August 2009 Archives

Advertisers Are Also Your Customers

user-pic

I was just reading this post Techcrunch Europe: The long lost formula for start-up success. No, really by Nigel Eccles and found it to be a great summary of Steve Blank's Customer Development methodology. But one thing stuck out for me which was a rather short two liner:

For apps that are supported by advertising, your customer is the person who hands over the cash. That is the advertiser, so the criteria still holds.

So much insight packed into these two sentences and yet no further discussion on it!

This was something that we discovered through the dotcom bust years at Yahoo!, and really didn't become something more apparent until we were down in the dumps in revenue after the crash of 2000-01 years.

For years, Yahoo! built its products on the mantra of always taking care of the users. Do what users want and traffic will come, and with it all the rewards including revenue. It really did work great, and arguably Yahoo! became the powerhouse it did back then amongst users because we had a single focused view on users' needs. It seemed to us that no matter what we did, money still came in and the product teams largely ignored any extra effort in taking care of our advertisers who were paying our bills.

This was exceedingly apparent in the ad banners that we ran and refused to change for years, which was the 468x60 banner. When traditional advertisers started toeing the internet advertising waters, they looked with disdain on the small rectangle that sat on our pages, which, when compared to the traditional ways of doing advertising, provided no where near the capability of producing "wow" for their clients. Our technical specs didn't help either; while they protected users from downloading huge files and slowing down their web experiences on Yahoo!, they severely limited what advertisers could do in those little rectangles.

And so it was that we went through the dotcom boom to bust period, saw its primary sources of ad revenue die away - the OTHER hugely funded dotcoms - and with traditional advertisers who really didn't want to put any time or effort into producing ads for Yahoo!, but were looking elsewhere at sites who were beginning to use other ad technologies like floating ads. It wasn't until Yahoo! started loosening up its standards and allowing different and new ad technologies on its pages that traditional advertisers started coming on board Yahoo! and trying internet advertising.

We realized that we actually had another customer besides our users, which was our advertisers. We also realized that our business was like a three-legged stool. The first leg was the company, which benefitted from having users and revenue from our advertisers; the second leg was our users; the third leg was advertisers. All three legs must be in balance or else the stool tips over. In our early years, we really only took care of two legs, which was the company and our users. The third leg existed, but we didn't really do anything about it because no matter what we did, revenue poured in, and mostly from all those dotcoms that had way too much money to spend on advertising. These dotcoms just wanted to get exposure to users and fast, to build their businesses quickly and get out ahead of their competitors (never mind that their business models weren't sustainable). So they spent a ton of money advertising on Yahoo! to do that and Yahoo! didn't really need to do anything else to get them to come on board.

When these dotcoms died, so did the revenue and we realized that we really didn't do much for people who had been doing advertising for years, well before the internet existed. So we worked hard to remedy this and bring our advertising technology to a place where it could support what traditional advertisers were looking for. The three legged stool became truly balanced and Yahoo! launched ahead of its competitors in the years following 2001, as we went out and wooed advertisers with much improved ability to create "wow" (as well as all the other important things like advertiser sales, support, and operations).

I think too many startups today don't think enough about the three-legged stool. They focus on their company and their users, and then slap ads on their pages and get frustrated when they pull in a small amount of money every month and wonder why their CPMs are so low. Or worse, some companies build their businesses solely for advertisers and forget that their users need to have a product or service that helps them, and not just advance the wishes of advertisers. Thus the three legged stool becomes unbalanced yet again.

Not suprisingly, users and advertisers go hand in hand. Advertisers look for users to market their products to. But not just any users; they want exactly the users that would want their product. Just giving a bunch of users to advertisers means giving what is called remnant inventory to them; it's the lowest cost inventory that they're willing to pay for since you haven't been able to tell them what kind of users they are reaching. So sites need to find a way to deliver those exact users that advertisers want to see their ads.

Users on the other hand, tend to hate advertising because most of the time it's irrelevant to anything they want or need at that moment, can be annoying, and a lot of it can be interruptive of whatever it is they are doing at that time. Aspirationally, companies need to find ways of delivering the right ad to the right person at the right time. Tough job, probably tougher than figuring out what kind of users you have to sell to advertisers.

However ignoring the third leg of the stool is just folly. If a site is going to ad supported, startups should realize there is a third customer for their site, the advertiser, and put steps into motion from the very beginning to take care of this customer. As we learned at Yahoo!, doing it later on is potentially painful - you don't want a downturn, or watch your startup's bank account run down to zero, to shock you out of the realities of what you should have been doing.

Combining Startup Investing and Distribution

user-pic

A while back I wrote about "me-too" products and that one of the biggest issues facing early stage internet startups is the lack of distribution to get their product out there. After going to Ycombinator yesterday, I, again, felt that similar feeling when I wrote my post many weeks ago.

I thought that some of these were really great, but most of them were much-improved twists on what was already out there. In this crowded world where people already have multiple ways of doing things, I thought it was a damn shame that many of these startups would fail not because they weren't better, but just because they could not get enough customer exposure before their bank accounts ran out.

Just the other day, I had lunch with a buddy of mine at a small publishing company and the topic of distribution came up again. We talked about how valuable the traffic they had on their site was to all these little startups who had none at all. From this conversation, an idea emerged.

Here's the idea, and it's one that is best executed by people who have traffic, like a Yahoo or a Google, or even a NYTimes.

Any of these companies and their like all have done venture investing. But it's been very much like a investor-startup relationship, which is we give you money and you go out to make something big out of it. To me, I think this should change. I think there should be a way to give both money and distribution. To an emerging startup, a firehose of traffic could be worth its weight in gold, in addition to the money.

Suppose at the bottom of every page, which is not worth very much to advertisers since they want to be at the top of the page, there was a row of links which was labeled, "New things to try:", or "Cool startups:", or even something more explicit like "Check out our new ventures:". Then for each startup you invest in, part of the deal is to gain a place in that row of links. You could have permanent placement, or rotating placement if there are more startups than link slots.

Then just let them run. I think you'd be surprised at the amount of traffic the bottom of the page can generate. Certainly, even 1000s of clicks per day driving to a new startup would be extremely valuable. At Yahoo, we did some exploration on placing links down there. At Yahoo traffic levels, they were driving a tremendous number of clicks to Yahoo products and services each day! But yet that space at the bottom of the page wasn't really being monetized otherwise, or of any use to users after the main content of the page had ended.

So why not give it to the startups you invest in?

Today, startups are in a fight for attention. The only way for most startups to get noticed, induce trial, and thus get true validation from the marketplace that they are better, is to point a firehose at them. SEO is too slow, SEM is expensive - what else is left - perhaps partnerships with companies who can give them exposure. But I think that while it is possible, it is a lot of effort to do a BD deal for distribution. As an investor, I would think that it would be easier to just give it them ourselves, right? If you can firehose your investments to show the world they exist, induce trial, really prove out their models, wouldn't that take a huge amount of risk out of your investments and increase the chance of a startup being successful? Of course it would also show whether or not you chose wisely or not....

So c'mon big media companies - work with your venture arms. Invest AND offer a firehose. These guys need it, and, aspirationally, we do want some of these products which ARE better than what we have out there now.

Monthly Archives

Favorite Links

Twitter Updates



About this Archive

This page is an archive of entries from August 2009 listed from newest to oldest.

June 2009 is the previous archive.

September 2009 is the next archive.

Find recent content on the main index or look in the archives to find all content.