The Sunjay Times

This post is a combination of 2 things:

1. Ways to “monetize” (extract value for yourself) other than directly charging your users
2. A meta-idea for a type of business to start

I’ll start with #2 and jump into #1 right away.

Need an idea for a business to build? Look around, find an existing profitable business, find out how the business is extracting value for itself, and figure out an alternate way to extract value.

E.g. Dating sites Match.com and eHarmony.com extracts value for themselves by charging their users a fee for using their site. Dating site Plenty of Fish (pof.com) has an alternate way to extract value for itself: instead of charging their users a fee, they make it free, which in turns fuels growth, and with the sheer number of users, they now have enough eyeballs to charge advertisers who want to reach those users. It’s no secret that Plenty Of Fish is raking in the dough to the tune of millions in profit per year.

Phrased another way, look around for a profitable business, the pricier the product/service the better (because the bigger the incentive for the user to switch to a free solution), and build up a product that you can give away for free, if you can extract value for yourself via a different way. Clearly this is a more appropriate meta-idea for software / internet products where the cost of replication and distribution is almost zero.

Aside from straight up charging people for money, what else can you monetize from all these free users?

• Labor. Your users could perform an action that’s worth something to you. Example: Spammers need lots of throw-away email accounts from free webmail providers like Yahoo, Hotmail, etc. but CAPTCHA prevents them from automating signups. Their solution is to operate a premium porn site that can be free to a user if they solve a CAPTCHA. What can your user do that would be of value to you?
• Attention. If you had a product where someone sits in front of for long cumulative periods of time, you can monetize their attention. Most obviously, with advertising. E.g. Facebook
• Intent. Unlike Facebook where you spend hours on per day, you don’t hang out leisurely on www.google.com per se. You go to google.com to find something – and click away from Google the moment you find a result. Sometimes, what you search for has purchasing intent (“computer repair mountain view california”), sometimes it does not (“Charles Darwin birthday”). Purchasing intent is obviously monetizable. Can you invoke an intent from your users and harvest it? Related: Preempting Search by Alex Rampell of TrialPay
• Product improvement. Free users can improve your product’s value. Examples:
  • BillGuard users flagging scammy credit card charges improves BillGuard’s alert system for other users
  • The more of your friends join and friend you on Facebook, the more valuable it is to you. Ditto with Skype, and network-effect based social-networks and communication tools, usually. Metcalfe’s law
  • Even if you never ever click an ad on Google, all your searches are valuable data used to further fine-tune their search algorithm, making Google even better
  • Some % of Yelp users leave reviews, which makes Yelp a little better for everybody else.
• Upsell. Tier your product/service, and try to move the user up the tier that’s more profitable for you. First tier the user starts on could be a free tier, then all tiers up are > $0 (e.g. Dropbox). Lots of “freemium” companies do this. Example in buying a flight ticket would be when asked if you’d like to upgrade from economy class ticket to business class
• Cross-sell. Try to get your free user to purchase an ancillary product/service. Example with online stores are the “Customers that bought this product X also bought this product Y”. Would you like an iPhone case with your new iPhone? With upselling and cross-selling, think of your free user as a real live person you can sell something to, and since they’re already your user, you’re starting that sales conversation/process from a position that’s better than a pure cold-call (valuable!)
• Cross-subsidy / loss leader. Give something of value away for free, taking a loss, but eventually making it up. Here’s an idea: Dropbox and Box.net have free tiers and paid tiers differentiated by more space, collaboration & enterprise features. A (physical) cross-subsidy idea would be to give away free USB flash drives—not the crappy 128MB ones they give away at trade shows (what can you fit in there these days?), but beefier ones, maybe 16GB.
  The idea is that it’s not so small that people just use it for a 1-time transfer for a 500KB .doc file to their other computer, then discard it since it was too cheap to matter, but one that is big enough that people could use it as, well, a poor man’s Dropbox/Box.net. It would be “sticky” because they would actually carry it with them every day, and store lots of important files, and they wouldn’t want to lose it because the USB flash drive is worth at least $30 if they had to purchase it.
  Here’s the important part: when the USB is plugged into the computer, it would prompt the owner of this free USB drive to sign up for a free account/tier and install itself onto the computer. Now eventually, it will be a matter of time before they hit a triggering event (run out of space on the drive, drove over the drive, or misplaced it and need to retrieve the backup) .. perfect time to turn them into a paying customer.
  If each USB drive cost you less than your current CAC (factoring in the fact that some % of these USB drives may not fully convert into a paying user), wouldn’t it make sense? It also serves as a gentle transition for technology-unsavvy people to the “cloud”. Or cut a distribution deal with existing USB drive manufacturers (e.g. 50% off a USB drive with Dropbox/Box.net on it for consumers). Dropbox/Box.net if you do this, I want a free unlimited account for life! Other examples: Gillette (free razor, paid blade), Xbox (take a loss on the game console, make it up with the price of each game), cell carriers (free phones with service contract)
• Social proof / spreading to their friends. That is, getting your users to advertise your product to their friends (or even to non-friends), thereby tacitly endorsing it. Examples:
  • Facebook “like” to unlock a coupon, or just “like”-ing it because you genuinely do. Your friends see it and non-friends see that you’re among the thousands of people have “liked” this product/company
  • “Pay with a tweet” to download / watch video (all your followers see it)
  • Dropbox’s “free 250MB extra space if you get a friend to sign up”
  • Hotmail’s “Get your private, free email at http://www.hotmail.com” email signature they added to every outbound email causes all email recipients from hotmail to learn about hotmail, one of the earliest examples of viral marketing on the internet
  • Screenshot of AppSumo incentivizing a person who has just entered it’s free giveaway contest to spread it as much as possible

