Category Archives: Uncategorized

Quora’s hardest question: Which users matter?

It was less than a year ago that Quora saw a nice little bump in traffic. Quora was on everyone’s lips and many of the Valley cognoscenti predicted  that this is was just the beginning of the hockey stick. 10 millions users before the end of 2011, they crowed. True, there were skeptics, myself included.

The promised growth never materialized and what seemed like a sure thing to some is growing even more slowly than I thought it would.  So what happened? Why didn’t the hockey stick-like growth occur?

In January, great conversations were being had and tech celebrities like Steve Case and Reed Hastings were participating. The site was fun and engaging, informative and yet still playful. For me personally, Quora was a a discovery engine, introducing me to smart people and great conversations.

However, sometime in the beginning of spring they deployed an army of unnamed “administrators” to police the site.  Quora was setting strict and oftentimes arbitrary ground rules for engagement. This type of heavy-handed engagement not only turned off the new users, but also some of the existing users. And the hardcore users weren’t very excited about new users joining as well. And then when Robert Scoble joined all hell broke loose.

By all rights, a consumer-facing site with no revenue model, modest gains in a userbase and users which are hostile to site growth would be a recipe for disaster.

Therefore, you would expect big changes…. opening up the site and finding ways to make it more user friendly…. or you would expect it to fail. Yet, Quora chugs along without a userbase that can make it profitable.

There are two reasons for this: 1) Quora has a vision of the what the product should be and that is independent of what the new users wanted and 2) they are well-funded enough that they don’t need have immediate needs to show traction to get additional funding.

So what exactly is Quora’s vision of what the product should be?

It became clear to me what Quora’s vision of their product in Charlie Cheever’s paean to Wikipedia. Quoth Charlie:

I love Wikipedia. It’s the original site that works because of the constraints it imposes. You have to follow the spelling and grammar. You have to format it this way. You have to use the objective voice….. A lot of times, too, people say to me, “As Quora gets bigger, isn’t the quality of answers on the site going to degrade? Don’t you know people on the Internet are stupid?” In the face of that, Wikipedia is inspiring. It’s reassuring to be able to look at what you’re doing and say, some percentage of people really care and are smart. If you can get them interested, they can build something of real value.

So Quora has an interesting challenge… they are trying to build two types of communities: content creators/curators and content consumers. Problems arise when the content consumers try to answer questions and get beat down by the creators/curators. Of course, how are the consumers to know that they aren’t supposed to answer questions? It’s a Q&A site after all, and no one likes being told that they aren’t smart/clever/eloquent enough to answer a question.

Quora’s challenge is to cultivate content creators/curators without getting the unwashed masses to answer questions. That’s why they created ask-to-answer and give creators/curators credits to disperse. See below:

As someone who has been active on Quora, I have credits to give someone to answer the question. Helpfully, Quora has an algorithm to identify users who might present the best answer.

This is not the first time that Quora has used technology to solve what would normally be a community problem. In the past, Quora has used thousands of Twitter accounts for SEO purposes. I’ve also noticed  that Quora is populating geo-specific questions on their mobile app using a bot. ( I mean, seriously, why else would there be 16 questions about Campbell, California?)

Quora’s mobile strategy is a post for another time. The question that we’re trying to address here is, can Quora cultivate two concurrent communities and still have expansive growth. My immediate impression is that they are dealing with a chicken and egg problem.

So what Quora has essentially decided is that it’s content creators/curators are more important right now than the content consumers. Quora’s approach is to incentivize and build for the content creators/curators and hope the the content consumers arrive later.

Breaking it out using the customer ecosystem model, Quora is doing a decent job with the content creators/curators:

However, Quora is doing a poor job in terms of bringing in content consumers and once they are there, doing something to keep them engaged.

It’s not to say that Quora hasn’t tried to reach out to broader consumers to get their interest. Quora worked with Paramount to get filmmaker JJ Abrams to answer a few questions, but they will need more than some celebrity respondents to reach the hockey stick growth that people expected.

Is Google Instant trying to trick people into clicking on ads?

I was thinking today about how Google Instant was going to impact their ad revenues. Despite myself, I wondered if they were perhaps killing their cash cow for the sake of a cool technology. I was assured they were not.

