Andrew Chen Archives

Well, it turns out that Star Wars fanatics are easier to monetize, but are harder to find at scale!

More recession talk = More interest in direct monetization
There’s always discussion about the weaknesses of ad-based revenue models for consumer internet, and with recession chatter increasing every day, many companies are turning to freemium based models. Silicon Alley Insider recently wrote about this in an article called Revenue Crisis: Here Come The Pro Accounts. And of course, there is constantly discussion around the example of 37 Signals, who are notable critics of business models that give away product for free, described by the the Techcrunch article 37 Signals Drives Another Company To The Deadpool. Here’s another from Slate called A Radical Business Plan for Facebook: Charge people.

Direct monetization models versus indirect monetization
To restate the general argument in my own terms, there are basically two kinds of companies on the internet (and btw, I’ve discussed these two groupings of companies at my talk at Startonomics – you can check out the video here and the slides here):

• Direct monetization, aka Advertisers: Direct monetizers charge money for their products, via subscription, ecommerce, virtual items, etc. They typically have a small, focused group of customers.
• Indirect monetization, aka Publishers: Indirect monetizers don’t charge money to use their product and in fact, often give their product away. They chop their audiences into pieces (using content to differentitate between them) and sell the targeted audiences to companies who directly monetize them.

Now note that Direct monetizers and Indirect monetizers have very different problems:

• Direct monetization: The biggest issue is cost per acquisition and limited size of their customer base.
• Indirect monetization: The biggest issue is zero cost user acquisition and identifying user intent (via targeting)

And of course, the central issue is that direct monetization has the huge advantage that you can “make money as you go” and maintain a profitable trajectory at every point. This is great for the bootstrapped startup.

Compare this to the indirect monetization companies which often need to reach a very large critical mass, burning lots of capital along the way, until it gets large enough to sell their audience segments in large enough chunks to be interesting to advertisers.

From the venture capitalist’s point of view, the indirect monetization models are often able to produce larger exits, and thus the “go big” mantra holds here. The reason is that the indirect monetization methods are often appropriate for companies who have extremely horizontal audiences (like search, email, video, etc.) combined with viral growth.

From the VC’s perspective, the direct monetization models can often be less desirable because they may have a small customer base that can only be reached by expensive marketing techniques. As a result, there ends up being a smaller exit because the startup exhausts all their marketing channels to reach their customer base and may not be able to grow beyond that. This is why, although it may be highly profitable to build software for orthidontist offices, these companies often end up lifestyle businesses and not venture-returns businesses.

Which one are you?
I want to stop here and ask, which method best suits your company? I’ve found that there are several Web 2.0 companies floating out there that should probably charge for their product because they are niche products, but instead they are opting to go free and ad-supported. This may be a mistake. Similarly, there are products out there with wide audience appeal that may generate more revenues as indirect monetization models (for example, much of digital content).

Both strategies work: Compare MySpace versus World of Warcraft
Ultimately, this is an optimization of two variables simultaneously. One variable is the size of the audience, and the other is the revenue potential.

The tension is that:

• Size of audience is determined by breadth of appeal
• Revenue potential is driven on intent and passion of audience

Oftentimes, of course, these two variables are at odds. It’s the rare product that EVERYONE will pay for, and often you have to choose between monetizing a small group of fanatics at high rates, or monetizing a huge group of casual users at low rates.

The two corners of this model, of course, are MySpace and World of Warcraft.

• MySpace is an amazing indirect monetizer – they have a HUGE audience, but but make very little money off of each user. Even with 10s of millions of uniques, they make cents per user per month. But this all adds up to nearly $1B in revenue per year. Note that the first version of MySpace was relatively cheap to build (hey, it’s just a website!)
• World of Warcraft is an amazing direct monetizer – they have a much smaller audience (<15M subscribers) but make a ton of money off of each user. They charge a $15/month, and even with their much smaller audience they make nearly $1B in revenue per year. Note that the first version of WoW was quite expensive (into the 10s of millions!)

The point is that both strategies work – the question is, what can you learn from each of these to figure out which model works best for you?

Pretty interesting data:

SAI publishes a post called Ad Rates Dropped 11% In The Third Quarter.

I think this tells you that if you have a direct monetization method for the audience (and context) within social networks, music, and entertainment, this is a great opportunity to pick up users on the cheap. Companies that are selling subscriptions to DVDs, music, etc. will all benefit from this. Games supported by virtual goods and subscription should stand to benefit as well!

Leadgen blog
For those of you guys who are interested in Offerpal and Super Rewards, and want to learn more about the leadgen industry, I couldn’t recommend Jay Weintraub’s blog more.

Here are a couple of my favorite articles:

• The Mobile Subscription Services (aka Ringtone) Ecosystem
• Incentivized Marketing – An Updated Look
• New Strategies in Incentivized Marketing (B2C)
• Lead Generation – Quality over Quantity
• State of Remnant Advertising
• Direct Response In A Behavioral Marketing World

Jay also doesn’t write nearly enough, but perhaps this will send a torrent of traffic his way that will encourage him to spend more time blogging :)

Also, a great preso
Most recently, Jay published an amazing presentation “You Give Leads A Bad Name” on leadgen dynamics including topics like:

• history of leadgen
• ad creative
• user flows
• mobile services
• leadgen
• scammy tactics
• … and finally, the evolution of leadgen into more sophisticated sites (that give users value)

Watch for the slides on Mint.com and Billshrink.com, in particular, which are valley darlings (and are mentioned very favorably).

You should probably watch in full screen!

You Give Leads A Bad Name

Quantitative marketing in politics
There was recently an article in Slate on the topic of the effective of robo-calling versus text messages, and discusses in some detail the ways that A/B testing is used in the political world. I previously wrote about a similar topic in my blog post Obama and McCain: How political marketing has evolved from offline to online.

Why look at political marketing strategies?
I find the world of political marketing very interesting, as it requires marketers to maneuver without significantly their product (their candidate), but rather only changing the messaging and story. It’s a pure marketing pitch. Compare this to tech marketers who often depend on new features to compete. It’s sort of like asking the question:

How would you sell bottled water?

That is, given a completely commodity product like water, companies like Evian, Fiji, Voss, Arrowhead, and others manage to sell a product using a fundamental pillar of branding: STORY.

I find politics interesting for the same reason, because it’s all about storytelling and narrative. I wanted to point everyone to a recent story in the New York Times on the difficulties in establishing a narrative for McCain, in the article titled The Making and Remaking of McCain. Worth reading.

Robo-calling in the Slate article
Now the article in Slate had some interesting passages that I wanted to highlight, on cost per acquisition, split testing to encourage voter turnout, and other fundamental ideas that every quantitative marketer should have in their toolbox.

On the cost of robo-calling:

Robo-calls are the pyrotechnics of politics: They create a big disturbance, but they don’t have a prolonged effect. Numerous studies of robo-call campaigns show that they’re ineffective both as tools of mobilization and persuasion—they don’t convince voters to go to the polls (or to stay away), and they don’t change people’s minds about which way to vote. So why do campaigns run robo-calls? Because they’re cheap and easy. Telemarketing firms charge politicians between 2 and 5 cents per completed robo-call; that’s as low as $20,000 to reach 1 million voters right in their homes.

