Posts from MBA Mondays

My friend Darren Herman helped me think about this post. He sent me this deck along with some thoughts. This slide from Darren's deck is a good place to start this discussion:

It is true that the vast majority of consumer web apps have been and continue to be monetized with advertising. On mobile that is less true, but becoming more true every day.

There are all sorts of ways to generate advertising revenue online. Here are the entries under the advertising category in our revenue model hackpad:

This list is most certainly not exhaustive but it does cover the most common advertising approaches and you can see how many there are on the Internet. There has been a lot of innovation in this sector in the past 18 years since the first banner ads were created and sold.

The famous Luma Partners slide shows just how complex the online ad market has become over time.

And this market map is by no means exhaustive either. Online advertising is a big and complicated business.

I would break up advertising into two big buckets; ads that are sold and ads that are bought. The first is a relationship business, requires a direct salesforce or a salesforce that you can tap into, and will bring a higher revenue per impression in most cases. The latter is a data business, automated by machines and software, is a volume game and will bring a lower revenue per impression in most cases. Much of the online advertising market is moving inexorably toward the latter category, for good and bad.

The reaction to this move away from high value "brand" advertising to commoditized and programmatic advertising is native ad formats and advertising models. I have written about native advertising at AVC before and am a big fan of this approach. Examples of native advertising are promoted tweets on twitter and radar and spotlight on tumblr. In both examples, the ad unit is the same atomic unit of content as the users create in the service. I think we will see more and more of this as the value of the impression is driven lower and lower in the programmatic model.

When you think about an advertising revenue model, you need to think about one of two things; scale or niche. Scale means hundreds of millions of impressions a month or more. Niche means a valuable audience that advertisers will pay a premium for. But even if you are going for the niche approach, you will still need to have a lot of impressions. Here is why:

Advertising is sold many ways, including:

CPM: Cost per thousand impressions

CPE:  Cost per engagement

CPA:  Cost per acquisition

CPC:  Cost per click

Sponsorship:  Fixed cost for a fixed program

[thanks to Darren for that list. I took it directly from his email to me]

With the possible exception of Sponsorship, all of these methods will converge to the same number. For example if you sell a click for $1/click, and one out of every hundred page views turns into a click then you are selling a page view for $1/100 (1 cent), and that turns into a $10 CPM (10/1000).

CPMs have been in decline for years on the Internet. That's because the Internet keeps on creating more and more inventory. There is no scarcity. And as a result the supply/demand clearing price just keeps going lower and lower. Ten years ago, a $10 CPM was acheivable. Today, you will be lucky to get a $1 CPM. A $1 CPM means that 10 million impressions will generate $10,000. That's enough revenue to sustain a one or possibly two person business but not much more. You will need at least 100 million impressions and ideally more than 1bn impressions per month to have an interesting advertising supported business at scale. 1bn impressions is a lot of users using your service a lot.

Niche will work at slightly less scale. If you have a unique and valuable audience, you might be able to get a $5 to $10 CPM. So you will need 100 million impressions per month instead of 1bn impressions. That's still a lot of super valuable users engaging a lot.

If you are going with a scale model and you have a service that has that level of inventory to sell, then you have the choice of building a sales force inside your company or using a third party to sell your inventory. You don't need just one third party. You can use many of them. That's where the Luma slide (above) comes into effect. There is an entire industry built to take the inventory you give to a third party and put it through endless machines and algorithms before it is shown to an end user. I will not get into this in more detail here but Darren's slide deck, which I linked to above, has some good information on that. When you use a third party to sell your advertising you can give away anywhere from 50% of ad revenue to 20% of ad revenue. Most commonly it is somewhere in between.

If you are going with the niche or native approach, you will need your own sales force and you will need to hire a leader for that sales force (a VP Sales or Chief Revenue Officer) who can build and lead that team. The sales leader is a critical hire. There are people who do this for a living, who really understand how to put a team together and generate advertising revenue predictably and reliably, and they are highly compensated and are worth every penny. Do not skimp on this if you are building your own sales force. You may choose to build your own sales force if you are going with a scale model, but you don't need to do that right away.