So I took a another look and what I saw was genius. Did Google use the news today to diminish the color of the sponsored link box? Is Google Instant trying to trick people into clicking on ads?

Consider, the old Google search display compared to the new Google Instant.

Old:

New:

Not an apples to apples comparison, because I had to find an old search result to compare it to. However, it struck me that the sponsored search box was really diminished in appearance and I mistook it for legitimate search results and imagine many others would do the same. I would love it if someone focused on the search biz could investigate, because it seems fishy to me.

Was Zynga’s 7-11 FarmVille campaign a success?

The recent news about Zynga’s armored truck explosion bringing in 2mm Ustream views inspired me to go back and look at the last notorious Zynga promotion.

If you didn’t know any better you’d look at Famville’s recent usage numbers and say that the Zynga FarmVille campaign at 7-11 has been a massive failure. From 75mm MAUs in May to 63mm MAUs by the end of June.

Normally, if you’re doing a nationwide retail promotion you are doing so to acquire new customers. By that measure the campaign would be an abject failure. But what if we looked at it in a different way?What if it was a retention campaign? And not just any retention campaign, but a campaign to keep its highest paid, most active members engaged?

The way that the campaign was set up in many ways mimicked the game mechanics inherent in social games.

Rather than need to wake up early to login to their computers to harvest crops that would whither without their care, FarmVille players had to drive to their local 7-11 to get the exclusive items they coveted. Of course, these items were limited and people ended up driving all over just to find the items they were looking for.

Is the promise of a limited edition Neopolitan cow and a code printed on a Slurpee Cup or a pre-made sandwich going to entice you to try a game for the first time? Me neither. This campaign was for the hardcore players…. part reward, part task.

It’s also quite possible that Zynga was evaluating alternative engagement and upsell strategies with it’s biggest customers. Zynga’s five-year partnership with Facebook has dampened their interest in moving more traffic to their own properties, and as this playbook shows, the 7-11 promos drove people to a microsite.  Zynga is no doubt looking to see how much traffic they can drive on their own and what types of opportunities they can use for promotion/loyalty that are platform-agnostic as well as game-agnostic.

One thing that Zynga may also looking at was the ability to address the unbanked/underbanked market segment. Driving them to 7-11 stores where they can also sell a branded FarmVille card.

This is a smart strategy, because merely placing a branded card in a store without the right marketing support will result in a failure. In my time at Rixty I’ve come across quite a few game publishers seduced by be idea of a branded card in stores, only to see poor sales as a result. Gaming cards tend to be a destination purchase, not an impulse buy. By getting customers in 7-11 stores with FarmVille on the brain is a unique way to get branded gaming pre-paid cards to be worth the investment. Zynga is probably one of the two online gaming companies (Blizzard being the other) that could pull off  such an audacious brick and mortar promotional campaign.

So was Zynga’s 7-11 FarmVille campaign a success? From everything I’ve heard they were very pleased with it…. so I’m guessing it wasn’t about customer acquisition at all.

Don’t listen to your customers

The old adage that “the customer is always right” can have dangerous effects for your business, especially if you are engaged in customer development.

This notion was reinforced with me recently when looking at the problems encountered by my former employer Linden Lab (makers of Second Life). Chances are that you know the story by now: virtual world, caught up in hype cycle, experiences mass media attention before the product holds mass appeal.

Somewhere in this maelstrom Second Life acquired an active and and vocal userbase. These users felt a strong sense of ownership of the product and were encouraged to do so because it provided the company growth and revenue at a time when it was sorely needed.

Along the way, the company continued to innovate and roll out new features. Every single one of these features was trashed mercilessly by the users who felt betrayed on a regular basis. Now the CEO and most of the management that had brought about these unpopular products/features are out in the cold.

Could this have been avoided if Second Life listened to its customers? Absolutely. Could Second Life have succeeded as a business if it listened to its customers? Not a chance in hell. You can’t build a successful technology product AND be beholden to the whims of techno-anarchist BDSM furries. Interesting and smart customers, but not the users you build a tech IPO company around.

All too often web startups become virtually held hostage by a community that does want to see them grow. Sometimes, the result is Startup Stockholm Syndrome. Web startups are essentially held captive by their community and begin to think that they should, against their better judgement, listen to their current userbase.

