Adopt the ABA Revenue Model

Are you in the process of establishing or growing an early stage web business?  If so, I thoroughly recommend the ABA revenue model.

What is it, I hear you asking?  It’s the “Anything But Advertising” approach.

Over the last twenty-four months we have detected a shift in the type of technology start-up being established in London.  For whatever reason (and I suspect a $100bn initial public offering may have something to do with it), the proportion of B2B versus B2C businesses seems to have changed markedly.  A number of commentators have already noted the number of “Global Vice Presidents of Sales” floating around the Old Street roundabout – usually residing in start-ups with two other employees (one a President and the other an Executive Vice President).

I read a nice set of statistics recently on LinkedIn’s blog that demonstrates the dangers of assuming eyes plus hours equals cash – an assumption that I fear underpins a lot of these start up businesses:

  • LinkedIn users spend an average of 18 minutes a month on the site. Facebook users spend 6.4 hours a month.
  • LinkedIn gets $1.30 in revenue for every hour those users spend on site. Facebook: 6.2 cents.

Surprising, aren’t they?

How to monetize website based business is something we’ve debating at Rapid Innovation Group recently – and I was pleased to find earlier that we are not alone in this debate, with this Wharton professor expressing a similar ABA preference.  However, other than Professor Clemons no one seems to be addressing this issue.

So why wouldn’t you depend on advertising revenue as your main source of funds, other than on the basis that Facebook cannot make substantial amounts of money from it?  Firstly (and sadly), when things go bad in the economy advertising revenues tend to get hammered – and secondly, how many other businesses (starting with Google) are trying to make money from the same source?  Yes, the answer is lots.

I do not have a definitive answer for you, but what I will say is this: if you are creating or seeking to grow a business, you need to be looking for sustainable revenue streams.  If you are providing a product or service that is to be used day in, day out, you do not want to be dependent on the vagaries of wider economic performance for your end of quarter sales figures.  Identify another way of extracting value from your customers early on, have a rational reason for setting your pricing point, and then stick to your guns.

Examples you should be considering:

  • Do people go to your service on a regular basis?  Then use a subscription model
  • Do your customers want different amounts of something each time they visit?  Then use a transactional model
  • Do your customers need to understand your service before they can see value?  Then use a no-charge-but-I-need-your-credit-card-details-in-advance trial model

Whatever value your service or product provides, please do not kick off into the market on the basis that your customers might be interested in a General Motors Chevy Cruze or a package holiday to Spain as a result (unless you are selling cars or Spanish package holidays)!

Pricing models and points are difficult issues for early stage businesses to address – but they set the tone for the business over the coming decade, and demark your limits of growth to an extent – so make sure you get them right!