The New Value Threshold

Any online business looking for funds needs to have a business model (ie a way they hope to generate cash) that’s convincing enough for some (by definition, optimistic) investors to invest. While there’s room for lots of creativity and innovation in these models, there are really only 2 or 3 basic models that work for online consumer products, and everything else is a variation, combination or reinterpretation of these. The three are: ads, transactions and subscriptions.

Transactions and subscriptions are pretty straightforward. A user buys or subscribes and gets something in return – a thing, a service, access to content, whatever. That means that each user is getting enough value from the service that they are willing to open their wallet and pay. As long as enough people find out about the product and think its worth paying for, you’re making money. The value of the product to the user is the only value proposition worth talking about.

Ads however are interesting and different. Now, the product has two values to develop : the value of the product to its users, and the value of the product to an advertiser. The value to an advertiser is the answer to “how many people do you regularly serve that may be interested in my product too?”

This is probably obvious to the mba’s of the world. But its interesting never the less. If you spend any time at all in the online startup crowd, you’ll here a ton of really cool ideas. Ask about the business model, and 80% of the time you’ll here “ads”.

But the sizable audience that this requires takes some time to develop. Around 2 years, to be safe (safe-ish).

The challenge and the opportunity are interesting here (to me, anyway). The internet and the unique populist culture it fosters is creating on the one hand the challenge that there’s a lot of stuff that is now expected to be free, and it can be very hard indeed to survive the 2 or more years it takes to build enough of a “free” audience that advertising and advertisers care.

However, the internet made it so easy to distribute innovative content and services, that its very easy (well, ok, forget easy, lets say, easier) to build an online product and get users for it. So – if you can survive long enough, its possible to build an online business from with sorts of whimsical and innovative products that could never survive offline. At the same time, the internet syndication has enabled advertisers and ad slots to find each other without a sales force, so you don’t need a billion dollar business to sell ads.

So – I guess I’ve just come to the conclusion that every one else has too – the internet is a great engine for innovation. But it still isn’t exactly easy.

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