Monetization Part I: Understanding Monetization

A few days ago I had breakfast with my friend Max to talk about growing and monetizing his online service. He asked about whether to monetize using advertising or subscriptions, and I drew something resembling the following:

He saved me from committing a start-up cliché by handing me an index card before I could use my napkin.

The Monetization Funnel

The idea for this came from my friend Krishna Motukuri. When I was still working fulltime on reporterist.com, I would periodically go on long bike rides with him, and listen to his valuable start-up advice afterwards over beers and burgers.

Krishna's insight was that in our economy everyone is funneling users towards a purchase/ consumption/ transaction point.

The farther you are from getting a user to that transaction, the larger your potential audience is but since, the value you are adding is tiny, you can only earn a small cut. On the other hand, the closer someone is to making a transaction, the higher your margins for getting them closer. But there’re only a few people who are that close.

So there’s actually continuum of monetization (using Crossfit as an example):

• brand advertising – A billboard for a Crossfit gym.
• various intent-driven advertising priced as CPC or CPA – An ad for Crossfit showing up when you search for “fitness” or on a body building blog.
• lead generation – A gift (first month of membership free?) in exchange for getting someone to come into the gym and take a tour.
• commerce – Signing someone up for their first crossfit class.
• subscriptions – Subscriptions are obvious for gyms– but think about something like amazon subscriptions or prime)

Understand your funnel

Saying “I’m going to get lots of users and then figure out how to monetize” is okay (if you have the runway) but it’s still important to have a feel for the numbers. Some questions to ask:

• How large of an audience are we talking about? A thousand users? A million? A hundred million?
• Who wants to reach that audience?
• How much is it worth to them?
• How will you connect with them (the advertisers, not the audience)?

Max needs to figure out which funnel his service fits into, and what its shape is. If he can compare the approximate areas (revenue per user * audience size) at different points along that funnel he can figure out how best to monetize his users.

Not that getting these numbers right is easy – how do you know what a user is worth? How do you predict the growth or virality of your service? If you build an ad-supported experience, what do you do if you got your numbers wrong?

This is something I've been thinking about recently in the context of virtual currency. I think there's a connection. In my next post, I'll talk a bit more about games and virtual currency, and then try to explain why I think they've hit on something more generally applicable.