In the interest of keeping this post a reasonable length, I will end here. I highly recommend diving into the comments where we will discuss and debate this post. I will conclude by saying that an advertising model is a viable revenue model option if you are building a service that has a lot of scale. But if you don't have millions of users a month, you should think hard before going in this direction. There is a limited amount of ad dollars out there (except CPA budgets which are in theory infinite) and more and more services trying to tap into them every day which is why advertising rates on the Internet seem to be in permanent and systemic decline.

A revenue model is "the system design by which a business monetizes its services". That comes from Wikipedia. I like that definition. Short, sweet, and to the point.

I am going to spend the next couple months talking about revenue models for online businesses. We've started off this series by crowdsourcing a list of the various business models that online businesses use. I will use that list as an outline for this series:

Here is the outline:

– Advertising – the service is free to use, marketers pay to reach your users via advertising

– Commerce – sell something to your users, keep some or all of the proceeds

– Subscription – charge your users monhtly or annually for the opportunity to use your service

– Peer to Peer – connect people together in a network, take a small piece of the activity that ensues

– Transaction Processing – settle transactions and take a small piece of the transaction for doing so

– Licensing – charge users once upfront for the opportunity to use your technology

– Data – sell the data your service generates

– Mobile – Mobile is not a revenue model, but we will discuss how mobile presents some unique challenges and opportunities for monetization

– Gaming – Gaming is not a revenue model, but we will discuss how gaming presents some unique challenges and opportunities for monetization

Of course these categories are not mutually exclusive. Many web/mobile services will use multiple revenue models. Freemium, for example is a combination of advertising and subscription.

I will kick off this series by making an important point about focus. I strongly believe that entrepreneurs should pick one revenue model to start with and focus 100% on making that work before rolling out another one. It is very hard to execute two or more revenue models at the same time. Better to nail the first one before rolling out the second.

I am a fan of starting with the most native and easiest to execute revenue model first. Ideally it will be one that improves the user experience or at least in no way harms it.

I am looking forward to writing this series. We'll start next week with advertising.

So I messed up bigtime yesterday.  I created a "final version" of the revenue model hackpad and locked it down so hard that nobody could even see it. 

What happened is I am using a product, hackpad, that I don't really know how to use correctly. I am learning how to use it in real-time. Which is how I learn to use everything. Screw the manual. Just turn it on and get going. That can work, but it results in fails like we had yesterday. The truth is I still don't know exactly what I am doing with this product, but I am figuring it out.

The "final version" is now fully public but locked down for moderation. Whatever that means. I think it means is we can continue to edit this "final version" but I get to approve all edits.

Anyway, here's a link to the final version. There were some edits to the initial version yesterday that I like a lot. The transaction processing section was re-organized in a nice way. And a few more revenue models were listed. I will work to merge the two but don't have time to do that this morning.

Again, I want to thank everyone who has been working on this list. Crowdsourcing information is messy but together we have built something that is way better than I could do on my own.

The idea of peer producing a comprehensive web/mobile revenue model list was a success. The hackpad I created and linked to last week got a ton of contributions. I took the time this morning to clean it up a good deal. I will outline the high level changes I made in a bit. But since that hackpad is still wide open, I also made a final version and I have made it invitation only so I can control the edits this one gets. There may be a way in hackpad for the initial author to lock down a hackpad but I couldn't find it, so I did it this way.

So what edits did I make to the wide open hackpad? Well first, I tried to clean up the examples and make them as definitive as I could. The more well known a company/service is, the better example it is. I also took out many of the multiple examples. I think one is generally sufficient. I also took out the revenue models I thought were duplicative or slight variants of other revenue models. And there were a number of sections at the end that I would call "business models" as opposed to revenue models. So I took them out. Finally, there were a few entrepreneurs who were using this hackpad as a way to promote their companies. In effect, they were spamming the hackpad. I took out everything that felt like spam to me.

We are left with nine categories:

I think six of them are truly definitive revenue model categories (advertising, commerce, subscription, transactions, licensing, and data). The other three (peer to peer, mobile, and gaming) could be folded into the first six since they mostly map to existing models (mobile ads are ads). But these three categoris are unique in many ways and so I felt like leaving them in even though it's not as clean this way.

The "final" hackpad still needs work. There are some entries that are missing examples. I noted them with (??). There also may still be important or emerging business models we are missing. If you would like an invite to help fix the final version, please leave a comment to this post and I will invite you if I think your edit is useful.