On using split testing to test political marketing strategies:

[…] Text messaging is different: We pay attention to short messages that pop up on our phones. These conclusions arise out of work by Donald Green and Alan Gerber, two political scientists at Yale whose book, Get Out the Vote: How To Increase Voter Turnout, is considered the bible of voter mobilization efforts. Green and Gerber are the product of a wave of empiricism that has washed over political science during the past decade. Rather than merely theorizing about how campaigns might get people to vote, Green, Gerber, and their colleagues favor randomized field experiments to test how different techniques work during real elections. Their method has much in common with double-blind pharmaceutical studies: With the cooperation of political campaigns (often at the state and local level), researchers randomly divide voters into two categories, a treatment group and a control group. They subject the treatment group to a given tactic—robo-calls, e-mail, direct mail, door-to-door canvassing, etc. Then they use statistical analysis to determine whether voters in the treatment group behaved differently from voters in the control group.

On the analysis of “funnels” in converting contacted people into voting:

Having campaign volunteers visit voters door-to-door is the “gold standard” of voter mobilization efforts, Green and Gerber write. On average, the tactic produces one vote for every 14 people contacted. The next-most-effective way to reach voters is to have live, human volunteers call them on the phone to chat: This tactic produces one new vote for every 38 people contacted. Other efforts are nearly worthless. Paying human telemarketers to call voters produces one vote for every 180 people contacted. Sending people nonpartisan get-out-the-vote mailers will yield one vote per 200 contacts. (A partisan mailer is even less effective.)

Anyway, I won’t quote the entire article, but I personally found it pretty fascinating.

Underlying metrics
Anyway, the coolest part to me in all of this is the interplay between the soft stuff and the hard stuff. The soft stuff is the candidate, including brand, the speeches, the fashion, the messages, etc. The hard stuff is figuring out, once you have the candidate that you’re meant to market, how to break everything down into Dollar per Vote (which sounds kind of sinister when you put it tha way). Or perhaps, you could even calculate it down to Dollar per Electoral Vote.

Really this is a measure of the efficiency in which a well-run campaign is able to put the donations raised into the raw results tha they want.

Anyway, if anyone’s read other interesting perspectives on quantitative marketing in the political realm, I’d be interested in hearing about it.

Here are all the links I’ve twittered over the last week – If you want to grab these in real time, you can follow me on Twitter at @andrew_chen.

• inside the creative process at The Onion, it takes 600 headlines to generate 18 good ones: http://bit.ly/3GzXKZ
• twitter analytics, neat! I twitter the most mornings early in the week (mondays especially): http://xefer.com/twitter/andrew_chen
• pretty cute flash game: http://tinyurl.com/4uee65
• distribution of income versus distribution of taxes: http://bit.ly/1xLxT5
• lol, i’m using qwitter to figure out when people unfollow me, turns out it’s when i write a personal status message! http://useqwitter.com/
• dino run really is a great flash game: http://www.pixeljam.com/dinorun/
• luxury consumption index in free-fall: http://tinyurl.com/59a9jp
• cultural differences between games and web people, from adam martin (ex-NCsoft) http://bit.ly/16Sm4S
• venturehacks on lean startups: http://tinyurl.com/5bfr6d
• leveraged sellout is much less funny now that bankers don’t seem so baller anymore: http://www.leveragedsellout.com
• crowdsourcing sex: http://tinyurl.com/6d5ggu
• the facebook platform is dead! declares @rafer: http://tinyurl.com/6oqk54

A/B testing is fun ;-)
Generating candidates for A/B testing can be a great source of entertainment for your team. It’s easy and fun to generate dozens of potential candidates for a new headline, subtitle, picture, or other element of an important page. It’s also a great exercise in both the qualitative, consumer psychology skillsets required, as well as the quantitative set.

I’ve gather a couple rules of thumb in helping you generate good candidates for A/B testing below:

• Brainstorm the RIGHT way
• Dive down into potential customer motivation
• Go for high variariance approaches
• Test big things first, smaller things later

Let’s dive into each of these…

Brainstorm the RIGHT way
First off, not all brainstorming is created equal – you want to make sure you are going for lots of quantity, that the most senior person in the room doesn’t “run” the whiteboard, and a bunch of other guidelines that you can find in this article on IDEO’s brainstorming techniques. I generally find that after brainstorming individually on dozens of candidates, you can build on very interesting themes and start to coalesce the entire process.

Dive down into potential customer motivation
One important issue is that every product and every page within your product likely caters to multiple needs. Influence, the classic book on persuasion by Robert Cialdini, enumerates many of them. Is it:

• Reciprocation
• Commitment and consistency
• Social proof
• Liking
• Authority
• Scarcity
• etc?

Or alternatively, you may have specific ideas about value propositions or user emotions – for example, a social network like MySpace could be marketed around:

• Customizing profiles
• Socializing and friends
• Media content
• Photos and blogs
• etc.

Who knows which feature is king? The point is, each one of these potential customer motivations and values probably deserves at least one, if not several, test candidates in your A/B test. The fundamental emotions driving your product have a huge likelihood chance of altering the outcomes of your split tests.

Go for high variariance approaches
Similarly, life is too short for the safe stuff. Because of the fact that you throw away all the bad candidates and keep the good ones, it’s in your best interest to try to make the good ones as good as possible! As a result, make sure you try to go for extremely polarizing, high-variance approaches.

For example, make sure you try candidates that:

• … are aggressive and in your face
• … use different graphical elements like videos versus text versus audio
• … are varied in length, like very very long or very short
• … may offend certain subsets of your audience
• … are commanding and direct the user

Typically, in an A/B test I will usually have a control, then a candidate that incrementally improves on the control, and then a couple candidates from left-field. As you try out more candidates and learn from the process, then often times you will start going with more incremental stuff to finish your optimization.

But early on in your experimentation process, remember to go wild!

Test big things first, smaller things later
Similarly, make sure that you prioritize the your tests so that you aren’t testing subtitles and paragraph copy when you could be trying out even more extreme stuff. Things like the user flow, the layout, “hero shots,” and other factors are usually much more important than smaller things like icons or specific sub-labels for forms.

As a result, oftentimes the best thing to do is to rush out some forms to test, then make things prettier and more finalized from there.

Anyway, I hope this was helpful, and if you have more ideas, please comment and suggest more ideas!

Eric Ries recently wrote a great blog called Three decisions to make on virtual goods, detailing the major issues IMVU had to deal with during its growth:

• User-generated content (UGC) or first-party content?
• Subscription or a la carte payments?
• Merchandising or gameplay?

The first question is particularly interesting, and Charles Hudson (formerly of Gaia, now at Serious Business) exchanged a couple emails with me on the topic.