This brings us to a very crucial point. The users help a web startup get from A to B are often not the ones who will help the company go from C to Z. It’s important to be clear to yourself what your ultimate target market is before you build for them. More important than what the customers want is who the customers are and whether they are the customers you want. If they are the customers you want and who will enable you to grow as you had envisioned, then by all means, listen to them. Many times, however, feedback from a web startups initial userbase will not enable growth.

The dilemma this creates for entrepeneurs, especially of the lean startup variety, is how to create a business with a strong, loyal userbase that doesn’t kneecap your aspirations. Digg is a company that was hamstrung by it’s userbase and was unable to meet the true need of valuable user-centric news discovery, a void eventually filled by Twitter. Unsurprisigly, you can’t build a great company based on a fascination with lolwut.

So as web startups reach milestones in terms of user growth and user engagement, they also need to be conscious that they build and innovate for the customers they want to have, not necessarily the customers they currently have.

The Reason Twitter Bought Tweetie: User Experience

Twitter recently bought my favorite iPhone app Tweetie  and announced that it would become the official Twitter app for the iPhone. They also said it would now be free. Unsurprisingly, there was a lot of hand-wringing from the Twitter developing community (and some great t-shirts), but as Chris Dixon wrote, “Until Twitter has a successful business model, they can’t have a consistent strategy and third parties should expect erratic behavior and even complete and sudden shifts in strategy.”

The reason that Twitter bought Tweetie is that they are no longer content to own the platform, they also want to own the user experience. With this increased interest in the user experience, Twitter has changed their ability to impact the customer ecosystem and how they may try and monetize in the future.

Consider how Twitter looked a few days ago:

While acquisition efforts continue to be strong on the basis of a viral growth and an evangelist userbase, there existed serious problems with Twitter’s customer ecosystem. By positioning themselves as a platform, Twitter had enabled literally hundreds of developers/companies to build a user experience for Twitter users. The result, however, was a little bit of a mess. If you’re using a Twitter client ad it’s slow or  loads incorrectly you have to go find another client. The whole process of getting a client (mobile or otherwise) adds to the complexity of onboarding a new user. I think the simplicity of the Twitter website is why it seems to be the most used client.

My personal experience was probably similar to many others: started on twitter.com; drawn to other apps because of advance features; returned to twitter.com for simplicity and performance. The purchase of Tweetie, syncs well with the news that Twitter.com has a major redesign on the way.

Twitter has always banked on simplicity, a simple four input registration, simple communication tools (@ replies, RT, etc.) and now Tweetie… simplest, cleanest, iPhone app around. It must have killed Twitter to see these bloated apps from Seesmic, Tweetdeck, etc.

Twitter has given up being just a platform, they want to control the user experience from end-to-end. Personally, I don’t blame them.

A platform is great, but when the user experience suffers it can cause a lag in user growth or impact the revenue potential of the platform, then you must take steps to be more involved in the user experience. Much like Apple with the iPhone and Facebook,  Twitter is realizing that a tighter grip on the user experience is probably the right path toward  user growth and revenue.

So, now Twitter has a customer ecosystem under control,  the next step will be how to monetize it. I’ve already posited on why I think advertising is the wrong path for Twitter, but I see little downside for closely managing the user experience. Tweetie is/was a great app and this acquisition bodes well for Twitter users from a user experience standpoint.

Was the Tesla Roadster a MVP?

Tesla recently announced their plans to go IPO. The  desire to go public was not much of a surprise to anyone who had been paying attention, but buried in the S-1 was one thing that most people hadn’t speculated upon: Tesla is no longer going to make the only car they’ve ever made… the Tesla Roadster.

This was somewhat surprising news and while many people have been very skeptical of Tesla (myself included), they have managed to turn very little into a lot of financial support (from Daimler and the US Government) and now seek an additional $100 million in their IPO. How did they do this?

And then I thought about it. The Tesla Roadster, in prototypical lean startup fashion, was a minimum viable product (MVP). They identified a product that they thought the market was interested in. They threw an electric engine in a Lotus body and they stood back an saw if anyone would buy it. Consumers ( and investors) bought in and then Tesla said, “OK, now we have to make the real car.”

It was the equivalent of selling a barely functional web service by merely setting up a sell page with a Google Forms document.