  Note: If you can grow virally and get your viral co-efficient to be > 1.0 (holy grail!), you’ll achieve a hockey-stick growth curve. If you have heard of a viral coefficients, don’t forget to keep in mind the viral cycle time (see this post by David Skok from Matrix Partners). Also related: Social Proof Is The New Marketing by Aileen Lee from KPCB.

• Anything to lower your customer acquisition cost (CAC). Technically the point right above this about spamming your user’s friends is a form of lowered CAC for you. So any other creative you can come up with counts. Another way to think of it is: if you had to spend $1 in advertising on average to get 1 user, and if 1 of your existing user gets just 1 of his friends to sign up at no cost to you, it’s like that user just put $1 in your pocket—a legitimate form for value to you. Caveat: as long as the value > cost
• Anything to increase your customer lifetime value (LTV). E.g. Perhaps you run a freemium model like Skype, where let’s say, a user Bob with just 1 friend on their list uses Skype very rarely (thus a low LTV), but Bob increases the LTV of his friend Alice who has 10 friends on her list on Skype (including Bob), and uses Skype frequently enough to sometimes need to use their paid services. Not all freemium models lend itself to a situation as such where one user increases the LTV of another user
• Anything of value to you, however you define it. As long as it’s worth the price. Get creative
• Value extraction by proxy. This one is quite interesting and a simple concept, really. Maybe you can’t extract any value from your user, but your user is valuable to someone else, so you can “sell” that user to that someone else.
  • Give someone else a customer. Let’s say you really want to make $100 per user, but you can’t charge them because they won’t pay, even though they like your product and want it. You could say, “how about I’ll make this free for you, but there’s one condition: you sign up for a free bank checking/savings account at Charles Schwab.” Prior to this, you’ll have to set up an deal with Schwab such that they’ll pay you $100 per customer you send them – aka an affiliate deal (paid upon conversion). In the end, the customer pays $0 (except having to sign up for something else that’s $0), and you get paid, and your affiliate partner is happy. To expand on this, you could look around and find businesses with large customer acquisition costs (for banks, it’s about $100-$300 per user), and try work an affiliate deal with them – and you can monetize your free users that way.
    There’s a company doing this run by a real smart guy, Alex Rampell from TrialPay. List of some almost 200 things you can sign up for instead of paying cold hard cash from TrialPay. Unlike the next point, the list of things to sign up doesn’t really have to relate to what your product is
  • Give someone else a qualified lead. The idea is similar to the above, except it’s more of a lead, so a certain % will not convert. An example: Find really expensive Google Adwords keywords that see serious bidding competition, and try to be a lead gen for them. Perhaps you run a motorcycle rider social network (aka Facebook for motorcycle riders). It’s unlikely you can charge your users a fee for joining (that would really stymie growth when you really need the network effect). What do motorcycle owners all need? Well, unlike car owners, most of them do their own oil changes. So your user is of commercial value to a company that sells motorcycle oil, oil filter, and perhaps the actual oil change service too. The key here is that the lead is qualified (unlike previous example). If this oil change supply company is already paying $30 per click on Adwords, then $30 isn’t an unreasonable starting price to ask if they’ll pay you for traffic you send to them. And just like that, you’re getting $30 per user, and your user doesn’t pay anything other than clicking on a link.
  • Give someone else an impulse-purchase lead. Similar as above, but the lead is less qualified, but more suitable for impulse purchase items. Example: With Groupon, people tend to buy things using their discretionary income for things they “want” more than they “need”. Send them something they might want that could be an impulse buy. E.g. motorcycle riders love the adrenaline rush, perhaps 50% indoor sky diving would work. (coincidentally, that’s exactly what I recently purchased, although I don’t think they knew I ride bikes)

