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Comment by tom_rath | Hacker News Reader

If I started a service which gave away free cases of beer, I'd have insane 'traction' with a product hundreds of millions of people would find engaging. Like Pets.com, WebVan and the other "we'll make it up on volume" disasters, my service would be loved by everyone but it wouldn't be a good business.

It seems the lessons of the first dot.com bubble have already been forgotten. A business needs to have a clear path to profitability or else it's going to be left without a seat when the music finally stops; and the music always stops.

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The lesson of the Bubble is not that you have to know right away how to make money from users, but that you shouldn't pay a lot to acquire them. If an additional user costs you nothing more than a few cents a month of server and bandwidth, you can safely just grow.

Google didn't have their business model figured out when they started, and they seem to have done ok.

Google is a black swan; modeling yourself on an extreme probabilistic event is not realistic.

It's a black swan in the size it grew to, but not in the fact that the founders didn't have the business model figured out when they started. That's more common than not, if you look at recent web startups.

It's about expectations: having a popular service does not mean a successful outcome (this is the implication against which I object).

Right, but nobody said that it does. The point is rather that if nobody notices what you're doing, you don't even get to the point of dying because of a bad business model.

somehow this has splintered into an "business model vs. traction" agreement - in fact you need both. It will not kill a programmer to spend some time running a few models on how they can actually monetize the service, just as it is not beyond the scope of any biz/marketing person to understand that building something users want is job #1.

where many people stumble is thinking in one dimension terms, like assuming Adsense is a business model (see recent posts by Josh Koppelman and Jeremy Lui) on just how big you need to be for this to be truly viable.

What I liked in the original article is that it offered a few, less obvious options for monetization.

Some of the articles' suggestions were good ones. And yes, you should always have some ideas for how to monetize your business. However, one key problem is that if you try to implement a monetization strategy before you build a user base and really understand who shows up at your site, your monetization could be completely wrong.

Consider the following possibilities: your user base turns out to be very broad-based and large, your user base turns out to be smaller, but a significant percentage of them is from a particular demographic or vertical, or your product turns out to be most interesting to other businesses or other websites that want to integrate what you built into their own businesses. Each of these scenarios implies a different approach to monetization.

Given the way your understanding of a market can change as you actually meet the real people who use your site, a change in targeted user base can happen to a lot of different businesses. And if you spend too much time up front working on revenue, you may end up throwing all that work away when you confront the actual opportunities that present themselves.

For some businesses, you may have a precise understanding of who your customers are going to be in advance, and then that turns out to be exactly who they are. If that works out for you, cool. But my guess is that that's not the most common scenario, especially for a website.

Can you think of a counterexample? How many purely web-based startups have become massively popular and then died?

theglobe.com claimed 2M users in 1998

It is now a dot-com boom endnote

Just about any of the social networks that were "the next big thing" except for Facebook and Myspace. Friendster was the first social network I joined, was massively popular, and now seems pretty moribund.

a lot of aged web companies seem moribund. You could say the same thing about geocities. To tweak PGs question a bit, can you think of any sites that got massively popular and didn't have the opportunity to make a ton of money?

They didn't die of not figuring out a business model, though. They died of ceasing to be popular. If anything these examples support my case for the primacy of getting lots of users.

Friendster is the first one that comes to mind, though there are others.

But something one of the digg founders wrote on this site also comes to mind: http://news.ycombinator.com/item?id=143269

I see your point. This is the classic business mindset.

I would venture to say though that the classic rules can be broken for other considerations because the Internet is a new medium.

I will get to other considerations in a minute but the main thing to understand is that the Internet breaks the old rules by lowering distribution costs.

It makes sense to delay monetization if you have a compelling user proposition that can be scaled quickly through word of mouth(ebay,youtube,flickr) or by partnering with an 18 wheeler (google,paypal,skype).

The assumption here is that if you build a large user base it takes a very small number of paying users to make money.

Its easy to see that in each case there is a real value proposition. In fact none of these applications would exist except on the Internet.

Although some rules have changed, the old rules still apply i.e. building something with a real value proposition and then distributing it without breaking the bank.

Those that failed did not create real value in the marketplace not because of monetization.

"That's more common than not, if you look at recent web startups."

It is likely common in failed web startups, also.

If it's common in successes and failures then it doesn't have predictive value and isn't worth stressing over.

I agree on the black swan analogy. I think you have to be careful of survivorship bias, reasoning backward from a handful of highly successful survivors. Among the startups we see at the Bootstrapper Breakfasts very few are able to prospect for oil and find uranium in their backyard. The ones with a simple plan to build a compelling product, at a price, for a particular set of customers at least have something to tinker with when they start to miss their own expectations.

If those users still cost more to maintain than a company makes from them, more users aren't going to solve the problem.

Google became successful because they increased per-user revenue, not because they increased the number of users.

There's a significant difference there. Beer costs money to replicate, programs do not. The marginal cost of adding a new user to the Free-Beer program is the price of a case of beer. The marginal cost of adding a new user to your startup's community is a minor bandwidth charge. I'm not completely sure but I'm willing to bet that if you make a good enough service, people will come. With such a small marginal cost per user, you can afford to grow a userbase before you start incurring serious charge, and once you've reached a point where bandwidth costs are actually meaningful, you can almost definitely find a way to make money off of it.

As another user said, the companies listed so far failed for auxiliary reasons. One of them to be wary of is overexpanding, which is basically what Webvan did. The trick is to not do a massive land-grab unless you absolutely have to; Read this- http://www.joelonsoftware.com/articles/fog0000000056.html

If you don't have any secondary costs this is true.

A lot of web companies still need to "pay the rent" or other variable costs. Even without that, don't forget that revenue gives you a huge leg up when searching for funding.

If your cost per user is less than the incremental revenue each user brings you, it doesn't matter how little those users cost: You're still following the "we'll make it up on volume" battle cry in the wrong direction.

Bandwidth and server costs are still costs. Whether you split those costs among four customers or four million, you still need to recoup them and show a profit to create a sustainable business.

It's often hard to convince people to pay for something that was previously free. So you have fewer options if you start out without a business plan.

Additionally, a revenue scheme isn't just something that you tack on later. Your options are narrowed further if your technology plan is implemented before you think about sustaining it.

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