5 Business Models for Social Media Startups

During the first Internet boom, the most common business model was probably, “get a ton of traffic, then figure out how to make money” — which savvy readers will note isn’t a very good business model. Often, the way those businesses attempted to make money on that traffic was to use display or text advertising. Making money from advertising is still possible, but it’s no longer as easy as building a site and putting some ads on it. Fortunately, there are a number of business models to choose from.

Today’s social media startups are finding unique ways of generating revenue from the very beginning. Here are a few of the revenue models that they’re using and how you can apply them to your company.

1. Freemium Model

Description: This business model works by offering a basic service for free, while charging for a premium service with advanced features to paying members.

Examples of the Freemium Model: UserVoice, Flickr, Vimeo, LinkedIn, and PollDaddy

The biggest challenge for businesses using the freemium model is figuring how much to give away for free so that users will still need and want to upgrade to a paying plan. If most users can get by with the basic free plan, they won’t have a need to upgrade. For example, I’ll probably never upgrade my LinkedIn account and because I don’t shoot high definition videos, I’ll never need a Premium Vimeo account either.

I spoke with Marcus Nelson from UserVoice about their use of the freemium model and how it works:

1. Is UserVoice profitable?
We’re “ramen noodle” profitable, but have recently taken funding to accelerate our growth.

2. How long did it take UserVoice to implement a business model?
Eight months, though I would not recommend that as a new startup. I talk a lot more about this in an interview on Mixergy.

3. How long did it take to get your first customer?
Depends on your definition of customer – we had sign ups immediately and grew by 30-35% a month. What we had built was core features, so as we spoke with customers we began asking what would they pay for on our UserVoice page. Once we had some premium features in place, we went back to those customers and began doing paid pilots to test out the service. The first paid customer arrived in November.

4. How many users do you have right now?
16,652 as of June 5, 2009.

5. What percentage of users are paying members?
Since moving to paid plans, our conversion rate is around 5%.

6. What are the biggest obstacles that UserVoice has for getting members to pay?
The same as most businesses, providing value that customers want to pay for, and overcoming objections for implementation.

2. Affiliate Model

Description: This is a model in which a business makes money by driving traffic, leads, or sales to another, affiliated company’s website. Businesses that sell a product, meanwhile, rely on affiliated sites to send them the traffic or leads they need to make sales.

Examples of the Affiliate Model: Illuminated Mind, ShoeMoney, DIY Themes

Like businesses that rely on advertising, high traffic sites predictably have a much easier time making money using affiliate links than sites that are just starting out. High traffic means that even low conversion numbers can equal big bucks. However, in just a year since starting his blog, Jonathan Mead from the Illuminated Mind generates enough income from affiliate links that he has been able to leave his full-time job. This is a dream of many bloggers and this is how he did it:

1. When did you start your blog and how long did it take you to generate enough revenue to be a full-time blogger?
I started blogging in February of 2008, so it took me a little over a year (15 months) to become a full time blogger.

2. How much revenue are you generating through affiliate links?
I earn roughly $2-3k per month from affiliates. It depends on the month though, some are better than others.

3. How many page views per month do you have to receive in order to generate the status of a full-time blogger?
I don’t think page views really played a critical role in my success. I think creating a community based around living on your own terms and making self-development palatable, was really the key to my success. You can have tons of traffic without anyone really caring enough to value what you have to offer.

4. What is the best way to get your readers to click on your affiliate links?
I’ll try to break it down into what I think are the three most important factors.

1. You have to have your reader’s trust. If they don’t trust you, they will not buy what you recommend.
2. You have to target the products to your readers. Speak to their interests, personality and emotions.
3. You need to be able to write decent copy and communicate in a compelling way why they should buy what you’re recommending.

5. What are the best kinds of affiliate links: Low price point and low margin, or high price point high margins?
I only aim for $20 and above range, so I’m not sure how the lower priced products convert.

6. What are the biggest obstacles to overcome when generating revenue through affiliate links?
Reader trust and proper targeting. These things seem so simple, but it’s amazing how many people don’t get this part right. It’s worth the time researching those in your niche selling products and starting conversations with them. Ask them why their readers buy and then use that in your copy.

3. Subscription Model

Description: Sites using the subscription model require users to pay a fee (generally monthly or yearly) to access a product or service.

Examples of the Subscription Model: Label 2.0, Scrooge Strategy, Netflix

I talked to Greg Rollett, the founder of Label 2.0, a marketing school for musicians that sells its services for a monthly membership fee. The service teaches musicians how to use online tools to help further their careers, find more fans and navigate the business of music.

1. Why did you decide to use a subscription based model over a one-off sales model?
When Eric [Hebert] and I decided to work together I was actually presenting him with an offer to promote a product that I had created and he was working on something similar. Instead of offering a one-off sale for both products and fighting for the same niche (our sites have nearly identical target audience and traffic). We decided that coming together and creating a long term relationship with the people we were helping would be better for our business in the long run. We have enough content and features that every month will be an exciting new journey. The business model was pretty simple. We took the features that we liked the best and least from popular internet marketing strategies for membership sites, continuity programs, etc as well as different ways to run the membership software and found what was going to be the easiest for us to use and easiest for our members to digest

2. How did you prepare to have a successful launch to your service?
Luckily Eric and I had been building up trust and a user base for years through our blogs, Twitter, live speaking events and client work. We have both worked on high profile projects and that helped us secure a great position in the market. We both posted teaser blog posts and within a few days we had over a 100 musicians testing it out and providing feedback for our public launch. We expect 300-500 paying members within the first 2 weeks.