Also in true lean startup fashion, Tesla made an iteration based on the market. Through sophisticated market research (I’m sure) they realized that they would need to expand their target market beyond aggro VCs from Atherton. Hence the move from the sporty Roadster to the Model S sedan. Well, that and the fact that the US government gave them money for the Model S, not the MVP.

Obviously, this article is somewhat tongue-in-cheek, but what Tesla has done really does validate the lean startup model. Get your product out there first, make sure it works and then make the changes that the market demands. The one caveat is that if you are an automobile or consumer electronics startup you are not lean. You have high manufacturing and material costs. You need sufficient runway to succeed.

I worked at a CE startup that launched what the customers called a “beta product,” but could adequately be described as a MVP. The result was not pretty and not because valuable data wasn’t gathered in the process, but because most consumers do not want an MVP– especially in an established space. If you are going to try an MVP in anything but a burgeoning market, you should expect a major hit on your brand and you need to have the runway to survive. As far as I can tell Tesla may have succeeded by the slimmest of margins. Time will tell.

Marketing for coders (part 1)

The situation: You’re a technical co-founder, launching/managing a startup on a shoestring. You don’t have a marketing budget, but you need to reach a consumer (non-technical) audience. There’s good news to be had, you can use your technical skills to build a marketing apparatus for virtually nothing.

For the sake of this discussion, marketing will be discussed in relation to the customer ecosystem model.  Part one will focus on acquisition and conversion. Part two will look at upsell and retention.

Acquisition

Acquisition is what most people think of when they think of marketing. However, it’s important to keep in mind that marketing does more than acquire customers.  Marketing engages customers. Marketing upsells customers. Marketing retains customers.

Because acquisition is when the funnel is the broadest, it gets most of the attention.

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Search engine optimization (SEO) is the no-brainer of acquisition. SEOmoz.com is a great resource for those interested in SEO information and I found this presentation that they gave to the Y Combinator folks to be a great overview. There are two ways  to attack the problem of SEO. You can see what keywords you appear in and improve your ranks in those areas or you can see what people are searching for and then build around that. I prefer the latter. The best way to optimize in my view is through multiple landing pages with relevant content that can be swapped out early and often to remain fresh. Utilizing a free content management system is probably the easiest way to do so. That being said, if you’re a real estate site don’t optimize around Miley Cyrus. You should optimize around FSBO, foreclosures, and short sale even if you’re a site like Zillow whose niche is not listings but property values.

All of this can be accomplished for free through an adwords account. You don’t need to specifically pay to advertise with Google to get access to their tools, you just need an adwords account. As far as optimizing for other search engines, I wouldn’t really bother. Google’s share of the paid market is about 80% and for all intents and purposes, the paid market represent the value of the search.

SEO also helps validate your idea. If you’re having trouble finding the right long tail of searches, perhaps the market isn’t there for the solution you proffer.

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Virality of product is probably the best way to acquire new customer. How did you first register for Facebook or Twitter? I can promise it wasn’t via a banner ad or a paid text link. Chances are, however, that you’re not building the next Facebook or Twitter. Therefore, it is important that you build social tools into your product in a way to enable sharing and promotion.

Virality works best when it’s baked into the product. The quick and easy thing to do is to enable someone to share their activity via Facebook or Twitter. This is getting old quick, however, and I’m sure that I’m not the only one with status ennui. Much better to have engaged user send a customized e-mail to a close friend or share a heartfelt message to their blog than to have them post a half-assed Twitter update to 72 followers.

Be creative and you can build a viral feature into almost any web product

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Co-marketing is another great way to great way to acquire customers. Now since we’re talking zero budget marketing this might be tough, but not impossible. Look at these examples from Billshrink and FourSquare. Getting a top-tier mobile carrier or cable network to feature your product in a national television advertising campaign may not be in the cards, but look around for natural partners, especially ones that might benefit from aligning with your technology and your product.

If that doesn’t work so well, do a charity fundraising with your users. First off, you will get lots of karma for doing something good. Secondly, you will engender a lot of goodwill and curiosity with others who are associated with that charity. Silicon Valley is in LOVE with Kiva.org and doing a campaign for them will get the attention of the valley’s entrepreneurs. Be sure, though, that your charity efforts are something that your users and your target market are passionate about. This is marketing after all and don’t feel guilty or cynical for using this as a way to acquire new users. It’s still a net positive for the charitable organization.

