3000 per month?  In my experience, there are very few models that work at that revenue model.

Clearly, the trick to making the ad model work is lots of traffic.  If you have 100M pageviews per month, then you are more of a player.  But how many sites have 100M pvs/month?  Not many.  And, what's worse, how many small startup ideas will reach that volume of traffic any time soon?

The harsh reality is that almost none will.

I'm not saying that advertising based businesses don't work.  There are, and always will be, successful ad-supported models.  But, the world isn't big enough for lots and lots of those businesses.  Advertisers need volume.  Volume will always be aggregated towards the bigger sites, the ones whose traffic is in the "head" of the curve.

So, what's to be done?  Well, look to other business models.  There are only a few core business models available online that are focused on business-to-consumer businesses.

  • Make revenue from ads (so the advertiser pays you)
  • Make revenue from subscriptions/commerce (so the customer pays you)
That's about it.  When you're selling to consumers, either the consumer is paying you or someone else is subsidizing the consumer's experience (i.e., the advertiser).  We've tried for about a decade to build super-massive businesses based on ad-revenue.  There have been some successes.  There have been a lot more failures.  

Subscription and commerce based businesses require far fewer users to make the models work.  Seems pretty logical that the better bet is on subscription based models rather than ad-based models.  If you look at the economics of the small subscription based business, it looks a helluva lot more attractive and realistic.

That's not to say that there aren't challenges for subscription businesses.  There are plenty.  The big difference is that you don't need 500,000 people to like/hate you.  You need just 5,000 to like you.

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