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Four ways of making money online, and how to succeed
Sep 20, 2007
(Note: Usually in this space I take the customer perspective to explain the customer experience, but today I take a different tack - that of a business owner. Stick with it; it comes back to customer experience in the end... :) -mh
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"We'll make it up in volume." Veterans of the dotcom years will remember that statement, popular in the late 90s, as a cogent summary of what went wrong in many online businesses. A company might be losing money on every sale, but given the infinitely expanding size of the new economy, surely there was money to be made at some shining point in the future. (In reality, the only shiny thing was the oily surface of the glistening bubble, about to pop.)
Online business has come far in the past six years, becoming more realistic about business models. Unfortunately, many companies still don't understand the role of the customer experience in their business.
First, consider the four main ways a business can bring in money:
• from customers (paying for a product, service, or subscription), who can be individuals or other companies;
• from advertisers, who pay for the chance to distract individual users from the content of the site;
• from an IPO, which allows company founders to sell off pieces of their ownership to the larger market - and, oh yeah, bring in some capital for the company as well;
• or from an acquirer, the most attractive of which (today) seem to be Google, Yahoo, and Microsoft. (I know that private equity and lines of credit are among other options, but let's skip those for this discussion.)
Back in the dotcom years, the IPO and acquisition were the most popular options - or at least most highly lauded in the press - leaving in an obscure minority those companies that actually made money from their operations.
Even today, plenty of startups bet everything on an acquisition. They make their best guess as to what Google or Yahoo wants to buy at the moment, and they try to build it. The customer experience is nearly irrelevant; the main goal is to attract the acquirer's deal team (or perhaps the planners of tech-hype conferences, where acquirers will be attending).
But in the last few years, many companies have finally woken up to the reality that they may need to make money without the help of an IPO or acquisition. And that requires a commitment to the customer experience.
Let's examine what drives the first two business models above:
• What causes customers to pay for a product, service, or subscription? Especially online, where so much is free, and so much of e-commerce is still hard to use, what is the key motivator to get customers to pull out their wallets?
• If the site has advertisers, what motivates customers to come to the site? More importantly, what causes them to Ireturn to the site after their first visit?
Answers: customer experience, and customer experience. Unless a company is dead-set on an IPO or acquisition, the real driver of long-term survival and success is still the customer experience... no matter what the business model.
As online business continues to mature in the coming years, more and more companies will feel the effects of this reality. Some, interested only in following trends and press hype, will survive for a short while - and some lottery winners will even get acquired and cash out. But in the long term, given a competitive environment, customer-focused businesses are the ones that will thrive.
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See also (speaking of acquisitions): Yahoo Buying Zimbra, an E-Mail Service for Businesses
I don't want to devalue it, but customer experience is not *everything*. From a product and design strategy perspective, of course it is of utmost importance. But in the bigger picture of all of the various things that can make or break a business, there are some pretty important decisions that have little to do with customer experience.
If, for example, a content-production company has a crappy ad salesperson, revenue will suffer immensely no matter how good the product is.
Or if a company chooses to use an expensive tech platform that ends up not meeting their performance needs, they can flop by simply never getting their excellent concept to actually work.
Having a manager who's a jerk and who can't keep the team intact because people keep quitting -- this is a classic way for a company to ruin itself, even if that manager is evangelical about treating the customers excellently.
This is fresh in my mind because just the other day I wrote up a little thing about the potential for overstating of the importance of design on business strategy:
http://www.graphpaper.com/2007/09-19_there-is-no-strategy
Even beyond all this, of course, there are plenty of successful businesses that deliberately have crappy or hostile customer experiences, or where customer experience expense is simply never even considered as important. Gambling sites, spam business, quasi-legal mortgage scammers, purveyors of discount low end products everywhere -- plenty of businesses have thrived since the dawn of time by treating customers like shit and letting the money pile up.