He gave me permission to share his email below – note that this convo happened in December of 2007, so it’s a bit dated, but I think it’s still quite applicable:

from    Charles Edward Hudson
to    Andrew Chen
date    Tue, Dec 11, 2007 at 9:55 AM
subject    Re: question on virtual goods

The question you bring up is a big one and it’s really hard for me to be succinct (but I’ll try). There are a ton of advantages and disadvantages to each approach. I’ll tell you my thoughts (others at Gaia might feel differently) on why the user-generated model is riskier but potentially a bigger opportunity if you can reach scale. Below are my quick thoughts on the 3 biggest drawbacks to a UGC/DIY model as a starting point:

-You need to have users actually create stuff to make the UGC model work (DIY vs DIFM) – If you decide to go in the “do-it-yourself” model from day one (as opposed to “do-it-for-me”), you’re making a really big bet about the type of users you’ll attract. You’re going to need power users and creators who build lots of stuff to make your world or community feel vibrant. Instead of being constrained by your own ability to generate assets, you’re constrained by the creative cycles of your user base. I’m of the opinion that it’s actually better to assume the DIFM use case first and then slowly offer users DIY activities once you’ve figured out what it is that they want to customize or do within your environment.

-You need to provide users with the tools to actually create and manage those assets if you go the UGC/DIY route – You have to make a meaningful investment in tools (or at least expose the tools and systems you have) very early on if you want users to create stuff for you. And the type of tools you expose will dictate who builds. If you make really simple tools, you’ll get wide participation. Expert tools will likely narrow who produces content for you. I’d rather work on building a really great end-user experience than building great tools, but that’s just me.

-You have a lot less control over the world and economy when you don’t control the process of creation – To your point, it’s really hard to manage an economy or any system if you can’t control the inputs. It’s not so much about monopoly pricing as it is about being able to manage the economy – price controls, inflation, etc. You also don’t have to deal with all of the property rights issues and user-to-user copyright issues that emerge when you allow users to create and then resell their own goods.

I think the real challenge for someone like Second Life is finding enough people to create the world to the point where non-creators can simply join and have a great experience. I think that’s why they’re having a hard time growing. If you look at their community, they have a fairly small but really dedicated group of people. Those people are bearing a pretty serious creative burden to get the world and the experience to the point where it’s useful to and usable by a wider variety of people.

At the end of the day, I’m of the mind that the best way to become a platform is to build a great application. If you’re successful, other people will want to build on top of you and you’ll become a platform whether you want to (a la Facebook) or not (a la MySpace). Setting out to be a platform from day one (and that’s what I think Linden and others have done) is just a much harder road. But it you make it work, you avoid all of the retrofit problems that happen when applications need to rework themselves to be platforms.

So to summarize, according to Charles you face a number of issues:

• You need more creative users in your world, to author the UGC
• (Related to above, you need to lower the bar for participation in creation)
• You need to build an ecosystem of tools to help the authors
• You need to accept that it’s harder to manage the economy – pricing, inflation, etc.

Anyway, I found these points quite insightful – they should be useful for anyone looking to chose between first party and UGC virtual items.

Found on YouTube: Mario and Luigi’s insightful commentary on MySpace top friends

Cultural differences are always interesting!
I got interested in the games world first as a consumer of video games, but after I worked on an unsuccessful project to monetize MySpace using ads, I got interested in the monetization potential of virtual items in social products. For the last 2 years, I’ve been wandering around on the edges of the games industry to try to cross-pollinate some of the best ideas with what I knew from the web world.

Early on, after attending the Game Developer Conference and speaking with folks from many of the top publishers and studios, it became clear that there were lots of interesting cultural differences between web folks and games folks. I wrote some of these points down a while back and I thought I’d share them.

I want to caveat that these are purely anecdotal and my own experiences, and I’m sure that I’m overgeneralizing ;-) I also think that people that come from the casual games world (and in particular flash games) are much more similar to web entrepreneurs – the aliens I talk about are mostly big packaged games people. So please share your opinions in the comments if you disagree or have another perspective.

But here are the major ones:

1. Eyeball worship vs. Game genre worship
2. Distribution vs. Content
3. Utility vs. Experience
4. Open vs. Content gating

Let’s drill into each of these…

Eyeball worship vs. Game genre worship
First off, one of the big surprises for me was that many of the folks working at big games companies like EA have a very specific type of game they want to work on. Many of the folks I talked to wanted to make so-called “hardcore games” – very rich, deep, FPS/RTS/RPG/etc packaged games that sell at Walmart, and were completely uninterested in anything else.

While I excited about building simple Web-distributed games that could be played by millions of people, for many of these folks, if it didn’t look like a game, didn’t have monsters and guns, it was uninteresting. In fact, there was a pretty derisive view of folks who make so-called casual games as lower in the food chain.

This reminds me of a project I worked on a long time ago in the video space, pre-YouTube. I had interviewed a bunch of art students at Unviersity of Washington to talk to them about publishing their videos online, and they were very uninterested. For these art students, they had such a romantic sense of what it would be like to show your work in a theater, at Cannes, that the idea of millions of people watching a 400×415 pixel player seemed completely uninteresting. Perhaps the hardcore games folks I talked to felt the same way about their work.

The analogous concept in the web world is probably that a lot of entrepreneurs only want to work on “cool” startups involving fancy technology. They are less likely to think along the edges for products targeted at different (possibly more mainstream demographics). I also think that web folks get more excited about the eyeballs factor than anything else. The more simple, stupid, and widely used something is, the better!

Distribution vs. Content
Another interesting difference was the perspectives around content. For many of the games people I met, the content is everything. How good your game is perceived to dictate its ultimate success. I think this makes sense in an industry where distribution is essentially commoditized! The big publishers have many of the same relationships, and games developers in general have been outsourcing their distribution expertise out to the publishers for the past couple decades. As a result, it seems clear that the only place to compete is in the content of the game, rather than in the distribution.

Compare this to the web entrepreneurs who have to deal with the constantly changing landscape of distribution. Many of the top Facebook apps were simpler, dumber, and better distributed than their competition, and distribution in itself can be a competitive advantage. Eric Ries recently wrote about the distribution techniques that have recently been found for the iPhone App Store – these techniques include a primitive version of SEO via the App Store search function, as well as folks who constantly release updates to their app to try to get on the New and Hot list.

And of course, ad networks, affiliates, and leadgen companies represent the logical extreme in the distribution equation. Because they are selling other peoples’ products, they focus exclusively on distribution and differentitation via novel techniques and analytics.

It’s clear that both communities have a lot to learn from each other on this one, but because of the fact that distribution is extraordinarily important in the new social network ecosystem, I think this is why we’ve seen the top games coming from Web teams rather than Games teams. (With the possible exception of Playfish!)

Utility vs. Storytelling experience
One of my favorite cultural differences is the way web folks think about the role of their products in peoples’ lives. There’s often talk about making your product as “useful” as possible, or “social utility.” In the world of utility, oftentimes the main factors that are discussed involve terms like:

• pain points
• efficiency
• productivity
• ROI
• maximizing
• etc

These terms are great, and the world is better off for having products that make us all better worker bees!

Compare this to many games discussions, like the ones I sat through at GDC, which involved concepts like:

• characters
• plots and storytelling
• mood
• music
• fun
• etc

Now, I think that the productivity-inclined have their claim to the world, as does the fun/entertainment games people. But the intersection of this, in web media, is where the fun happens. For example, is the fact that Facebook has such an efficient newsfeed system a good thing, or a bad thing? I think it depends on whether or not you feel like the process of exploring peoples’ profiles and clicking through things as a good thing or not? In the MySpace world, given the degree of customization, you might argue that it’s more game-like in the way that it encourages people to click around and explore, whereas Facebook is clearly more efficiency-oriented.