My hope is by next week, we will have a truly definitive list of mobile and web revenue models and then I can use the list as a template for the MBA Mondays series on Revenue Models. Thanks for everyone's help on this.

We are kicking off our next series on MBA Mondays with an assignment. We are going to peer produce an exhaustive list of revenue models for web and mobile businesses. Then I will publish that list and use it as a template to do this series. I am not going to write a post on each revenue model but I am going to write posts on the top ones as well as discuss the pros and cons of each.

I've created a hackpad that we will use to do this assignment. I've filled in a few of the most obvious revenue models and have started grouping them into the big categories (advertising, commerce, subscriptions). There are certainly more revenue models and additional big categories that aren't on the list yet. So please go take a look and add anything that you think is missing.

I will publish the comprehensive list next monday and use that to kick off this series.

Back at the end of April I wrote a post asking for ideas for the next few topics for MBA Mondays. Out of that came the series on People which I followed with a series on Sustainability. It's time for a new series and I want to check in with everyone to see where you'd like me to go next.

The Disqus thread from that post in late April are full of suggestions so you might wade into them and see which suggestions interest you most. Or simply leave a comment with a topic you'd like to see me do a series on.

I'd like to tie together two posts and make a final point on Sustainability.

In my first post for the Sustainability class, I wrote:

Clay Christensen talks about this kind of thing all the time. Big company executives are asked to calculate an return on investment (ROI) on the investments they want to make. If the ROI isn't greater than some minimum hurdle, the company doesn't make the investment. And so along comes a smaller competitor who makes the investment and they eat the big company's lunch.

ROI is not the right framework for companies to evaluate investments. ROI is for the wall street folks. They will use it to decide if they want to invest in your company. But when you make investment decisions in your company, don't use the tools that wall street uses. Use the tools that animals use. Survival instincts. What will it take to ensure that your company is around in ten years, fifty years, 100 years? That's how to think if you want to stay in business.

And then the man himself, Clay Christensen, went and wrote a post for the NY Times yesterday which I highlighted in yesterday's What I Am Reading post. Clay wrote:

So we taught our students how to magnify every dollar put into a company, to get the most revenue and profit per dollar of capital deployed. To measure the efficiency of doing this, we redefined profit not as dollars, yen or renminbi, but as ratios like RONA (return on net assets), ROCE (return on capital employed) and I.R.R. (internal rate of return).

Since this is called MBA Mondays and we are supposedly teaching a MBA style curriculum, I want to emphasize this point. Do not use Wall Street tools to evaluate investment decisions in your companies. Use the tools that animals use. Survival instincts. What will it take to ensure that your company is around in ten years, fifty years, 100 years? That's how to think if you want to stay in business forever.

But Clay's post for the NY Times yesterday makes a broader point. If the folks who allocate capital in our society – venture capitalists, hedge fund managers, mutual fund managers, etc – are using IRR, ROCE, RONA, then they are going to allocate capital to companies that are making efficiency oriented investments, not empowering investments. And our society will continue to be awash in capital with no game changing  empowering investments that create new industries.

Clay suggests that we measure our returns in "dollars in dollars out" and forget about time, " profit as dollars, yen or renminbi". That's they way I was taught the venture capital business back in the 80s. Cash on cash, dollars in dollars out. That's what matters. If it takes a decade or more, who cares? The slow capital approach.

So if MBA Mondays is a school of business, then I hereby outlaw IRR, RONA, ROCE, from our lips. We aren't going to teach those tools and we aren't going to talk about them either. We are going to talk about making money the old fashioned way. In gobs and gobs, but slowly over time, with our survival instincts fully engaged. Let's hope others do the same.

I've enjoyed teaching the Skillshare class on Sustainability. I've learned a few things about the hybrid class model and I have shared them with the Skillshare folks. It's tantalizing to think about the power of teaching a class to 2,731 people at one time. But when I compare that to the power of teaching 75 people in person, the hybrid model shows it's weaknesses.

I need the real-time feedback from the students in the class. I need to see if folks are getting what I am saying or if eyes are glazing over. I need to know if I need to take another tack on the material before moving on. And I don't get that with a massively open online approach.

