Know When to Shake Your Money Maker

by Brent Hurley


In business, timing is everything and priorities matter.  For a business, there’s nothing more important or more pressing than monetization, right?  Not necessarily.  I’m often asked whether startups should focus first on monetization or on reaching scale.  As with most everything, it depends.  In particular, it depends on the circumstances facing your company and the type of company you’re trying to create.

Conventional business wisdom holds that any new venture should first establish product-market fit and then optimize unit economics before expansion.  That is, make sure there is an appetite in the market for your product and that your sales price exceeds your cost of goods sold, or that your estimated lifetime customer value exceeds your customer acquisition costs.  If these metrics are inverted, scale will only amplify the losses produced by the venture.

Why, then, do some of the most successful consumer internet companies fly in the face of this logic?

Twitter, Facebook, YouTube and Google all focused on user growth first, accruing significant losses, before ramping up monetization efforts.  On the other hand, similar strategies have led to some of the most infamous internet flameouts – Pets.com anyone?

Investor sentiment influences action.  After the dotcom crash and the “meat cleaver” days of the recent credit crisis, the pendulum of VC advice swung from championing first mover advantage and getting big fast to instead running as lean as possible and zeroing in on monetization efforts early to preserve capital and extend runway.  When times are tough, there’s seemingly no escaping these strong external headwinds, but in more stable times, I argue platform-based consumer internet companies should focus first on user acquisition and engagement, then monetization.

For consumer internet companies today, given the large number of competitors and the low barriers to entry, rising above the noise and achieving scale is the most difficult thing to do.  If achieved, however, it follows that the money-making opportunities for a large set of aggregated eyeballs are expanded and enhanced, whether through advertising, micro-payments, etc.  Platform-based internet companies are a scale business – network effects enhance a site’s usefulness, defensibility, and profit potential.

To achieve scale, though, you’ll likely operate at a loss initially.  Rapid prototyping is needed to uncover market demand, to show that users actually want to use your product.  Engagement and viral hooks should be the key measures of success here, not profitability.  Focusing too early on optimizations of your customer conversion funnel or advertising efforts can be a distraction.  Instead, your time would be better spent releasing and testing new products/features to drive growth, in hope that the favorable, emergent properties of operating at scale can be unlocked.

Given finite resources and time constraints, platform-based consumer tech companies should ignore profitability and focus first on growth.  Of course, you must be prudent and not overspend on things like Super Bowl commercials simply to buy users.  In addition, this ‘cart-before-the-horse’ strategy applies uniquely to platform-based consumer internet companies. An online pet store, for instance, would meet its own peril if it followed this advice for obvious reasons.  However, to me, all things being equal, the Silicon Valley adage, “ubiquity first, revenue later”, rings true more today than ever before. 

Remember to shake your money maker only after the dance floor is full.

Comments

Popular posts from this blog

Quiz Time 129

TCS IT Wiz 2013 Bhubaneswar Prelims

The 5 hour start-up: BrownBagBrain