Both approaches have their advantages, of course – and there are times where I use Facebook as a utility and times when I’m using it for time-wasting. The tradeoff between the two approaches are definitely interested to think about as your product is being constructed.

Open vs. Content gating
Related to the efficiency versus experience distinction, web products are very likely to make things very open and give the users all the features upfront. It’s very rare that you constrain what the user can do, and as a result, there’s no concept of leveling or grinding. As a result, oftentimes the experience that you get at the beginning is the same as the experience you have later on.

Games, on the other hand, have a clear concept of advancement and otherwise “content gating” their users. By withholding levels, powerups, weapons, trophies, etc., it creates motivation from the user to keep on playing. They say, “just… one… more… game…!!”

The Wikipedia article on this is instructive:

The most common form of level treadmill is the practice of killing monsters for experience points. The player constantly chases after the next level in order to be able to defeat the next slightly stronger monster. The outcome of MMORPG combat tends to depend more on the character’s numerical statistics than the player’s skill. Thus there is usually little for a player to do beyond clicking an attack button until he or she wins, or is forced to flee when nearing death. So whether fighting small rats or large demons, the player is performing essentially the same actions, the only difference being the larger numbers in his or her character and the monster’s attributes. In the eyes of players, the player is essentially running forward while going nowhere, as on an exercise treadmill.

As a result of this treadmill, there is a constant pressure for players to stay engaged and retained as customers. But the flipside of this is that it’s not enough to build one product – instead you build 70 product variations, and call each one a level!

Other observations?
I’d love to hear other thoughts on this issue, and any places where I’m overgeneralizing :) Comment away!

If you liked this article, check out my other essays here.

UPDATE: Adam Martin (formerly of NCsoft) writes up his views here, from the perspective of a games guy.

I wanted to quickly give some linklove to Furqan Nazeeri, a former EIR from Softbank who’s been writing some great stuff on raising money. His blog is at Altgate.com, and the RSS feed is here.

He recently made a list of his popular posts which I’ll list below here:

Raising Capital:

• 5 Reasons Convertible Debt Sucks HOT
• 10 Tips On Negotiating With VCs NEW
• Dating…er…Fundraising Etiquette
• The Science & Art of Term Sheet Negotiation HOT
• How Liquidation Preferences Work HOT
• How Much Money Should I Raise? NEW
• How To Get Introduced to VCs
• How To Pitch To VCs
• Killer VC Pitch Deck NEW
• Top 10 Tips For Entrepreneurs Pitching VCs
• Top 10 VC Objections (And How To Overcome Them) NEW
• Triage NEW
• Venture Debt For Startups HOT
• What To Expect In Due Diligence HOT
• Why Dividends Matter HOT

Startups:

• ‘Tis The Season To Change The CEO
• 10 Things To Consider Before Joining a Startup
• 10 Web 2.0 Tips: $75 HOT
• All-Hands Team Meeting NEW
• Board Management Tips For Startup CEOs
• Customer Support 2.0
• Financial Modeling Tips For Early-Stage Startups NEW
• Hiring Your First Salesperson
• How To Demo Your Startup NEW
• How To Pitch The Press
• Interview with Professor Noam Wasserman
• Sales Learning Curve
• Startup Compensation HOT
• Startup Entertainment
• Strategies For Two-Sided Markets
• What To Include In A Board Package

I have been very lazy about updating this! Sorry!

If you want to grab these in real time, you can follow me on Twitter at @andrew_chen.

• myspace making $1B a year, 3x more than facebook: http://bit.ly/PJPc2
• wow, what a lineup. John Doerr, Ron Conway, Max Levchin, and more. RecessionBeat event coming up soon: http://bit.ly/790Ci
• email marketing still most effective channel by ROI: http://tinyurl.com/4xqg34
• btw, i blogged about prosper stuff (today in TC http://bit.ly/7c9Z3 (expand)) over a month ago! http://bit.ly/1ccDXG
• Recession-Plagued Nation Demands New Bubble To Invest In http://tinyurl.com/5jgfha
• Retweeting @adachen: OMG BOOMBOT 2 IS OUT!! http://tinyurl.com/3ola4n
• great article in the nyt on amazon vs ebay: http://tinyurl.com/4r3ovc
• peter thiel and pearlstein on charlie rose, via @pkedrosky: http://tinyurl.com/5xjnu8
• remixes of the iconic obama poster, featuring amy winehouse, clinton, luke skywalker: http://www.posterpage.ch/exhib/ex216oba/ex216oba.htm
• jean paul gaultier redesign for evian: http://tinyurl.com/5yemed
• watching the gf play fieldrunners on the iphone for hours and hours. Looks like this: http://tinyurl.com/46dkxq
• testing ppl for their moral philosophies on mechanical turk: http://tinyurl.com/4t924l
• ok that’s cute. augmented reality virtual panda pet: http://bit.ly/1pFSsU
• andrew trader from zynga references maplestory’s $30MM in revenue in 2007: http://bit.ly/10h9bJ
• WSJ article on cans of mackeral becoming the currency of prisons: http://online.wsj.com/article/SB122290720439096481.html
• 7 habits of highly ineffective terrorists: http://tinyurl.com/42wrbd
• incredibly fascinating – a list of unusual deaths over the last 100s of years: http://tinyurl.com/8t7oc
• damn it feels good to be a banksta, The Comic: http://tinyurl.com/4zhzwx
• VP debate in autotune with music and beat. UGC video at its best: http://tinyurl.com/49juz9
• P. Diddy + Kim Jong Il collabo: http://tinyurl.com/3vnxgg
• smokinggun page of the day – ohio woman busted wearing cow costume and chasing kids: http://snurl.com/403dp
• vitamin-enhanced, ginseng-fortified, peanut butter-flavored bottled for dogs: http://tinyurl.com/3pwual
• “Results 1 – 9 of about 9 for barrack obama” via @brit http://tinyurl.com/4jpylj
• compete traffic analysis on the personal finance space, seems like mint.com is doing well (via ad buying): http://tinyurl.com/5xftmz
• nyt article from 1999: “Fannie Mae Eases Credit To Aid Mortgage Lending” http://tinyurl.com/4ulb87
• getting into fancy nyc restaurants by bribing the maitre d’: http://tinyurl.com/6g3ddn

Blog vacation
Sorry for the blog vacation – I’ve been working hard on presentations for Startonomics and the Virtual Goods Summit, which has taken a lot of creative juice over the last 2 weeks!

Blogger’s block
Anyway, I’m suffering some blogger’s block right now. I’d love some suggestions on areas and topics you guys want to hear about. Click here to suggest something, or write me at voodoo [at] gmail. I’ll get back on the horse soon!

Today, I did a talk at Startonomics on revenue metrics, click to see the text summary. The conference was well put together and a lot of fun. I wanted to share the slides as well as the video of my talk below – enjoy!

