As we have been devising the revenue models for statzen we have been focused on how we can make money running the business. In many ways we are approaching it the same way we have approached our other business; ensure gross revenue is higher than the cost of goods sold by a margin that is sufficient to cover the other expenses, maximize the average transactions and the number of transactions a month. I think that is the responsible way to run a business. After all, I am interested in business, not gambling.
I was just reading about feedjit on TechCrunch and saw a recurring theme that gives me a little pause:
The Feedjit traffic widget launched a month ago and is now claiming some fairly serious viral growth - 3 million impressions per week from the blogs that have added it.
Widget impressions are an increasingly common metric for DotComs to describe their success/growth/value. Now, I don’t know anything about the revenue model for Feedjit, but I can’t help feel the intention is to build and flip. The mindset that eyeballs are valuable reminds me of the 1990s, and that is scary. Sure, having a forum to deliver advertising is valuable, but advertising on widgets will pretty much ensure that they are banned from most popular platforms. MySpace, Facebook, Wordpress.com, Blogger, etc are never going to let ads appear on their sites without getting a cut. So what is the value of a widget impression?
With statzen we are going to be paying close attention to the number of widgets that we display, but that is not a measure of our value, but rather a measure of our advertising. Widget impressions are one of the many places from which we can try to calculate our conversion rate. Widget installations are a way for us to measure the usefulness of the product we are providing our customers.
While statzen has a strong plan for generating revenue, and an exit strategy is not a business plan, an exit strategy can augment an already strong business plan. We would be foolish to not be considering the possibility of acquisition as a potential exit strategy. So, do we plan to be valuable in the eyes of potential buyers?
I think that one reason choose a “freemium” service offering model is that the free users raise the value of the company in the eyes of buyers. Think about the Google purchase of FeedBurner. Shortly after purchasing the company they completely eliminated the revenue stream. Google was not interested in the profitability of FeedBurner, they were interested in the opportunity to sell ads on all that content (the true cost of free services).
So the question has bubbled up to the surface at statzen. Should we be a free service with a premium offering where we will be doing good to have 10% of our customers as paid subscribers? Or should we be a premium service with a free trial and a bare bones free option that would have a much higher percentage of customers generating revenue?
Assuming that we could/would have the same number of paying customers with either model then the additional free customers would just be an added expense that cuts into profit. However, while the additional free users would cost more, the additional users would make us more valuable as an acquisition target of traditional big internet companies. So are profitability and a big sales price at odds with each other? Do we really want to make seemingly bad business decisions for the sake of a exit strategy?
In reality it is not that simple of a distinction. The additional widgets/buttons on the blogs of the free users would help with expansion. As long as we maintain (or improve upon) a reasonable conversion rate, having more free users should produce more rapid growth. Still, all those free users can be expensive. It is all a moot point if we can’t afford to stay in business. If we grow by 20% each month and we have the same number of paying customers the first month in both models, then we would have the same number of paying customers in each plan for every month. I am not sure I can see the reason that higher numbers would result in a higher customer growth rate.
I like the idea of launching a dotcom that plans to be profitable within the first year. I don’t think I would want to do it any other way. There are lots of people who are willing to gamble on a loss-leader application in hopes of a profitable exit later. I don’t want to take that gamble with my money or anyone elses.
A while back Nicholas Holland and I were talking about franchises. He brought up an interesting point that he had heard. If you have a business that brings in $50,000 in annual profits that is the same as having $1,000,000 in the bank at 5% interest. Revenue and profits are my friend. Sure, it would be nice to sell out, but it is nicer to not have to.
