GROW AND TRACK YOUR STARTUP REVENUE Th e F or mul a fo r On li ne Re venue y Backstor If you’re planning on starting an online business, you have to think about revenue from the outset. You can come up with an amazing idea, but a great product About the author won’t require a signiﬁcant amount of time or money to produce, and will have little to no distribution cost. Jason Lawrence Nazar is the Co-Founder and CEO of The best way to think of revenue is as an exchange of value. The amount of Docstoc.com, which revenue you earn is directly correlated to the amount of value provided to others. provides the best quality Especially in the online space, more value leads to more proﬁt. and widest selection of documents to start, grow and manage your small business and professional life. Before starting Docstoc, Jason was a partner in a venture consulting ﬁrm in Los Angeles where he worked Remember: with dozens of startups. He holds a BA from UCSB and his JD/MBA from Pepperdine University. “A successful online Docstoc.com hosts the best company provides quality and widest selection of over 30 million goods that take very professional documents little time and and resources including articles and videos to make money to produce, every small business better. Docstoc is a top 500 most and with very little tracked website worldwide and has over 25 million distribution cost.” registered users. Adapted by Rochelle Bailis Examples of Online Revenue E v e rg re en Cont ent Com modi tiz ed Serv i ce LegalZoom took a highly valuable hourly service, legal work, and commoditized it— turned it into a product. It turned legal consultations and labor into a package available at the click of a mouse. These sites create content, either in- house or via outsourcing, and treat that content like an annuity. Content sites derive revenue from a simple process where, for example, they pay $10 for a piece of content, and over the course of a speciﬁc period of time they’ll make $15 back from advertisements on that page. Aggre gation o f They build a massive business off of this formula, and grow from there. Pe ople and Data These websites succeeded because they reached a critical mass of people and data that holds value for consumers. At eHarmony customers pay for access to a database of other individuals searching for a life partner. LinkedIn has reached a critical mass of professionals seeking to V i rt ual Goo ds connect with one another. These websites can make money through ads, paid access or subscription, but they are all based on people trying to connect with one other. People pay (either through fees or ad exposure) for access to a digital world where they can interact with friends online, and create, grow, exchange or buy virtual goods. Diﬀerent Types of Online Revenue On lin e Advertising CPM CPA E-Commerce (cost-per-thousand) is the amount of (cost-per-action) the user money you make for every thousand needs to complete some people that view a particular page or sort of action for you to unit. It’s the most common get paid, such as making a E-Commerce purchase or ﬁlling out a measurement that you’ll see mentioned simply refers to a when people talk about ads. Lower form. CPA is the hardest to value ads placed somewhere like a master, since it requires service that sells Myspace page will only have a CPM of a the customer to actually couple cents. Higher value websites like click an ad, and then virtual or the Wall Street Journal might make $50 complete an action. - $100 CPM on their pages. However, it also provides physical goods the highest yield, and it will also be the best way for online. Examples you to advertise your own include Amazon, CPC product on other sites. It’s (cost-per-click) is run for Google win-win for the advertiser eBay and Zappos. AdSense, and pays you every time and the ad host, since somebody clicks on one of your ads. neither can lose money, How much you’re paid can be a range, they only have potential maybe 5 or 50 cents per click. revenue to gain. One-time Sale s Subscription This is simply a one-off deal or sale. With a subscription service, you will For example, Twitter charges for sell continued access or use of a digital access to certain feeds, and a or physical good, and it will bring in company can pay once for access recurring revenue. I prefer this because to different levels of API data. it assures a steady ﬂow of money. Tip: Diversify My goal in online business was to make money through each of these methods. I spent two years building Docstoc as a product that could earn revenue through multiple channels. We earn money through online advertising, and we’re a top AdSense publisher. We sell documents one-off, but we also have a subscription service. Maintaining a variety of proﬁt streams has helped Docstoc maintain stability, and paved the way for growth. The 10 Rules of Making, Tracking and Growing Revenue 1. Hunt Ele phant s 2. Sma ller Fund ing: Don’t Wait “Hunt elephants” is another way to say aim big. If you’re If you’re planning on going to center your energy on something when you’re raising seed capital from starting off, focus on something with a potentially large family or angel funding pay-off. Take an approach that if you’re lucky, can turn into under a million dollars, something huge. This may mean spending all your energy don’t wait to start on one big deal, instead of smaller