A great new blog from IMVU cofounder
I recently have been reading a new blog by Eric Ries, one of the founders of IMVU. The URL is http://startuplessonslearned.blogspot.com and the RSS feed is here. I’ve found it to be a great source of thinking around both games and metrics, two of my favorite topics. It’s quickly become one of my favorite blogs.

For those of you guys who haven’t spent much time looking at IMVU, here’s a good summary from GigaOm, including the statistics below:

• About 1.7 million user-generated items have been uploaded to the IMVU catalog
• Users create most content offline with industry-standard modeling tools such as Maya and Blender
• Individual content creators can take their earnings and sell them on third party web sites
• As with Second Life, IMVU users retain intellectual property rights to content submitted to the IMVU catalog
• About 100,000 users are registered to be IMVU content creators, but the number of consistent creators is in the tens of thousands
• IMVU users often sell their credits to other users via third-party web sites — also fine with Cary. “We observe it sort of casually,” he said.
• Demographic: Largest cohort is teens; 60 percent of users are female, 60 percent are American
• 50-70K concurrency is typical, with peaks in the high 70s
• IMVU areas are more like virtual rooms restricted to 10 avatars or fewer; Cary estimated 90 percent of those room interactions are person-to-person, anyway.

Eric has already written some great articles from his experience at IMVU, including articles on:

• common distribution models for online businesses
• gaining distribution advantages on the iPhone
• doing market research for product feedback
• a/b testing products

I’d encourage you to read more games+web+metrics goodness.

KP beefing up on games
Another interesting note is that it looks like KP has recently been beefing up their games focus. These days, Eric is a venture advisor for Kleiner Perkins, after 4 years at IMVU. He also joins the recently made partner Bing Gordon, a cofounder of EA, who quickly went on a tear making investments in games companies like:

• Facebook social gaming powerhouse Zynga
• mobile games company Ngmoco (from EA veterans)
• GoGii (from the Jamdat founders)

They also have Chi-Hua Chien, who sourced the Facebook for Accel Partners, and who is obviously a great resource for the intersection of social web and games.

Anyway, I hope you enjoy the blog!

My friend Dan Cook over at Lost Garden put together some slides on productivity research which I thought I’d share below. Much of it references the typical “crunch” periods when delivering large traditional games:

Last week’s Twitter links

If you want to grab these in real time, you can follow me on Twitter at @andrew_chen.

Wow, there has been a ton of investment into games-related startups.

I hadn’t seen this table until today – I thought I’d share it. It shows the tremendous amount of investment that’s been thrown into the “new” games space, although I’ll note that some of the companies on this list are relatively mature. But lots of them were funded in the last year or so. Given that there are still tons of stealth companies out there, I bet that a comprehensive list would be >2x as large.

Read more about this on Jussi’s excellent games blog:

UPDATE: There was a set of new updates on Jussi’s blog, which I’ve added here.

I’m speaking at the Virtual Good Summit (plus a discount code)

I’ll be speaking at this year’s Virtual Goods Summit on October 10th, 2008 and I just wanted to share some details about the event. The Virtual Goods Summit 2008 is a one day conference focused on the emerging market opportunity for virtual goods and economies. This year’s conference will build on the success of last year’s event and dive even deeper into some of the key themes facing this emerging industry. The conference will feature a blend of panel discussions and expert-led breakout sessions covering everything from getting started with virtual goods to maximizing the revenue opportunity around virtual goods and virtual economies.

I’ll be giving a talk during one of the breakout sessions – Daniel James and I will be talking about how to apply a metrics-driven approach to analyzing and understanding a virtual goods business, using some of Daniel’s experiences at Whirled as an example. There will be a ton of great speakers and presenters at the conference – I’ll be joined by Amy Jo Kim (Shufflebrain), David King (Lil Green Patch), David Perry (Acclaim), Brian Balfour (Viximo), Sean Ryan (Meez), Nabeel Hyatt (Conduit Labs), and many other leading thinkers in this space.

I hope can you can make it out to the Virtual Goods Summit 2008! You can save 10% on the cost of registration by using the code “ANDREWCHEN” at checkout.

Conference Website: http://www.vgsummit2008.com 
Registration: http://vgsummit2008-andrewchen.eventbrite.com

Last week’s Twitter links

If you want to grab these in real time, you can follow me on Twitter at @andrew_chen.

As always, I can’t promise they are all work-related 

Quick intro to getting set up on analytics
I’ve been asked a few times recently, “Wow, these analytics you write about are great, but how does a startup begin to bite off the relevant parts?” This blog is to address these questions.

First, let me recommend reading a previous blog, called omg I’m just a startup, I can’t do those fancy metrics. In it, I cover some more general philosophical ideas about how to approach what to measure and what not to measure. Might be worth taking a look if it’s not too important.

Now let’s move on to the first couple topics:

Step 0: Pre-product
Initally, the product development process should likely be focused on big-picture qualitative information, like whether or not your business is addressing the right audience as well as the preferences for that audience. So don’t measure anything yet :)

Instead, spend your time gathering qualitative data, interviewing users, understanding the problem-behind-the-problem you’re trying to solve, and prototyping concepts.

Do this for a couple weeks!

Step 1: Prototypes
As you create prototypes of your product, you should throw up some free, simple analytics to get you some rough ideas of what’s happening inside the functionality. This likely means something like Google Analytics, although there is a very large universe of equivalent tools out there as well.

Google analytics can’t really tell you much – it’s not very actionable. The main things I like to look at are new versus return visitors, top content pages, what pages are causing bounces, etc. Again, at this stage you are still primarily driven by qualitative research and ideas, and it’s hard for analytics to drive much of your thinking.

This prototype phase might last a month or a couple months

Step 2: Traffic comes in, so data must be collected
As your product begins to mature, and you get a better sense for what you are trying to do with it, the next thing I might do is to figure out what the important pieces of data are, and confirm that it’s being measured. Nothing is worse than throwing data away that you might want to use later.

Generally, I prefer a single table or log that can be queried later that stores events. The right granularity of events is at the “business” event level, like “someone updated their profile” or “someone downloaded a video” rather than at the URL level. This ensures that you are getting a good amount of information from the logs but it’s not so overwhelming that you’re blowing up your database.

You might, for example, hold events in the rough key/value form:

user_id, event_name, value, datetime

Where it might look something like:

1000, profile.photo.update, 1, 9:30AM 3/14/2008

Make sense?

I prefer to start out via SQL so that the manipulations of the data are easy, although many large-scale systems eventually move to flat-files of some format.

Design-wise, here are some things to consider:

• What’s your “event” hierarchy and what level of granularity do you want?
• Do you want your analytics DB to be the same as your webapp DB?
• How should you join data between your webapp stats and your analytics stats?
• Where does it make sense to throw data away versus trying to store it forever?
• How do you pass data into the analytics DB? Via a JS interface called by the client (like Google Analytics) or server-side within your methods?

There’s really no wrong answers to the above – I’ve seen it done in many ways.