3. What are your price-points and how are you maintaining a personal touch with your subscribers?
Our pricing model is high for the industry we are in and we know that. At around $50 a month and $400 a year we have priced ourselves to only work with those that really want to see an impact in their careers. If you look at the bigger picture and see that for consulting we typically charge $100 an hour, you are getting a great deal, but losing that one-on-one feeling. That is why we are having bi-monthly conference calls, webinars, walk-throughs, Q&A’s and really doing our best to ensure that every musician gets their bang for their buck.

4. What are the biggest obstacles in the subscription-based model?

1. Price – Musicians are used to free. MySpace is free, YouTube is free, there is free information everywhere and musicians would rather spend $500 on a new guitar pedal than invest $50 into something that can find them hundreds of fans with which they can begin to make a living on.
2. Stereotypes – Musicians do not think of themselves as marketers. They feel like that is what a manager, record label or promoter is supposed to do. We are helping them turn that stereotype upside down by teaching them how to market themselves to create better relationships with their fans which is going to help their business in the long haul.
3. Monthly membership sites have a high attrition rate – The reason is after their 1st or second time they login, they forget about it and never come back. We are doing everything that we can to ensure that there is always something going on, from new lessons to trainings to calls and webinars to activity in the forums to leveraging the community to make everyone stronger.

4. Virtual Goods Model

Description: Users pay for virtual goods, such as weapons, upgrades, points, or gifts, on a website or in a game.

Examples of the Virtual Goods Model: Acclaim Games, Meez, Weeworld, Facebook Gifts

Virtual Goods come in all shapes and sizes. Hot or Not was one of the pioneers of virtual good in the online dating industry by allowing users to send virtual roses to other users that cost from $2 to $10. The beauty of virtual goods is that margins are high, since goods essentially only cost as much as the bandwidth required to serve them, which is generally almost zero. I spoke with Ali Moiz from Peanut Labs, a social monetization company that focuses on virtual goods and currencies.

1. What is the margin on each item sold?
Very high. There is little or no marginal or production cost once you setup an economy, so for game companies this is in the 90% or higher range.

2. What percentage of your users actually buy virtual goods?
10 – 20% buy it using credit cards, another 30 – 40% get it for free by doing surveys and offers through Peanut Labs Media and companies like us.

3. What are the biggest obstacles in selling virtual goods?
Creating something that users want and need, and that is relevant to the community.

4. What are the most popular types of virtual goods sold?
3 main categories: functional, status items, decorative. All 3 play a major role.

5. Advertising Model

Description: Sites that rely on advertising, sell advertisements against their traffic. In basic terms: the more traffic you have, the more you can charge for ads (additional demographics about your site’s visitors, such as age, gender, location, or interests, also affects the amount you can charge advertisers to place ads on your site).

Examples of the Advertising Model: Yahoo!, MySpace, Tweet Later

I spoke with Dewald Pretorius from TweetLater, whose site relies on a unique variation of the advertising model in which users are able to bid on daily sponsorships on his site. When researching the site, I found that the average bid amount for a completed auction was $50-$80. Predictably, most of the users that won the sponsorship auction also linked out to TweetLater web site from their Twitter profile — driving more traffic and potential bidders back to the site.

1. Is TweetLater profitable?
Yes, absolutely! I run my business with very low overhead costs, and TweetLater has been profitable since the very start when I monetized it in February 2009.

2. How long did it take TweetLater to implement a business model?
I started TweetLater in April 2008, and ran it as a completely free service until February 2009. That period allowed me to build a solid user base, which was very willing and keen to dive into the paid side when I released it. Personally I think some people are too anxious to start making money immediately and underestimate the value of being patient and first building a reputation and user base.

3. How long did it take to get your first customer?
After I announced TweetLater Professional? If I remember correctly, it was about 10 minutes after I made the announcement that I got the first subscription. I might be wrong. It could have been 5 minutes.

4. How many users do you have right now?
TweetLater has around 71,000 users, and is steadily growing by around 600 users every day, seven days a week.

5. What are the biggest obstacles that TweetLater has for getting members to pay?
It is never easy to monetize something that sits on top of a free service. I have done that successfully, and logically it is because folks feel they get real value for their money. Maintaining and increasing the value proposition is one of the things I think of every single day. I believe that giving people a free trial of TweetLater Professional has contributed to its success. People can test-drive it with no commitments and no catches before deciding whether it is the right service for them. I believe it demonstrates respect for the users, as well as confidence in the value that the service provides.

Conclusion
Before you launch your startup, make sure you have a clear business model in mind. You will most likely have to change and tweak your business model as your startup progresses, but at least you will be focused on cash generation from the start, which means you’ll be ahead of the game.

This post covered just a small number of the many business models available to web startups. Please feel free to use the comments below to discuss these models and others that you may be using or considering for your startup.

Via: Mashable