deals that are easier to earning money. attain but won’t allow your company to skyrocket. From the day your product goes live, you’ll 3. Big F u nding: Scale, Then Charge need something to sustain yourself and build upon, and fast. If you’re planning on raising signiﬁcant capital, you have the ability to scale your product, and then charge for it. For example, a friend of mine started a business For example, it took Docstoc 18 months before we got to a called Laughstock, position where we charged for documents. We spent a lot of which is like Fandango time building out our repository of documents, and increasing for live comedy events. I our trafﬁc over a couple years. If we’d immediately started was on the board of his selling and managing documents, we wouldn’t have been company and I believed able to scale into such a big in him, but I knew he business. wouldn’t be able to raise more than a million There was another company dollars. He couldn’t wait that started around the same for a year to build time as us, and sold paid critical mass of users, documents from day one. But he’d need to start they didn’t scale, because they making money had no users. Docstoc, on the immediately. other hand, now gets 25 million people a month coming to our So he changed his website directly, and another business model, and 10 million people a month that turned Laughstock into see our documents embedded a software service that in external sites like the New runs ticketing for the York Times. major comedy clubs around the country. He Once we had the scale, we could insert a marketplace of paid makes $5,000 a month documents, and they actually sold. Our advantage was that per club, and is now we raised money upfront, a total of $4 million, which allowed able to build out his us to focus on growth ﬁrst. community features. 4. Le verage “Freemium” The internet is a great place to build a business off of giving away things for free, mostly because it doesn’t take much work. In the case of Docstoc, we have over 15 million free documents that users can download after registering. The great thing is that these free documents are actually generated by other users. We basically outsourced the community for these free products, and pull in new registrations every day because of them. This took care of one of the big costs of building a business: the cost of production. The other cost is marketing. We didn’t really start marketing until a couple months ago, before that we grew our website from organic SEO, links and referrals. The key is to leverage “freemium” in the beginning, by giving consumers a free taste, and enticing them to take a bite out of the product they really want. 5. s Try Charging for p u Ev erything t r A Tale of Two Cities a t S The Bay Area and Los Angeles are both This is a tip I got from Jeff Tinsley, the prominent startup locations, but I’ve found founder and CEO of MyLife, a website that both communities approach money that pulls a lot of revenue and runs very differently. successful ads. He told me simply this: “Try charging for everything. You will be Bay Area companies often build amazing surprised what some people will pay viral products that are astounding to for.” The same motto applies to other behold, but don’t focus enough on how aspects of business, such as sales: they will make money from it. The founders offer value, and let the customer are pure technologists, and don’t like talking about money. choose. People in LA don’t necessarily make better I’m not encouraging you to be websites or products, but they still make careless. I am trying to prevent you money. Companies in LA do what they can from letting perception dictate what to start making revenue, however they can. you offer. Too many entrepreneurs put off charging by telling themselves that My suggestion: Merge those two their product is too expensive, people mentalities. Create incredible products, but won’t like it, or it’s not ready yet… etc. also be interested in revenue from day one. Don’t pre-qualify the postponement of I’m not saying “don’t be afraid of money” I’m saying that you should be excited about your services. People will spend money making money. on the things that they want, and what they want might surprise you. 6. Fo cus o n W hat’s Working 7. Acqu ire Traf fi c Prof itabilit y Every online business functions the same way: Internet business is one big math formula. you launch your product, then test a variety of Your goal is to earn revenue by bringing tactics to grow your revenue. Ultimately, these trafﬁc into your website for less than it costs approaches will deﬁne your success or failure. to create and maintain it. That’s it. Every internet company has a ﬁnite life. You There are hundreds of internet marketers have no way of knowing its span. It could be that don’t go to startup mixers or six amazing months followed by a successful TechCrunch conferences, but quietly make exit, or eight months before your business millions of dollars through trafﬁc proﬁtability. implodes. Maybe your business just moseys They make sophisticated pages for other along for ﬁve years. The only moments that people’s offers, and buy trafﬁc into those determine your company’s success during its pages so that they make a commission off lifetime is the number of times you try new it. They have ﬁgured out how to exploit this things. formula. It