Step 3: Identifying your user flows
Every web product ultimately has a bunch of user flows contained within it. For example, there might be a series of flows in how users come into the site, starting with ads, SEO, or otherwise. Similarly, once they get on the site, you might be trying to optimize their usage of their site.Identifying these flows is key since you are trying to find the”critical path” that is then optimized. Figure these flows out, and make sure you’re collecting the right data to optimize.
A good place to learn about these user flows is to read about ecommerce “funnels” and how folks go about breaking those down and optimizing them.

Step 4: Trying ad hoc queries
As users are coming into the system, it can then become a good idea to start gathering data into a standard format. This means creating a small set of queries that you might try to run to learn more about the critical paths that users are taking, and where you can adjust their flow. At this point, it’s important to have the vision of the product become fairly stable so that you are starting to optimize the edges rather than reinventing the core constantly.

The kinds of ad hoc queries worth doing revolve around whatever are the tactical goals of your business. If you are trying to come up with a monetization strategy, you should try to figure out your average order size and what percentage of users that start a buying process finish it. Once you create a small list of these queries, then you can start to formalize the ideas into specific metrics that you track daily.

If any ad hoc queries return data that is similar to what you could get out of Google Analytics (for example, aggregate numbers like pageviews and uniques), it’s probably a dumb idea to try to do those in-house. Don’t do more work than you have to! Instead, the only homegrown stuff should be so specific to your business that it’s easier to do in-house than to shoehorn it into a 3rd party analytics stuff. Don’t waste your effort on numbers a off-the-shelf analytics pacakge would get you.

Assuming that your product is stable, most startups will want to tackle this within the first few weeks (but obviously not until you have data)

Step 5: Formal in-house reporting
Once the product features (and thus the user flows) are sufficiently mature to invest in this area, then it makes sense to formalize out the reports. Typically I would start out with a series of pretty plain HTML pages using tables that just print out SQL queries. You can add finishing touches like percentage %s, key ratios, etc. as you go. I generally invest zero time into cute visualizations and graphs, and prefer to read the key numbers.

How many reports should you generate? I find that it’s pretty addictive to build reports and get a clear understanding of what’s actually happening in your product. So create enough that you can make key decisions, but don’t go too far either – you’ll hit diminishing returns quickly. Generally, 2-3 reports are good enough to start, but ultimately you’ll probably track dozens of dashboards each focusing on specific aspects of your business like.

• System performance and uptime
• User acquisition via each method you use
• Aggregate metrics
• Retention
• Engagement
• Content creation?
• Ads and monetization?
• Pricing and revenue?
• etc.

Anyway, get enough data but not too much – it’s a fine balance. For timing, it probably only makes sense to do this once the product is quite stable and the key user flows are stable as well. This is likely at least a month or two out from the prototype stage.

Step 6: Too much data! Reports are too slow!
If you’re lucky, eventually your reports will be too slow. At Revenue Science, we were gathering somewhere like 1 billion pixel hits per day, and that had to be translated into reporting. Ouch. So you likely will go through a couple specific steps:

• Reports will initially query the production server – eventually this doesn’t work and slows down the site
• Reports and data are then moved off to a slave machine, where the queries still happen in real-time – but eventually this doesn’t work either because it’s too slow and there’s too much data
• Reports and data are then pre-processed every hour, and then served up – which is fine, until your queries take too long, and you have go keep moving
• Data is then replicated across a number of slave machines, where the pre-processing happens
• etc.

There are many many layers of incremental improvements you can make here – but the toughest nut to crack, in the case where your web product is HUGE is that you will be inserting more data into the system than the system can process within a reasonable time.

Then the more exotic technologies like Hadoop, HBase, Hypertable, etc start to make a difference. Most sites don’t have to deal with this so I’ll stop here!

Conclusion
Eventually, most serious analytics-driven businesses have to build their own internal analytics. It’s not pretty, but it has to be done. Hopefully the above article gives some background on the key issues you might want to look at as you scale up your product.

If you liked this blog post, please recommend it to a colleague and/or click here to get updates via email or RSS.

New mobile blog from KP
This morning, my friends at KP launched the iFundVC blog to specifically cover the iPhone and the open mobile ecosystem that’s emerging. Their first blog post details a number of investments that they’ve made in the space, in particular Pelago, iControl, ng:moco, and GOGII. Anyway, I’d encourage you to read more about this legendary firm’s perspectives on the impending transformation of the mobile landscape.

One of the important comparisons for me is between the Facebook platform versus the iPhone platform. They are two of the biggest ideas of the past few years, one to open up the monster traffic enabled by social networks, and the other to crack open the walled gardens of mobile carriers. 

Is the mindshare of hobbyist developers going to the iPhone platform?
A key issue is where the developers are going to go – most of my technical friends have spent the last year and a half hacking away building apps on the Facebook platform. However, as time as passed, the platform has grown less attractive for a number of obvious reasons – to resummarize:

• Lack of stability: Facebook may slap down your app and replace it with their own
• Lack of monetization: Beyond remnant ad networks, there isn’t much you can do with the <$0.25 CPM inventory
• Lack of investment: Many angel investors are no longer investing much into the space, as mature companies like Slide, Zynga, and others have established themselves
• Lack of market excitement: Everyone wants to find the next new thing!

I want to also note that for the hobbyists, it’s not even the money that really concerns them. They just want to tinker around with stuff and build cool products, and there’s a set of sexy features like geo-location and SMS that allow them to experiment with the interactions.

As a result, I’d argue that a class of social network “refugees” are forming who are looking to build the next new thing, and the mobile platform (iPhone and otherwise) will start looking pretty attractive for them. I wonder how many of the lessons learned on the FB platform, like social gaming, viral distribution, etc. will port over to iPhone as well.

Comparing the Facebook platform and the iPhone platform
I also asked the audience to fill in a couple of the datapoints around comparing the two platforms, and what axes they would use. Here are some of the thoughts I got back:

I’m sure there is a much more comprehensive table out there. Noah also had a fantastic table here that was very funny. Anyway, in the comments there was a fun discussion of whether or not Facebook’s huge relative audience was more important, or if having more direct monetization was more important – quite a good exchange.

Ultimately, some of the >1M adoption rates of free iPhone apps like Tap Tap Revenge show that there may be enough audience there to generate some sizeable returns. So regardless of whether or not it’s a favorable or not platform, it’s attractive enough (especially with the stronger monetization channels) for developers to get excited about it. The after-effects of the open mobile platform, across all the carriers, is likely a strong enough trend to get VCs and entrepreneurs to decide that “it’s finally here.”

Are you doing cool stuff on the iPhone platform?
If you are, drop me a note at voodoo [at] gmail, I’d love to hear more about it.

If you want to grab these in real time, you can follow me on Twitter at @andrew_chen.

As always, I can’t promise they are all work-related 

• Blog essay list is finally up to date! Added the most recent stuff… http://tinyurl.com/5m2qdq
• New site: http://AmINormalOrNot.com? My fave section is the Most Weird, with “I eat poopy” and “I have never seen star wars”
• scientific american article on how sleeping and dreaming helps you get better at tetris: http://snurl.com/3oddd 
• lots of neat aggregated stats on angel investing (via @fredwilson):http://www.angelsoft.net/industry/index.seam
• top 10 free to play publishers, representing $2B in revenue per year: http://tinyurl.com/5knx4d 
• david shen on competing via design versus features, depending on product category lifecycle: http://tinyurl.com/5jzspv 
• interview with will wright on spore “I think of the theme first, the genre last.” http://tinyurl.com/66rtk6 

Here’s the transcript:

Intro
Hi everyone. My name is Andrew Chen and I’m a blogger and entrepreneur, focused on consumer internet products here in San Francisco.
This afternoon, I gave a quick talk at O’Reilly Alphatech Ventures called “Growing Renewable Audiences” which I thought I would share.

