Unlocking Monetization’s Genetic Code
Injecting revenue strategies into your product’s very DNA
August 2013 — An iterative and data-driven monetization strategy must be an intrinsic part of your product’s DNA. Only then can your start-up produce revenue with the highest degree of success.
The notion that you have merely to focus on creating an experience, attract users in large numbers and the money will follow is at best misguided, at worst disastrous. A product’s core design and monetization strategy must link in a disciplined way and equal passion. That way a company can lay down the foundation for lasting sustainability and success. Granted: creating an innovative product or service that users covet is crucial. But it is a dangerous guiding principle on its own, as it most often leads to complacency when building a sustainable business model.
While a service is often created with an incredible amount of zeal, innovation and a top user experience in mind, the means by which to generate revenue are frequently amateurish or worse yet – neglected altogether. As a service grows and becomes popular, monetization suddenly must be tacked on and it is oftentimes too late. A sought-after product is spoiled with clumsy monetization features (such as traditional banner ads) that dilute the experience. The opportunity to truly innovate the monetization model with something new that heightens user experience and creates future profit pools is missed altogether.
The service first, then user adoption before business model is practiced by many big name players including Google, Facebook, Twitter and Foursquare and supported by well known investors such as Fred Wilson, a General Partner with Union Square Ventures. Josh Elman, Partner with VC firm Greylock, also has a great point of view on timing and importance of monetization. The lean start-up methodology, developed by entrepreneur and author Eric Ries and Stanford University Associate Professor and entrepreneur Steve Blank, advises start-ups to find the product market fit and validate their business model before scaling. While the timing argument is an important one, embracing monetization internally with passion and a spirit for innovation, across teams is equally crucial in establishing what I call Monetization Nirvana.
Relegating monetization to an afterthought can all but guarantee failure. Veritably, businesses will find themselves in dangerous waters unless they acquire, engage, monetize and enlist users on an ongoing basis. Failing to do so will result in a diminished brand, restricted growth and too much valuable time spent on user acquisition — all of which can lead to a downward spiral into the “box of death,” argues Geoffrey Moore, a high-tech consultant, author and venture partner at Mohr Davidow Ventures.
Some might argue that Tumblr, which recently sold to Yahoo! for more than $1B without a viable business model, has to be doing something right. In reality, Tumblr merely passed on the task of monetization to Yahoo! Only time will tell if Yahoo! CEO Marissa Mayer, David Karp and team will do so in a manner that avoids Tumblr’s untimely death. Foursquare, among the most popular location-based social networking sites, may likewise be trapping itself inside the “box of death”. It has built an incredibly popular service but is now under tremendous pressure to generate revenue – making it challenging to roll out original monetization mechanisms at scale.
Monetization Thinking must be part of a company’s culture. Making it so will earn it the same attention, innovation and fervor from its teams — be they product design, product management, engineering or marketing — as the rest of the product. “Monetization Thinking” is important as it forces product innovators to think multi-dimensionally in terms of who their product needs to serve and how the product will generate value. But beware of rigid time frames. Settling on ways to monetize too early can prevent a team from creating a successful product and discovering more innovative and profitable monetization models down the road. Fostering monetization thinking organically allows companies to drive disruption in monetization models versus simple adoption of existing ways to drive revenues (often in substandard ways). Hence, teams can run quantitative experiments early in the process and expand on those as they scale into viable ways to monetize. That does not mean that you have to activate monetization straight away, but that it is ready in your arsenal.
Remember AdWords? Google’s main advertising product points to what innovative monetization can create – the likes of which we haven’t seen since 2003 when it was first introduced. Now its flagship source of revenue, AdWords offers what was then an innovative pay-per-click model attached to an auction system. Not only was AdWords one of the early “native” ad formats that added significant value to its users, but it also formed a scalable and efficient marketplace for keywords. Last year, the advertising product contributed in large part to the company’s impressive $50 billion in estimated total revenue.
Last year, search and banner ads accounted for nearly 70 percent of all digital ad revenue in the United States. But the system is not a spend structure driven by true progress but rather by a lack of innovation in monetization models yielding a new Return On Investment (ROI) driving blockbuster in digital marketing.
Early stage start-ups – including OrderGroove which powers subscription retail programs for more than 70 online brands including pharmacy giant CVS – contribute their monetization model to the success of their enterprise customers innovating around the notion of Cost Per Desired Outcome (or CPDO). Angellist, started by Naval Ravikant and Babak Nivi, a service for raising equity or debt investments for start-ups among other services such as recruiting, is creating a significantly disruptive multi-sided market with a multitude of disruptive monetization opportunities at the transaction level. Flipboard, a popular magazine format and social network aggregation experience, is in a fantastic position to reinvent media with disruptive monetization models. Wanelo and Sift Shopping, online and mobile meta services for shopping, and pin board-style, photo-sharing applications like Pinterest and Houzz, likewise have a tremendous opportunity to monetize creatively as the next generation commerce services emerge. There is also a powerful eco-system of companies emerging that catalyzes the success of players who experiment and scale new and proven monetization models such as subscriptions. Tien Tzuo, Founder and CEO of Zuora, coined the term “subscription economy” to make the point.