  To wrap up this point about “value extraction by proxy”, you’re basically a front-end to someone else’s business model and they give you a cut of the action. Interestingly, you could also be the back-end to someone else’s business (perhaps they can’t monetize their users as well as you can). Or maybe you could be sandwiched in between 2 businesses because you’re able to add and extract value to the “chain” in a way that makes it beneficial for the other parties too. Some ideas: Flickr charges $25/year. Build a product/service for people who don’t want to pay $25/year, to do $26-worth of spell-checking/proof-reading on Amazon Mechanical Turk, and pocket that $1. Know someone who wants a .com domain ($10/year) but don’t want to pay for it? Have them do $15 worth of video transcribing on Mechanical Turk, and pay for their domain, and pocket $5 for yourself

• Mix-and-match some of the methods above. Mint.com is a good example. It provides a valuable service, helps you track your finances, budget accordingly, even alerts you when a bank hits you with a fee or lower your savings interest rate. However it doesn’t charge any of its users at all, and there’s no paid-tier to upsell. But they make money by cross-selling a related product, getting affiliate fees when they recommend a user change to a better credit card (and when the user does it). Clearly not 100% of their users do it, but even with the ones that don’t, they’re helping the improve the product when they help categorize their transactions into the right category.

I’d like to end this post with an excerpt from Wired magazine:

..externalities, a concept that holds that money is not the only scarcity in the world. Chief among the others are your time and respect, two factors that we’ve always known about but have only recently been able to measure properly. The “attention economy” and “reputation economy” are too fuzzy to merit an academic department, but there’s something real at the heart of both. Thanks to Google, we now have a handy way to convert from reputation (PageRank) to attention (traffic) to money (ads). Anything you can consistently convert to cash is a form of currency itself, and Google plays the role of central banker for these new economies.

There is, presumably, a limited supply of reputation and attention in the world at any point in time. These are the new scarcities — and the world of free exists mostly to acquire these valuable assets for the sake of a business model to be identified later. Free shifts the economy from a focus on only that which can be quantified in dollars and cents to a more realistic accounting of all the things we truly value today.

I hope that gets your creative juices flowing! I’m always learning other creative ways of “monetizing” users—I collect these! Please do share if you have any  This is the 3rd post in my meta-idea series. I’m @jaysern on Twitter.

Footnote: I wrote this with the spirit of helping pre-traction, pre-funded internet startup founders get creative in monetizing. I had per user / unit economics in mind, less so models that rely on scale. E.g. selling the data of what 1,000,000 users do on your site. If you had a million users, advertising can pay your rent. Not so true if you have only have 100 users.

Tags: meta-idea, value extraction

This entry was posted on Friday, December 30th, 2011 at 1:33 AM and is filed under ideas. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.