The primary focus of this talk is about the fact that every internet startup needs to grow their audience to be successful. And for venture scale returns, you need 10s of millions of users, not 10s of thousands. So ultimately, this divides the growth efforts that you can use into two types: renewable and not renewable. I’ll get to defining what this means in the next few moments.

Techcrunch and press traffic
Let’s start with this Alexa graph. There’s really nothing special about it – they’re just another startup trying to grow their traffic. I will say, however, that this startup is one of the many that presented last year at Techcrunch 40, which leads to the question, how many of the companies that launched this week at Techcrunch 50 will look like this in a year?

My point is not to pick on Techcrunch, which I love and read on a daily basis. Techcrunch is great for getting introduced to potential partners and investors, but for a consumer internet product that’s trying to drive users to a site, it doesn’t do much. The reason is that press and blog traffic are ultimately nonrepeatable, nonsustainable audiences that doesn’t stick. You get the spike in traffic, and it melts away as quickly as it show up.

In fact, I’ll describe press and blog traffic as “fool’s gold” because of the associated emotions that it brings. It’s easy to overestimate the impact of this kind of traffic because it just feels good to have your name and company featured. It strokes your ego. You might get a bunch of inbound emails from other press and partners, and all of these things can contribute to a feeling that you’re on your way to getting tons of traffic. Problem is, you inevitably become yesterday’s old news.

So again, this is the kind of one-time traffic that I definitely discount and stop focusing on. Instead, let’s talk about what it means to build sustainable, renewable audiences.

Renewable audiences versus not
What’s the definition of renewable? I’m interested in the last part of this definition, which is to define it as “inexhaustable or replaceble by new growth.”

For a startup, this can only mean one thing: the hard-earned audiences you generate via buzz, beta testers, and other sources must beget more audiences. This means that you should focus on building repeatable, sticky traffic that will stay for the long term rather than getting the quick hits. This is the only way for startups to get big and create venture-scale returns.

So let’s talk about a bunch of methods that are renewable versus not renewable. I’ll start with the non-renewable stuff first. As I said, pr and blogs. Same thing for talking at conferences. PR, blogs, and conferences are great to attract investors, partners, potential employees, but terrible for trying to scale to 10s of millions of users.

Same for community building events like meetups, contacting influencer communities, and so on. This can help you build out intuition for your product, but it won’t help you grow your userbase to 10s of millions.

And finally, here in San Francisco we have the “cult of feature worship.” Every product must have better features than the next, and it’s easy to respond to issues of traction with thinking. But I’ll argue that features might increase your engagement, but have a tough time driving more users.

Compare this to the renewable strategies, like viral marketing, SEO, widgets, and ads, which can scale into 10s of millions of users but are primarily centered around tough, non-user centric work. These are things that if you get right, you can optimize your way into a big, sustainable audience.

So I’ll stop here and ask you: What strategies is YOUR company using? Are they more from the left hand column? Or the right hand column?

Taking a systematic view to growing audiences
Finally, let’s talk about the approach for how you execute these growth efforts and build up sustainable audiences. First, you need a mental model for how users enter your site, and the process in which they bring in other users. This is your growth funnel, which you should then measure in extreme detail, and then use A/B testing tools to optimize. If you approach this process scientifically, then you’ll end up generating a vast array of hypotheses which you then identify, measure, and optimize.

I’ll give an example of this in advertising, and why ads can be a renewable resource.

An example: Growing audiences using ad arbitrage
Let’s say that you have a product that has a great LTV backend, like a free-to-play MMO that uses virtual goods for monetization. Then ultimately the entire focus of your business should be around figuring out how to buy ads profitably. get them to your site, upsell the experience so that a % of users buy. This then enables you to focus on buying more advertising, which lets you reach more users. If successful, you’ll be able to grow your audience up to its maximum size, until you run out of ads you can arbitrage effectively.

Comparing the iPhone platform versus Facebook platform
I’ve recently been pondering the key similarities and differences between the way the Facebook platform ended up getting executed versus the iPhone platform. It’s an interesting trend now that other mobile players are thinking about opening a platform and providing an app store as well.

How would you guys add to the following table?

What else should be in this table?

Do users really love your product?

If they did, how would you be able to tell?

I would argue that the single most telling metric for a great product is how many of them become dedicated, repeat users. This angle of thinking naturally leads to a number of metrics around user retention, which we’ll examine in this blog post.

User retention is especially important for social web products. Failure to consider the backend retention of a userbase can lead to catastrophic results – in particular, without the proper mechanics in place, it’s easy to hit the “shark fin” user curve, as well as the death spiral caused by reverse Metcalfe’s Law. In both cases, once the core audience of a site starts to erode, then the erosion can cause a negative feedback loop that causes the entire audience to fall away.

This raises a series of questions:

• What are the right metrics to track for user retention?
• (And as a corollary, what are the wrong ones?)
• What is a “good” retention number? What are bad retention numbers?
• How do you optimize and improve retention rates?

Let’s tackle these below.

Retention versus Engagement
First off, there’s an important distinction between engagement versus retention, which some folks often track in one bucket. I generally define retention is simply the act of getting users BACK to revisit, regardless of their actual activity on the site. Contrast this with engagement, which measures how much time they spend with the product, how many features they interact with, etc.

An implication of this is that the right metric to follow is visits rather than something like pageviews or time-on-site.

Here are a couple examples of the separation of engagement versus retention:

• Google is a high retention, low engagement site
• MySpace is a high retention, high engagement site
• News sites are often medium/high retention, low engagement sites (like checking a headline)
• etc.

Note the important point that engagement doesn’t necessarily correlate with monetization. Because many retail sites and reference properties are transactional in nature, oftentimes this implies that the closer you are to the money, the lower the engagement is.

Keep this in mind for people who espouse “addictiveness” and “engagement” as virtues for social media sites.

Retention versus Acquisition
Secondly, there’s the important issue of how to disambiguate newly acquired users from retained users. The problem with a traffic graph that’s going up-and-to-the-right is that it’s not clear what’s really happening – is the site bringing in lots of new users? Or is there a bunch of dedicated users that are extended their engagement? You need to figure out which of 4 scenarios are actually happening, which I’ve blogged previously about:

1. Pageviews are coming ONLY from new users
2. Pageviews are coming ONLY from one generation of users (like early adopters)
3. Pageviews are coming ONLY from retained users
4. Pageviews are coming from new users and retained users

The proper way to disambiguate retention from acquisition is to precisely track the following stats:

• How many new users are joining the site?
• Of these new users, what are the different funnels they are joining from? (be it SEO, direct navigation, etc.)

