The Startup Revenue Model Smell Test

Why Path may be in trouble

First published January 2014

For startups in the consumer internet space, there are a relatively limited number of business models that can deliver consistently meaningful revenue growth, a list that includes advertising, subscriptions and premium services (for a more comprehensive list, start here). While evaluating Path to determine its chances of long term success (additional investment, growth, IPO, etc.), I was struck by the corner it has painted itself into, and thought it was a useful reminder for all new startups.

Startups aiming for long-term viability (rather than a quick exit) eventually need to identify a revenue model to effectively monetize their product. Some startups have it from day one, such as e-commerce startups like Dollar Shave Club. Others have a hunch, but don’t pursue it seriously until they have developed enough users, like Twitter.

However, all startups upon the outset should make sure they pass what I call the “Startup Revenue Model Smell Test” (I really wish there was an awesome acronym like SNARF, SNIFF, or SNORT… but I couldn’t make it happen).

Quite simply, the potential revenue model (and there could be many) should ideally align, or at the very least not contradict, the core value or unique selling proposition (“USP”) of your product.

For example, Netflix thrives on the promise of simple-to-access premium content at a discounted price. In that scenario, subscription as the revenue model is perfectly aligned (assuming they don’t way over-charge). If they tried to bake in commercials to all of its content, that would go contrary to its USP.

Some of the most successful tech companies in the valley have succeeded by building a product that users love and then creating a complimentary revenue model. In the table below, I lay out four hugely popular tech companies that each have different levels of alignment between their USPs and revenue models:

Comparing alignment of USP and Revenue Models of top tech companies

Although it’s clear from above that you don’t have to be perfectly aligned to make your millions (like Facebook), it certainly helps. In looking at Path, while I love the service (20M users as of Sep. 2013) and have a ton of respect for its founder Dave Morin, it has found a way to deliver a USP that makes alignment with any business model incredibly difficult. To me, Path’s USP is a highly elegant and intimate, design-oriented, mobile social network. While design and elegance certainly helps to attract users, it’s also tougher to align with existing business models without detracting from the design and elegance.

At first blush, one would assume that Path, like Facebook and Twitter, would turn to advertising to monetize their user-base. However, as we’ve all seen, most ads are highly intrusive and anything but design-friendly. Path likely saw this divergence from its USP as well, which is why it first launched two alternative revenue models in September 2013: 1) a sticker model (used successfully by many chat-services like Kakao) and 2) a premium model ($1.99/mo for new stickers and photo filters). Unfortunately, the recent layoff of 20% of staff as well as the struggle to finally close half ($25M) of the long-rumored $50M round possibly indicates that both models are struggling to gain traction. While both models are better aligned (and less profitable) than ads, the premium model has likely struggled since most social network users are used to getting everything for free, and stickers are a novelty that is hard to do well. Path still has its believers, especially those investors in the new $25M round, but it faces a long uncertain road ahead.

For those considering launching new startups, the moral of the story is to always be sure that the product, platform or ecosystem you are building has a path to monetization that does not completely contradict the USP for your product.

Gary Coover is a tech and startup business model junkie who honed his snark through years of strategy/BD work, co-founding a startup, and a few years in Korea and the Bay Area working for Samsung. Gary currently runs Global Operations for the Samsung Accelerator, helping architect, launch and scale the Accelerator and its startups in New York, San Francisco and Tel Aviv. His opinions are his own, as are his tweets, which are occasionally above average.

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