Also, many businesses compensate for crappy products by having intensely lean and mean operational expenses. I only have to sell half as many widgets as you if I pay my staff half as much, so if my product is half as good as yours we will be equally successful. If I pay 10% what you pay, by offshoreing everything from technology to design to customer service, my product can be 90% crappy and again I am equally successful as you.
You are speaking, I think, about *values* as much as you are talking about good business sense. Treating the customer well -- not deceiving them, being proud of your work, making sure your team feels the same pride and shares those objectives -- these are personal values that I share and admire, but they are not, I'm afraid, integral to business success. Capitalism has at best a flimsy moral and ethical core -- at some level we need to draw on and be proud of our personal ethics and not be forced to justify our business decisions on an empirical bottom line.
One would think that the subscripton model for software would work great. Users would get charged less, always get the latest version, get better tech support, and developers would get better cash flow, and could devote their energies to building better products.
We have been able to get that done on an enterprise basis, and hence have been able to provide better tools, etc.
But the push back on the consumer side has been dramatic. I guess people believe that paying a modest sum for a product that returns huge value, means that they own it for life, and their is no recurring cost.
Perhaps there is a better way to position the idea of a subscription mode for client software. If so, we would love to know.
Interesting ... but slightly off the mark, at least as I see the world.
The fundamental challenge is to deliver recognizable value that is worth more than what it cost to obtain. Clearly, the customer experience is of central importance in determining the "cost" of obtaining what is being offered. But if the recognized value is high enough, the customer experience doesn't need to be all that good.
The focus should be on recognizable value, with customer experience being a critical element in determining the "cost" of obtaining that value ... and hence the net benefit of what the business is offering.
Mark, I say very well said.
It's quite interesting reading the other comments here but what I think has been missed is that all the items mentioned here ARE part of the customer experience.
Crappy ad salesperson - not giving his/her customers (people who buy the ads) a good experience.
Tech platform not meeting performance needs - classic case of something not meeting the customer (read users of the platform) needs.
The manager who is a jerk - the manager hasn't realized that the staff reporting to him/her are his/her customers so by being a jerk that creates a negative experience for his/her customers.
Delivering recognized value - the ultimate customer experience success because it is only the customers who can recognize and then pay for the value.
If we look closely and realize that every person we deal with is a customer in someway and every thing we create has an end of goal of a specific customer, then it is the customer experience that makes for success.
I'm not sure that everyone is defining "customer experience" the same way.
I just see it as one thing = being successful.
Being successful demands that the "customer experience" be effective - good information scent to get to where I 'do the business'; comfortable reading or doing process.
I don't see that we should confuse immoral/amoral business practice with the WIN-WIN paradigm of online.
Ultimately, the "customer experience" determines whether the customer achieves their objective - offline or online.
Business is successful if what the user wants to achieve delivers business outcomes.
Interestingly enough, yesterday I received a notice from the NY Times. It seems they have decided to stop charging for archived content.
Their explanation was nice and flowery, but the short version is that there are so many different options available to consumers for content and the news on the Internet, that it was probably becoming an increasingly hard sell.
I recall that several years ago, I used to subscribe to weekly email alerts from their real estate section. This simply consisted of perhaps a feature article and then links to other articles that appeared in the section. Then one day I received notice that they would begin to charge for this service. Not to access the content, but to even send the email alert at all! This seemed ridiculous to me and needless to say I did not subscribe.
I am glad the NY Times has finally reconsidered their business model regarding their online content.
agreeing with another comment made... we need to move away from vague, overreaching definitions and lockdown what customer experience means.
savvy consumers come back for the product. the customer experience is simply acquiring the good or service. kiehls online store is a good example of this - great, revered skincare products but lousy online acquisition experience (and in such contrast to that offered in store.) in kiehl's case, "value" does not really apply either as they don't markdown and have higher prices than most skincare offered.
despite what the marketing gurus say, discriminating consumers go for the perceived quality of the product.