What’s The Revenue Model?

The fundamental attributes of Web 2.0 (User Value, The Long Tail, Network Effects and Experience) mean that startup costs approach insignificance. Unlike dot-com boom startups, where investments needed to be significantly high to reach any kind of scale, the convergence of technology and community has made it accessible to almost anyone who wants to try.

Further, the evolving nature of community based activities means that investments can be phased out on a “do it as and when required” rather than spending it upfront just to find that all of it has to be redone. The possibility of leveraging on external resources to add functionality drives costs further down; rather than doing everything in house, any venture can farm out most activities to keep the core small and manageable.

This in part makes it easy to understand why there’s a boom in Web 2.0 ventures; the risks shrink to a level where it makes sense to leap before you look. After all, if the idea doesn’t work out, you’ve lost a few thousands of dollars, or maybe tens of thousands at most; whereas, if you were to wait to perfect it, and someone else leapfrogs you, the opportunity cost is in millions.

But costs are just one side of the story. Revenues are the other; and finding a revenue model that works is as important, if not more – if there isn’t a sustainable revenue model, there isn’t a sustainable service.

Most of the services we see today operate on the “free” model, where users don’t pay to use the service. The preferred revenue or return models seem to be either advertising led or a “get acquired” option; with the phenomenal prices paid for Skype, Myspace and YouTube, the temptation is high to embark on such a route.

However, ad revenues can be limited, especially if every other venture is looking for the same; and for every multi million acquisition, hundreds of others can and will fold up. Both these models rely on a competition for eyeballs to maximize potential, driving the need to have as large a user base as possible. Think of it as the Wal Mart approach to growth; you need to target the mass market, making it the lowest common denominator.

And in the process, forgetting one other factor. Wal Mart isn’t the only profitable retailer, and mass market isn’t the only game in town. In fact, as the Long Tail shows, there’s opportunity down the tail.