Conversion:

Conversion is all about landing pages. The better the landing page, the better the conversion. Period.

Ideally you should have a landing page for almost every search term, while this is an important part of optimization to bring in the traffic, it’s also an important part of the converting the traffic.

Having multiple landing pages is a great way to bring in diverse traffic. Once you bring that traffic in, you need to fine tune the landing pages to determine the best way to convert those potential customers.

A few tips:

  • A strong visual component.
  • Very little text
  • A strong call-to-action (CTA)

Your CTA should probably be in the form of a button. Here’s a great primer to get you started. The important thing is to have multiple iterations and to continue to refine.

Working with Google Website Optimizer makes the process almost pain-free. Starting off with simple AB tests makes sense, but you’ll probably want to move into full multivariate testing soon thereafter just because it’s so much fun.

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The other big part of conversion is  understanding where your traffic is coming from. While it’s easy to find out where traffic is coming via Google, it’s a lot harder to track conversion from viral efforts. it is especially hard to track success when you have multiple viral efforts going at once. Therefore it’s important to build the ability to track campaigns.

Ability for promo codes is probably the best way to track a viral campaigns success. The ability to accept promo codes will help whether it’s an invite to a closed beta or an opportunity for free/discounted use of a premium feature. Moving forward, it will also help track the success of paid marketing campaigns.

Easier than setting up a promo code is a unique landing page: it.com/promo, but in my experience people tend to read right through these and go straight to the homepage. Especially if they are obviously promotional, like it.com/radioad.

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Look for part 2 to this post next week.

Why Facebook wants you to have more friends

We tend to think of Facebook as an 800 lb. gorilla, lumbering toward an IPO and world dominance in social networking. The user growth (350M+) has indeed been impressive, but the question I have is about user engagement. Is it as strong as before? Is Facebook experiencing problems with retention?

The question seems pertinent because Facebook very recently made a big push for users to find more of their friends on Facebook through use of their friend finder tool. This has gotten a lot of attention. Andrew Chen tweeted: “wow, huge “find friends” ad at the top of Facebook today. Wonder if they are trying to juice their growth?”

I think the answer is that the user growth is just fine… it’s engagement and retention where Facebook is trying to move the bar.

Anecdotally, I’ve noticed quite less usage from a many friends who used to be very active on Facebook. Based on my friend’s list I would say that the regular users from a year ago are a lot less active on Facebook now. Additionally, the most active users in my friendfeed are not even hopping on Facebook to update their status, but rather are doing so via Twitter.

So I’m betting that Facebook has a problem with user engagement. Revenue does not come from adding new users, but retaining engaged users. The more engaged users are, the more time the spend on the site and the more pages they see. The more pages they see, the greater the number of ads that Facebook serves. This certainly is not rocket science.

So Facebook tries to solve the problem of decreasing engagement and retention.

But how?

I wouldn’t be surprised if someone asked the data warehouse to analyze the user activity and find out more about the most active users and how they differ from less active users. And I’m sure they were told something like this.

  • Active users average 37 more friends than inactive users
  • Active users are 5 times more likely to receive an e-mail than inactive users.

Hence the push of the friend finder tool and  hence the messages you get on the sidebar to send someone an e-mail. Take a look at who they want you to send a message to. It’s invariably someone who is not very active on Facebook.

So these are the tools that Facebook is using to boost engagement and aid retention, but do they work? Hard to say, but it’s important to remember that correlation is not causation. Trying to artificially create user behaviors without understanding the motivations behind them seems superficial and short-sighted. Engagement and retention come from understanding the the customer and the why. Facebook seems to be focused on the how.

Lean startup viability: how to know when to quit

This post was prompted in part by a discussion a few weeks back by former Joost COO Hedrik Werdelin’s post, “Twitter used to be a crappy idea”,  about Twitter and their viability as a startup based on user metrics. While I think the article was more linkbait than reasoned analysis, it did raise an interesting question. How do you determine the viability of a lean startup? Or more importantly, how do you know when to quit?

In a VC or even angel-backed startup your viability, assuming you are not profitable, is generally based on one thing…. The ability to raise additional funding. When the money runs out either you raise more funds or you go home.

