View more presentations from Caelen King.
My experience with monetizing web software can be broken down into three very different professional experiences.
The first one was with Baltimore Technologies, where I promoted the product UniCERT. Despite Baltimroe Technologies’ unfortunate demise, the product was profitable and at peak we had revenues of about €150M.
The second was with NewBay Software. While I was VP of Product at NewBay Software, we took a very different approach. For the most part, we looked to white-labelling our web application into customers with large, existing subscriber bases.
Thirdly: I am currently CEO of RevaHealth.com. We are a search engine/comparison shopping site for consumer health products such as high end dentistry, laser eye-surgery, cosmetic surgery, fertility etc. We monetize this application through a combination of subscription and advertising, and when it comes to advertising we use the entire gamut of advertising models out there.
I am not going to talk about other forms of monetization such as transactional models, micro-payment, virtual currencies and one off pay-to-use fees. The reason I’m not going to talk about these is that I don’t have any direct experience with them. I’m going to try and limit what I talk about to only what I have direct experience with.!
Early stage companies put a lot of focus into getting the deal done and not enough focus into long term profitability. What happens here is that maintenance, support and recurring license fee are neglected totally. Having been in this position multiple times, I recognise it as almost inevitable, however it is possible to temper your eager sales guys going out to get the deal done.
Commission models normally highly incentivise large upfront payments and so the sales guy front-loads the contract as much as possible (after all that is what you are paying the guy to do). What happens then is that your customer becomes a liability. This is not good – customers should be one of your biggest assets. Think about how this would look to a potential investor in your business. A really good way of combating this is to have a contract negotiator who operates as a separate function of sales and who is not commissioned on the sale, but on the long term profitability of the contract.
NewBay Software is a good example of effective white-labelling. They run their web applications under the brand of various tier-one network operators around the world – using a variety of business models. Each model is right for the individual customer; however they all share one characteristic – sustainable revenue.
The simplest of these models is the per user per month fee. This gives the customer confidence that they are only paying for value (if a consumer stops using it they stop paying) and gives the white labeller a very predictable revenue stream. Revenue tends to build month on month.
Subscription revenue from consumers is sometimes viewed as the nirvana of web application revenue.
In general I’m a big supporter of the subscription model and it forms the backbone of RevaHealth.com’s revenue. If you can get users to pay a monthly subscription it is a sure sign that you have created a product of value. If you haven’t, then they won’t pay for it.
It shares a great deal in common with the white label model of charging per user per month due to predicable, increasing revenue.
However there is a dark side to the subscription model that isn’t much talked about. This is the graph that is commonly used to demonstrate the power of the subscription revenue model. The logic behind it goes like: if you can sign up 10 customers a month and each user pays every month, rather than
upfront, it leads to ever increasing revenue, or at the very worst, static revenue. Growth in revenue is not dependant on an ever increasing sales department.
The problem with the graph is that it is rubbish. It is a theoretical model that cannot be achieved in the real world. The reason for this is that people die. No matter how perfect you server is, people die and will stop using and therefore paying for your service. In reality the list of reasons people will
stop paying for your service is long, with dying being the least likely.
So lets have a look at the affect on the model. Firstly an aspirational 1%. At 1% we can just start seeing the curve in the graph– but hey, no big deal, you’re still going to rich.
At 5%, the curve starts to become more pronounced, and those with a mathematical bent will start noticing the self-limiting nature of the function.
At 15% the curve starts becoming self-limited at about 20 months and growth is minimal from about the 8th month. If you want growth to continue, you are going to have to start signing up more users on a monthly basis. The reason for this is that the number of subscribers that you can sign up in a month is a
function of some internal resource of your company (raw traffic, sales, engineering). Whereas the number of customers that you lose every month is a function of the number of customers that you signed up in the past (and the churn rate). And no matter how hard your sales team work, they can’t change the
number of customers that they sold to last year.
Advertising is the crack cocaine of web application revenue. You never have to sell. Just plonk a bit of code on your website and money arrives in your bank account every week. However, the problem with crack is that once you’ve taken it you want more.
And before you know it you have pimped out every pixel of your site and your application has become like a clapped out hooker that no one wants anymore.
On a serious note advertising works best when your user is transient and close to the point of purchasing a product or service. If your user base is very much the same from one day to the next then they won’t see the adverts anymore. In the case of RevaHealth.com, 80% of our users every month are unique and most
are looking to purchase a healthcare product with a typical value of about €3,000. This makes advertising a particularly suitable revenue model for RevaHealth.com.
You have to be careful with advertising. Sometimes you can undercut your own business model. This is the old UI for our site RevaHealth.com. On the left hand side of the screen you can see our search results – this is our main method for monetizing our site. On the right hand side we have Google
Adsense, this provides a minor but still significant revenue stream.
Now, if you look at the results on the left you will see a clinic in our search results.
On the right hand side, with Google Adsense, you will see the same clinic advertising. This is bad for two reasons.Firstly, one of these entries has to be under-cutting the other and secondly, it provides the user with a bad experience. This is totally avoidable but does require a management overhead to
get right.
Per Impression advertising is the old man of online advertising. In general it offers you the lowest revenue for the lowest risk. You get paid for each impression, regardless of the user’s interaction with the banner.
RevaHealth.com earns about $5 for PPM advertising, which is pretty good. I have seen sites that have a PPM of $0.2, so if you plan on making money through PPM advertising you are going to need a lot of impressions.
Pay per Click advertising is now the most common form of advertising on the web, thanks in part to Google’s Adsense network. In general I think this is an extremely good way of monetizing a web application and Google make it pretty easy. We earn about $0.8 to $0.9 per click on average, with click-through of about 3-4%. These are very high click-through rates and reflect where in the sales process our users are. This results a $22 PPM equivalent. Please note that these PPC figures are not Google Adsense but from advertising that we sell directly.
A not on Google Adsense I would encourage you to start experimenting with colours, position and borders. We made some seemingly small changes to our Adsense, incorporating them better into the page content, resulting in a doubling of revenues.
Affiliate marketing or Pay Per Action advertising are largely the same thing.
In general, they tend to offer the greatest levels of revenue of all advertising models, however they also carry the highest levels of risk. With PPA advertising you don’t get paid for showing the advert and you don’t get paid if the user clicks on the advert. You only get paid if the user completes a purchase with the target company. At RevaHealth.com we have done a few affiliate deals and the resulting levels of revenue are truly eye watering.
We can earn the equivalent of €400 PPM on an affiliate model, which seems
to make PPA or affiliate marketing a no brainer.
But despite the massive payout we don’t do affiliate marketing anymore. The reasons why not are collections and cash flow. Unless you are in a field where there are established affiliate networks, such as the online gambling industry, trying to get paid is a big issue. In the case of RevaHealth.com, trying to collect money from 10,000s clinics worldwide would require a collections department larger than the rest of the company combined.
Cash flow would also be a major issue, as a customer typically gets in touch with a clinic 3-4 months before they intend on having the treatment and it can be a further 3 months until the clinic gets paid. This would give RevaHealth.com an unacceptable cash flow situation.
So we try and balance our revenue stream by using a combination of subscription revenue (which provide predictability) and Pay Per Lead advertising. This gives us better monetization than PPC and good cash flow, as revenues are paid in advance.