So my next class is going to combine the in person dynamic with the power of a massively online approach. The best thing to come from the hybrid class model is the idea of using google hangouts/youtube to broadcast the class to everyone. I am going to do that from now on.

I also like the idea of teaching a four part class with a blog post each week. I can build on that model too.

I am less happy with the discussions on Skillshare and that they did not tie into the discussions that happened on AVC. I need to figure out how to make all of that work better. It's obvious that a teacher (me) can't give real time feedback to 2,731 students. And I think leveraging the students to give feedback to each other (the disqus model), is right. So it's worth working on this model to perfect it.

I want to thank Michael from Skillshare for prompting me to write about Sustainability this month. As I said in my first blog post on the topic, I think Sustainability is a great model for business owners and leaders to take in thinking about the highest objectives of the company. If I have contributed anything to the way business leaders think about Sustainability, then I have accomplished my goals with this class.

I am going to postpone my final office hours which were scheduled for this evening at 6pm eastern time. Hurricane Sandy looks to be coming through NYC at that time and I don't know what that may cause me and my family to be doing at that time. We live right on the Hudson, at the border of Zone A. So I've got a few things on my mind today that fit right into this Sustainability theme. I will report back on a new date and time for my final office hours.

Stay safe everyone on the east coast today. Let's hope the hype is overblown. And let's prepare as if it isn't.

This is the final post for my Skillshare class on Sustainability.

I will not do office hours this evening but I will do one final office hours next Monday, Oct 29th, from 6pm to 6:30pm. The link to attend that office hours is here.

For this final post, I want to focus on the Business Model Canvas and how to think about sustainability in the context of creating your business model. In order to talk about that, I went ahead and created a Business Model Canvas of my own using bmfiddle.com.

My Business Model Canvas is for a Bitcoin Bank.

If you think about banks in the real world, they are high cost affairs, with huge fixed costs including large branch networks. I am always shocked by how many bank branches I pass in a five to six block walk in NYC. The way these banks sustain these high costs is with large fees for depositors and high spreads between their cost of funds and the interest rates they charge borrowers.

So in thinking about how to create a sustainable Bitcoin Bank, I focused on a few key things:

1) keep the operating costs super low except in areas where there is a unique and important consumer value proposition

2) make it easy to access the bank and your balances within the context of low operating costs

3) keep the fees charged to customers as low as possible

4) allow third parties to build busineses on top of our business

The result is a super simple business model. My Bitcoin Bank would charge a very low monthly fee per Bitcoin deposited and nothing else other than pass alongs for any costs incurred in moving bitcoins in and out of the bank on behalf of our customers. We would not have any branches. We would operate via simple, easy to use mobile and web interfaces. We would keep our operating costs super low with the exception of one area where we would make a large and ongoing investment – in hiring and retaining a top notch and super experienced security team. We would allow third parties to create related businesses on top of our API. Services like lending, investing, etc would not be provided by our bank but by third parties who access our customers via our API.

I believe this business would be highly sustainable because it would focus on one very simple value proposition – security. And in return it would charge the lowest fees possible in order to make and sustain a profit. It would make it very difficult for others to price lower fees for storage and security. And it would benefit from the ecosystem of third party value added service providers operating on top of its API.

Here are some decisions I made in order to increase the sustainability of the business:

1) A focus on very low fees to our customers so that it will be difficult for competitors to undercut our offering.

2) A decision to focus on only one thing, security, and allow others to build additional services for our customers. This allows us to be best in class at the one thing we choose to do and it means our customers can choose to pay for additional services or not, and always on their own terms.

3) A cost model that keeps operating costs as low as possible in all areas other than security, which is our key consumer value proposition.

So when you are finalizing your Business Model Canvas for your final project for this course, think about what your key value proposition is and who is your primary customer and focus on that. And think about what you can do in your revenue model to make it so that it will be hard for others to come in and undercut you. And think about your cost model and how to keep it as low as possible while allowing your company to be best in class at what it does.

Please submit your final Business Model Canvas project here by Thursday, Oct 25th, 11pm EDT. I will pick out a bunch that I like and review them next week on office hours.

That will be the final event in this course. I hope you have enjoyed this class/series. I think sustainability is an important and overlooked aspect of business and it needs to built more tightly into business thinking.