In a lean startup however, there is no such Darwinian fate. By the very nature of a lean startup and its iterative customer development process, a lean startup can live virtually forever and perhaps never find success. Therefore it falls to the entrepreneur to decide when to cut bait.

In this post I have applied the customer ecosystem model below (also see examples for Zynga and Twitter) as a means of determining lean startup viability.

Wederlin’s point was that Twitter had poor user acquisition growth and user numbers in the early years of the business.

Now, I think this point is debatable, but let’s assume for a moment that this is the case for StartupX.  StartupX launches and sees low to moderate user adoption. Despite this, there is no reason to necessarily throw in the towel. However (contrary to Wederlin’s assertions), mere faith in the technology or the team is not enough. You need to have strength in one of the following customer ecosystem areas: conversion, upsell, or retention.

Conversion

Almost more important than user acquisition is converting those new users once they arrive at the site. Obviously each type of web startup has has its own metrics, but  if conversion and usage is high it can more than make up for poor acquisition results. Consider the case of Twitter. Sure it’s user base may have been growing slowly, but is that how they were measuring success? More than likely they were looking at other metrics as being important:

  • % of unique visitors who register
  • % of users who send a tweet
  • % of users who follow someone
  • % of users who have followers
  • % of users who tweet 5 times a day
  • % of users who have more than 100 followers

Merely looking at the number of new registrants is a poor way of measuring success, but also growth. Internally, even though acquisition growth may have not been growing as they had hoped, my hunch is that metrics like those above were growing strongly, indicating that they were on the right path. They weren’t just flying blind.

Now let’s look at imaginary StartupX:

After a brief write-up in a techblog, StartupX gains 15,000 new users. Six months later they are adding only 500 new users a month and the active userbase is steady. Time to cut the cord? Not necessarily.

Consider:

  • 65 percent of unique site visitors register and create a profile (up from 33% just two months ago)
  • 35 percent of users post content on StartupX (up from 25% three months ago)

Metrics like these are good and would indicate that (contrary to the acquisition numbers) that StartupX is still viable. There obviously are acquisition issues (wrong target market, poor virality, etc.), but when one aspect of the customer ecosystem is executing well, it means that with a sufficient pivot, the startup is viable.

Upsell

Are people paying money for your product? Usually this excludes about 90% of web startups, but cash money can be an amazing salve for a startup which is not experiencing substantial new user growth. If you are able to get users to pay either a one-time fee or a subscription then you have something to build upon.

Let’s look at the StartupX upsell scenario.

StartupX has a premium service for active users which includes and enhanced profile and unlimited uploads. Despite the fact that user growth is slow, more than 5% of active users pay for the premium service. Not only that, only 1% of users paid for a premium membership 4 months ago. Growth in premium subscriptions is a much more valuable metric than total user growth. Some users are more equal than others.

The trick here is that if you are getting people to pay for your product, you need to work to identify how large the realistic addressable market is and determine strategies to get traction in this market. If you’re bootstrapping, it does you no good to be exaggerating your addressable market (as opposed to when you’re trying to raise VC). However it behooves you to look far wand wide and identify other groups that may pay for your product. The key here is to continue growth in this revenue stream.

Retention

Retention is the kissing cousin of conversion in the customer ecosystem model. For conversion, is the content/experience compelling enough to for you to register or participate? For retention, is the content/experience compelling enough to keep you coming back.

If, for example, 80% of registered users are coming back on a weekly/monthly basis, there’s a lot of potential in what you are doing. Even low to moderate user growth with high retention levels can be a success.

Overcoming Acquisition Issues

In order to be successful, every startup will eventually need to figure out the acquisition puzzle. Sometimes there are businesses where the acquisition costs are just too high for a viable business. The point however of this blog post is that startups need not initially live and die by acquisition numbers. Other components of the customer ecosystem model are equally important components to figure out and basing viability on initial acquisition efforts is foolhardy.

Knowing When To Quit

If your acquisition efforts are failing, there need to be signs from other places in the model (conversion, upsell, retention) that the business is on the right path. If you’ve been at it for a long time and acquisition is poor and everything else is muddling along, then it’s time to quit. However, if you have found that you can either convert, upsell or retain customers well, then keep plugging away.  The feedback from users is that your startup is on the right path…. now it’s time for incremental improvements in the other areas of the model to allow the business to reach the next level.

