Imaging my interest when someone offers me a review copy of a book called, The Social Network Business Plan: 18 Strategies That Will Create Great Wealth. Obviously, I jumped at the opportunity to read it. The book is written by David Silver, a VC and angel investor in online communities. If you have read this blog for a long time, you know that I do not strictly review books, but I try to find those nuggets of information that most books have.
One of the best quotes in the book is near the beginning where David throws advertising as a revenue stream under the bus:
You cannot use advertising as a revenue source while operating a recommender community…The elegant recommender community is member supported; its mission is truthful exchanges of information that benefit the lives of its members; and it will solve the pain of its members.
There are a few things to note here. First, he is focusing on recommender communities, basically those communities that are built for a niche not a general social network like Facebook or MySpace. Second, for the community to be strong, there has to be some benefit to the users of the community. Lastly, there has to be some problem that this network solves. This is good advice for almost any startup. If there is no problem to be solved, then what are you building?
Another important quote from the book is actually a quote from an outside source:
We assume that all products of our competitors have basically the same technology, price, performance, and features. Design is the only thing that differentiates one product from another.
If I did not read the book, I would have assumed that Steve Jobs had said this. However, these words of wisdom come from Norio Ohiga, the former chairman of Sony Corp. Sony may have lost its’ way on this, but Apple has been capitalizing on this idea for several years now. This is definitely something to think about when you are creating your next startup.
So, if you are building something that people want or need, how do you monetize it? This book gives you plenty of ideas, some simpler than others, that you can try for your community. Obviously, some of this advice may not work for your community, but if you know what your community wants you should be able to figure out which ones will work. Also, there are a few categories that these revenue streams fit into, so I will talk about each category as a whole.
Fees and Direct Revenue
These are the more obvious and general purpose revenue streams. There are basic subscription fees that can be used for premium content or even basic access to the community. Another idea is a tip jar where members can tip other members based on their content, and the site takes some “processing fee”. One interesting fee based idea is the reputation management fee. This is not like the marketing and public relations applications that are appearing, this is partially rewarding your users. It is best described by a summary from the book:
members want a continual flow of information on many factors affecting their community. One of the main news items is naming or “outing” the corporations or enterprises that have attempted to place employees in the community who act as ordinary citizen members, but in fact are attempting to spread the biased gospel of their employer’s product or service.
This reputation management is an interesting method that can also be used to ensure that the community keeps itself clean and free of spammers. Kudos are another interesting model where people can get “unexpected rewards” from other users or the community owners themselves. Obviously, there needs to be some way to purchase the “rewards” as well. Synthetic currency is the current hot topic for sites like Facebook. Obviously, synthetic currency is only as good as the virtual products that people can purchase.
What I am calling marketing revenue are those streams that are based on your marketing of your community or leveraging the knowledge of the community to create direct revenue streams. The first revenue stream is slicing and dicing the conversation. I am a big fan of this method due to the amount of information that can be collected in social networks and other social media. Many companies are willing to pay a good amount of money to get this information, even in an anonymized form. User group meetings and conferences are definitely money-making opportunities, but your community needs to be fairly large or well respected. This is also a work intensive method, because setting up a conference with various speakers is not an easy job. David calls one revenue stream the JD Powers business model or the “validation business”. This is the general idea of ranking the best companies or services in various industries. Part of this is probably the analyst reports that you can also generate. Some blogs, like GigaOM, are taking advantage of this model already. Lastly, we have the one advertising based stream which are sponsorships and “powered by” references. Sponsorships are basically long term advertisers that get special placement on your site. “Powered by” is a little harder to work with. Basically, if there is a company that can provide services in some form, they can get a “powered by” logo on the site. You see this a lot on technical sites because they may be promoting some open source tool, but this can be used for any niche community as well.
Indirect revenue are those streams that are generating revenue through other sources or “kickbacks”. The first indirect source is an affiliate network. David mentions affiliate ad networks, but even selling a product through an affiliate network can be a good revenue stream. There are a lot of potential kickbacks available to social networks as well. First, if you port the community to mobile phones, some of the text messaging charges can get passed back to the community owner. If your community becomes well respected in its industry, there can be “Approved By” stickers or recommendations. Again, if there is a product being sold, there can be some percentage of revenue that gets paid to the community owner. One interesting method that David includes are prepaid credit cards. As he states in the book, “Visa typically charges 3.5% against purchases and will kick back roughly a third of that.” Given that there are some setup costs for the cards, there can be annual fees and other minor charges. The final revenue stream mentioned is setting up a not-for-profit. Given the requirements for a not-for-profit organization, this is not an option for someone who wants their community to run on autopilot. Also, if you are really thinking about this option, I would recommend looking at the book as well as consulting an attorney and a CPA to make sure that you are doing that right.
Maybe your startup has decided to postpone generating revenue in order to focus on building traffic and the community. This is somewhat typical in today’s internet as more startups focus on an exit strategy. David does have some interesting things to say about this as well. First, he states that “the current going price for the purchase of social networks is 20 times trailing twelve-month revenues.” If you have no revenue, then how much do you sell your company for? David does not give any solid information on valuing your company, but he does have a few rules when thinking about selling:
- Do not listen to free advice – a community of experts toils daily in the merger and acquisition marketplace and provides advice that is worth far more than any tips you pick up from your stockbroker, attorney, etc.
- Do not discuess your plans with relatives – since they probably cannot contribute much constructive advice, why tell them anything.
- Do not develop an inflated idea of your company’s worth – at the very least, your company is worth its liquidation value: the proce that its tangible assets would bring at auction.
- Look for a strategic buyer before you sell to a financial buyer – a strategic buyer is a company in your industry or a related industry that seeks to acquire your company for strategic purposes.
- No one ever lost money selling too soon – although an early may seem too little, it may be the only one you receive.
- Consider selling to the public – obviously this should only be done when the market is friendly to an IPO which is questionable at the monent.