might be the 2nd or 10th time you execute a If you want to earn revenue, your goal change, but every time you innovate you give should be to design a ﬂow that involves yourself the chance to be in the right place in buying trafﬁc into the pages that are making the right time, with the right product, and get money for you, in a way that remains that big break that will catapult your company proﬁtable. Whether you make money off ads to a different level. or services is up to you. When you’re trying to grow, always focus on For a company like Docstoc, our process what’s working, then improve, invent and build. was to build out a great product, then spend Matt Cofﬁn, founder of LowerMyBills, did money acquiring trafﬁc that will generate some research and found that companies were proﬁt, through both ads and the services we making money off helping consumers ﬁnd the provide. We succeeded in bring in trafﬁc for right mortgages for them. So he focused all of less money than the trafﬁc generated, and his energies on creating a product that does thus beat the formula. that (but even better), and ended up making a multi- million dollar website based on that service. When a lion is Cofﬁn turned over rocks until hunting, it doesn’t he found something chase all of the interesting that could make gazelles at once, he him money. Then he started focuses on one digging. Investors and other gazelle and channels entrepreneurs will encourage you to focus on “the next big all of his energy into thing,” but sometimes it’s taking it down. important to stay on one Harness your energy track. Don’t worry about and target it towards jumping on the next boat, an effort, like the lion. focus on one product, tweaking and improving it until it works. 8. Se t an d Track Reve nue goals This step is pretty simple: set and track your revenue goals. You can never realize your company’s potential if you don’t have a mission. Know what you’re going to do and in what period of time, then work towards it. g Tools Trackin 9. A/B Test Key Metrics Google Website Optimizer The best way to track your revenue is to test as much as possible, then let the data Google Website Optimizer is a tell you what’s working and what’s not. I great way to change elements of recommend using A/B Tests to test your website for testing, such as metrics such as views, clicks, intent to colors of buttons and text. You can buy and actual buys. then measure which changes are leading to higher conversions, and I promise you, with A/B testing the link it with Google Analytics (which changes that you realize add value to your can track your trafﬁc in greater site will often seem counter-intuitive. You detail) and AdSense. might try making text larger, or add a call to action, and ﬁnd that it actually results in With this powerful combination you lower trafﬁc. can track who’s visiting your site, who’s clicking ads and who’s It only takes a small amount of people purchasing your product. A few key coming to your site to distill enough things to remember: if you can information to improve your webpage. A increase your conversions from 1% signiﬁcant statistical variance within even a to 2% you have increased your couple hundred people can help you make revenue without necessarily educated decisions on how to alter your boosting your trafﬁc. Similarly, if site’s features and increase conversions you can get a customer who’s (customers who actually purchase spending an average of $20 on something). The more trafﬁc you’re your site to spend $40, you have working with, the more accurate your doubled your revenue without information will be, but don’t let your increasing trafﬁc. numbers prevent you from testing. 10. Ben chm a rk Re v enue and Re- Evaluate Ass umpt ions This is the ﬁnal and most important step when it comes to increasing revenue: benchmark your revenue and re-evaluate all the assumptions you have made. Every entrepreneur sets goals, and projects how much revenue these plans will generate. Once that projection period is over, you must review your goals, and compare the actual revenue to your projected earnings. If it was less than you’d hoped, it’s time to re-evaluate your assumptions. What did you assume would play out, but didn’t? What new assumption will you need going forward? At Docstoc we go over our projections both monthly and annually, and review projected versus actual revenue from our subscriptions, sales and ads. I explain to the board what my assumptions were, and what my new set of assumptions are as we move forward. I’ve been lucky enough to tell the board that my assumptions were lower than projected and revenue has been higher than expected, almost every month. The only way to make this happen with your company is to discipline yourself. Force yourself to have regular board meetings, and spell out what you are going to do. This puts pressure on you to execute. So remember, if you’re planning on tracking and growing your revenue, focus on the things that are most important. Don’t be afraid to focus on the big initiatives, and keep taking huge chances. If channeled properly, the same amount of energy that will get you small $10,000 pay-offs might lead to 50 million dollars of recurring, high- value revenue. Turn over rocks until you ﬁnd that tiny diamond, then start digging. Don’t get distracted by other rocks. It will be worth it when you strike gold.