Growth and traffic are no guarantee for a profitable online business

Side effects of using steroids

Side effects of using steroids

37Signals has a great post up, entitled “The bar for success in our industry is too low”. The author, Jason, takes several examples where respectable media (NY Times, GigaOM) take a story of a web company showing growth, traffic, and revenue and present it as a success. A quote from his post:

Let’s erase one claim right off the bat. The headline, “Using ‘Free’ to Turn a Profit”, is misleading and downright false as it relates to the subject of the story. Near the end of the piece Phil Libin, the chief executive of Evernote, says they are generating about $79,000/month in revenue. Then the article goes on to say “By January 2011, Mr. Libin projects, the company will break even.”

$79,000/month and they won’t break even until January 2011. So every day they’re losing money until 2011. And the title of the piece is “Using ‘Free’ to Turn a Profit”. What? How can the Times let a headline like this slide?

Jason points out something I’ve always disliked about current web practice. There is too much attention on growth, and too little on revenues. A company that shows impressive growth rates is successful, a company that doesn’t is a loser. Traffic and eyeballs, it’s so web 1.0. I thought we passed that phase, but when measuring the success of a company, or by just following the money that gets invested, I bet that a large fraction is still invested in growth. Iow in a future perspective of revenue. Jason:

This pattern — “success” based on forecasted future success instead of current success — shows up all over the tech-business press. Instead of metrics like “they make more money than they spend” we see stuff like “user count growth” and “followers” and “impressions” and “friends” and “visits” qualify success. Whenever you see someone piling big numbers into made up metrics, it’s a diversion. They want you to think that this time it’s different. But like Judge Judy says, “If it doesn’t make sense it isn’t true.”

Growth is necessary for any business to be sustainable. Web 2.0 and social media technology are steroids for growth. Connecting one big network to another, creating a third. It’s dead simple.

This relentless focus on growth masks the one thing that is important for any business. It’s web 2.0’s biggest tragedy. Do you provide enough value to turn that value into revenue? It’s easy to generate growth using web 2.0 social media technology. Everybody does it. But while the whole world is chit-chatting and sharing away with each other on all these networks, there are very few companies that are able to turn that into a profit. A total waste of resources, energy and focus. Enough talk already, we need to focus on value! What is more valuable? A company with millions of users, strong growth rates, but no revenue? Or a company like SmugMug, that doesn’t have millions of users, but a couple of hundred thousands of real fans. Each of which is a paying customer, turning it into a very profitable company?

This is something I struggle with every day (as CEO of Glubble). We are a small company. We do not have the industry standard impressive growth figures the way big social networks like Twitter have (although we are quite satisfied with our current growth rate). But we wonder every day how we can provide users value and turn that into a sustainable revenue stream. Instead of growth first, we focus on value first.

Is that a better strategy? We believe so. We are generating sustainable revenue now, we are showing good growth in revenue too. But we are not profitable yet. And we are aware of that every day we go to work. We have investors that help us reach that phase. But the trick is that no investor can really do that for you. It’s your own users that help you become profitable. Your product or service needs to be providing so much value that a user is actually willing to pay for it.

Growth fetishists never discuss this openly. They focus on growth and constantly give us impressive stats. There is a whole industry that ironically makes a profit by stilling our hunger for growth figures of other web companies.

All this does is take away attention from the hard part of the online business, generating sustainable and profitable revenue through user value. We don’t see revenue reporting in the online business. The reason isn’t secrecy. It’s simply because most companies do not generate enough revenue to be profitable (makes you look like a loser right?).

We haven’t implemented Facebook connect yet, we do not have connections to 50 other networks. Because it wouldn’t help us. We need do the hard part first. We need to get our service right. Our users are enjoying it, but we know we can do better.  We are now relentlessly focusing on improving the user experience and the value we provide. When we reach a point where we, and our customers, can feel really proud about the service, we will turn on some of these growth machines. But we will know that it will then lead to sustainable growth, both in users and revenue, instead of an impressive nr of page views.

About vanelsas

See my about page, http://vanelsas.wordpress.com/about/ ;-)
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