But for the latest in the monetization movement, we need look no further than Twitter, a real-time information network that connects you to the latest stories, ideas, opinions and news about what you find interesting. Promoting tweets and trends was merely the beginning for Adam Bain, Twitter’s revenue chief. Even more exciting than the monetization potential is the company’s so-called “force multiplier”, which boosts the impact of TV commercials. The link between old and new media has enormous potential to capitalize on the way people use computers, smartphones and tablets as means to communicate about what they are watching in real time. Twitter is also aggressively pursuing product and monetization ideas that link its unique consumer service to lead generation, commerce and transactions, displaying Twitter’s commitment to user value through both its service as well as its method to make money. Last week Twitter announced that it is expanding the roll-out of its Lead Generation Card product after successful initial tests. The Cards let companies register users and their emails for promotions or memberships directly within a tweet. When you walk into Twitter’s HQ offices in San Francisco you feel the passion for both world class user experience as well as innovation in monetization. We shouldn’t be surprised if this type of data-driven passion, culture and organizational set up will yield the next billion dollar revenue products with highly profitable monetization concepts unknown today.
Making up ground
There are no shortage of reports that claim Facebook has seen its peak given its lackluster growth and reduced user engagement. The most recent claim that the trailblazing site is losing ground as the go-to social network for teens. Facebook’s penetration amongst the coveted demographic is flat at 94 percent. And while teenagers are not abandoning Facebook altogether, they are simultaneously establishing a presence on Tumblr, Twitter, Snapchat and Instagram, according to a107-page report from the Pew Research Center, which surveyed 802 teens between the ages of 12 and 17.
Facebook Founder Mark Zuckerberg openly admits that mistakes were made in the dawn of the mobile market. Why? Facebook rested on its web laurels for too long and was heavily biased against advertising. Monetization was seen as an evil impediment to the user experience. By reducing viral accessibility, driving up acquisition cost and tapping into its game developers’ “in-game purchasing” revenue streams with its credit system all at the same time, Facebook was doing little more than syphoning from another company’s monetization pool, weakening its once flourishing developer eco-system. As such, strategic Monetization Thinking in general – and on the burgeoning mobile market – suffered and continue to lag to this day. It’s only an indication of how much potential there is once Facebook figures out the secret sauce; and the company is world-class in fast iteration and experimentation.
Facebook must passionately embrace monetization-thinking on all levels in order to create sustainable monetization profit pools that unearth new revenue mechanisms, all the while enhancing consumer proposition. With access to the largest social experiment on earth backed by a seemingly endless data trove, Facebook’s army of employees, as of late, are driving much more aggressive innovation that is tied to Facebook’s immersive experience and user value proposition.
Facebook’s lackluster stock performance since its public offering May 2012, at least for now, has come to an end. Finally the market starts to realize that there is more under the hood at Mark’s company (read this Google IPO article from 2004 and you might recognize similar patterns). Newer Facebook services for marketers go beyond commodity advertising into more unique monetization concepts that will eventually differentiate Facebook in a way that allow for premium pricing driven by superior ROI. And with its much-touted user interface layer for Android-compatible smartphones “Home”, Facebook hopes to gain even more of the market share. The alternative home screen, which was released in April to mixed reviews, creates yet another layer for integrated mobile monetization, allowing users to view and post content on Facebook along with launching apps and other features.
The social networking site as it stands has more than 1 billion users. In June, Facebook had an average 469 million daily active mobile users. According to a recent International Data Corporation study, smartphone users stop by Facebook 13.8 times throughout a given day, spending almost 2.5 minutes on the network each visit. Facebook earned $390 million in mobile ads for 2012, claiming 9.5 percent of the market, according to eMarketer. The social networking site’s mobile ad share is expected to climb 3.7 percentage points to 13.2 percent this year. All told, conventional and mobile users will generate an estimated $6.5 billion in revenue this year, according to analysts.
Notwithstanding the impressive numbers, the current mobile monetization arena is stunningly inadequate given its potential. Mary Meeker’s latest presentation on internet trends highlights some of mobile’s lagging metrics. There is no reason why mobile need remain a less lucrative platform than its online counterpart. Sure the screen is smaller, but that’s just an excuse for the current lack of ingenuity. Mobile — given its location awareness and constant presence alongside the consumer — should be more costly to use than conventional, non-mobile technology. The reason why it is not (or at least not yet) is because we are taking old advertising models and clumsily slapping them on new, mobile platforms driving disappointing ROI metrics. It’s akin to driving a Ferrari on dirt road and wondering why it can’t go quieter and faster.
The next five years will bring completely new forms of monetization fused into the value proposition of mobile and online services at a pace never before seen. A catalyst for this will be smart phones, tablets and wearables as they are forcing us to think beyond the norm. We will see breakthrough monetization models that add relevance to users, profits to buyers and maybe – if we’re lucky – make the world a better place.