Why Twitter shouldn’t pursue an advertising business model

First, a confession. I made the decision recently that when I start an internet company it will not be dependent on advertising for revenue. As an aficionado of the lean startup model and customer development process, I believe it imperative to have paying customers from the get-go. When I developed the Customer Ecosystem model, I explicitly included a revenue component that was independent of advertising. The simple fact being that as VC funding becomes more tight and companies need to show their worth more quickly, advertising as a revenue model is going to become a relic… a bubble throwback that we will all talk about, but probably not think about employing.

Recently, Twitter co-founder Biz Stone and COO Dick Cost0lo have  made comments about the first substantial real revenue stream that we’re going to see from the über-hyped microblog company. And if you chose chose advertising (really cool, non-traditional advertising) in the pool…. prepare to collect your winnings.

Even though Twitter has millions of users and can probably become profitable rather quickly, I think it is a mistake for Twitter to pursue an advertising model.

Who has succeeded, and I mean “knocked it out of the park” succeeded in using an advertising model? Google…and that’s about it.

The internet is strewn with the living dead of companies that have tried to become internet kingmakers and failed using an advertising revenue model: AOL, Yahoo, MySpace, MSN Digg, and countless others.

And then let’s look at the key players in the market who generate their revenues from ads, the up-and-comers like Glam Media. Well, they recently took Series E (!) funding.

Many of the businesses that are reliant upon advertising are getting CRUSHED. Look at the the New York Times, NBC Universal, Clear Channel etc… the simple fact of the matter is that it’s becoming very hard to be a business that matters with advertising as a revenue model.

Sure, Facebook may be able to pull it off, but like Google they are also turning the advertising world on it’s head and there’s still no promises of success. Consider:

Google: Changed the advertising world on its head by making ads relevant, practical and contextual. And of course, they executing the living bejeezus out of their  biz model. Anyone with any doubt about about their ability to execute should try to advertise on MSN or whatever the hell they call it now.

Facebook: In the process of changing the advertising world through massive amount of demographic/psychographic data that allows for targeting via affinity. We still don’t know if they will be able to pull it off. Smartly though, Facebook is hedging its bets and looking seriously at other business models.

Twitter: Trying to re-do advertising model. The problem is that they just don’t have the numbers compared to Facebook and their growth is slowing.

I’m not saying that Twitter is in trouble, far from it. I’m just saying that an advertising model, no matter how innovative, will have a hard time succeeding.

So let’s look at what Twitter does have:

  1. Loyal, active (not to mention affluent) users
  2. The attention of the corporate world
  3. A core technology that would be difficult  for competitor to supplant/replace

If this doesn’t spell subscription model, I don’t know what does.

I was excited last week to read that Twitter was considering a subscription model in Japan, only to have them put the kibosh on those plans the next day.

It’s too bad. Because Twitter could have a very strong customer ecosystem:

Acquisition: (Good) Despite somewhat stagnating growth compared to Facebook, and an unremarkable viral coefficient in the truest internet business sense, Twitter spends virtually nothing on acquisition, gets tons of free press and is promoted actively by many corporations and individuals.

Conversion: (Fair) More than half of twitter registrants never follow anyone, tweet or get followed. This is not so bad considering their acquisition numbers, but it speaks to and underlying weakness in conversion to a mass market.

Upsell: (Good) Obviously, we’re in pure speculation territory here, but I see huge potential in multiple subscription levels on both an individual and corporate basis. I can imagine a $5.99 a month subscription for individuals who for the following features:

  • Ability to send direct message
  • Ability to send more than 25@ replies per month
  • Backup/storage/offline accessibility to tweets
  • Support for more than 500 followers

Obviously the corporate subscription would have some similar features, but would focus on marketing/support and would have robust analytic tools.

Retention: (Good) If there was a ever a trapped customer it would be the Twitter customer. Sine Google killed Jaiku (and I’ll never understand that one) there has only been one microblogging platform. Additionally Twitter users love the service and promote it heavily. Eventually, a new technology may come and replace Twitter, but not in the near future.

Twitter is a great company with a world-changing product… let’s just hope that their revenue model (when it eventually comes) won’t consign them to the garbage heap.

UPDATE: Twitter testing enterprise tools. Looks like a good first step.