Then you separate out these users completely from the aggregate numbers, and the remaining folks you have left are ones who are coming back to the site. You can then further segment this group by cohort, which we’ll discuss below.

Building your first retention table: User cohorts vs Revisit rates
Using the points from above, you can now build a retention table that compares how many users are coming back. This table starts with three columns:

• Time period the user joined
• Number of users that joined that period
• Revisit percentage rate

The reason why you separate it out into cohorts is that it gives the ability to compare performance of the site over time. As new product features are added, ideally the revisit rates would also continue to rise.

Let’s put this together in a table, imagining that we’re at Week 5:

A couple points on the above table:

• Looking back as Week 5, you can see that Week 1 is now the “oldest” cohort, and those users have had many weeks to revisit the site
• The overall userbase is growing 10% per week, starting with an initial userbase of 1000
• The revisit rate is naturally <100% since whatever initial cohort you start out with, it can only decrease but not increase
• Note that the retention rate of the site seems to be around 30%, although you’d want to let the Week 1 cohort run for a while and see if it eventually stabilizes
• Week 5 is currently at 0% since in this example the week just started and no users have revisited yet
• The actual number of visits on any given day is weird to calculate using this table, since the view is not based on aggregate numbers

The key metric is really the number that the revisit rate converges to. You can use this number in your traffic models to understand whether you should be focused on acquiring new users, or if you can simply focus on extending the engagement levels of your site.

What’s your revisit rate? (Using Google Analytics to approximate it)
Google Analytics gives you an overall number for free, with some caveats. You can access this feature on the lefthand nav through “Visitors”, then “New vs. Returning.” Basically this is an OK approximation of the revisit rate, as long as you:

• Maximize the window in which you are doing the analysis (ideally starting the analytics window when the site was first made public), otherwise the numbers will skew high since you’ll be counting too many dedicated users
• Ideally, the site would isn’t adding exponentially more users every day, since it would skew lower because newer users are less likely to have returned

Essentially there’s some skew that comes into play since Google Analytics doesn’t let you segment your users based on when they first joined the site.

Willing to share?
For readers who are willing to share the numbers on their site, please comment below and if I get enough responses I’ll do a followup blog post on the subject.

Like this blog?
If you did, please recommend it to a colleague and/or click here to get updates via email or RSS.

If you want to grab these in real time, you can follow me on Twitter at @andrew_chen.

As always, I can’t promise they are all work-related

• new microsoft ad with seinfeld, i like it. http://snurl.com/3n4x6
• 11-year old girl saved her family by knowing an upturned car can explode because it happens in Grand Theft Auto. http://snurl.com/3n1vw
• Funny Flash game – Pigeon Projectiles: http://is.gd/2blg
• great discussion on offerpal on venturebeat by @eldon: http://snurl.com/3mn0i
• pretty sweet t-shirt: http://store.glennz.com/grounddefenses.html
• myspace continues to grow, both in uniques and overall engagement: http://snurl.com/3mfpw
• top advertisers online – note that these skew towards large, remnant buyers: http://snurl.com/3mfpq
• another example of america != SF, mapquest still has 46% marketshare in maps: http://snurl.com/3mfp6
• lol. “Pizza grabbed 4 of 10 spots in a recent list of mobile-directory restaurant searches in US metropolitan areas” http://snurl.com/3mfop
• there needs to be more advertising related open-source projects i wanted to give this one a plug: http://snurl.com/3md6l
• vanity fair article on rupert murdoch: http://tinyurl.com/55x6yd
• compete.com blog, ctr and conversion rate comparisons: http://tinyurl.com/663gq5
• pretty cool futuristic tennis video: http://www.lacoste-future.com/
• interview with mike moritz and john doerr: http://snurl.com/3m3ak
• behavioral targeting on the ISP-side continues to drift out of favor: http://snurl.com/3m0sz
• star trek the experience (vegas) closing down: http://www.cnn.com/2008/TRAVEL/09/01/star.trek.voyage.ending.ap/index.html

Online poker revenue datapoint
This article on the online poker industry in Italy was interesting enough that I had to post it:

Online poker players in Italy spend an average of $881 per person a year on the pastime producing a yearly haul of $514 million according to a new survey released as the nation’s Government gets set to legalise, license and control Internet gambling.

Normalized down to month, this nets out to $73 ARPU/month!

I have no idea how this compares to the broader set of online gambling, or if it mostly has to do with the specific demographics in Italy.

Comparison to virtual good games
Compare this some numbers that Jeremy Liew posted in his excellent analysis on free-to-play and Facebook app monetization.

• Second Life: $9.30 ARPU/month
• Club Penguin: $1.62 ARPU/month
• Habbo Hotel: $1.30 ARPU/month
• Runescape: $0.84 ARPU/month
• Facebook apps: $1.20 ARPU/month

Peer-to-peer lending
Prosper is one of my favorite startups, on a personal level, since what they are doing with peer-to-peer loans makes the market more efficient and generates gobs of graphs to play around with. For those of you who are not familiar, here’s a description of Prosper from Wikipedia:

Prosper Marketplace, Inc. is a San Francisco, California-based company that operates Prosper.com, an online auction website where individuals can buy loans and request to borrow money. Borrowers set the maximum interest rate they wish to pay^[1], and loan buyers, called “lenders,” bid on specific loans by committing a portion of the principal and setting the minimum interest rate they wish to receive on a particular loan^[2]. Prosper manages the reverse dutch auction, assembling bids with the lowest interest rates in order to fund the loan.

Prosper verifies selected borrowers’ identity and personal data before funding loans^[3] and manages loan repayment. These unsecured loans are fully amortized over three years, with no pre-payment penalty. Prosper generates revenue by collecting a one-time fee on funded loans from borrowers, and assessing an annual loan servicing fee to loan buyers. The idea for the service is derived from group banking concepts, such as rotating savings and credit associations. Other motivating ideas derive from the concept of microlending.

And because of their open API where you can query for pretty much every piece of loan data in their system (examples here), there’s been a large ecosystem of Prosper-related websites that have sprung up, including one of my favorites, LendingStats. They have a number of charts on their site which I’ll run through below.

The main thing I’m interested in is how the recession has affected the Prosper marketplace, and how it might affect other companies in this area as well. Obviously a bad recession is bad for almost every consumer startup, but it’s interesting to dive into this particular example.

Prosper Total Member Count
First off, the growth around Prosper has been good albeit mostly linear. That’s OK since the site actually involves money, versus non-revenue generating web 2.0 sites ;-)

Interestingly enough, you can see that new Borrowers outpace Lenders, and that right near the end of the chat (in the upper right), there is a bit of a plateau as membership growth stalls. Given the state of the economy, I’d assume that the reason is that Borrowers now have cheaper sources of credit and/or Lenders have less money, so fewer of them are on Prosper.

Sharp drop in membership growth and active lenders/borrowers
You can see the same drop here, where since April/May 2008 there’s been a substantial drop in membership.

Another view of this is just the Active members, rather than new users coming in:

One interesting note for the above graph – why do Lenders rapidly outpace Borrowers? My guess for why there’s more Active Lenders than Active Borrowers has to do with the fact that the Borrowers are just trying to get a big lump sum out of the system, whereas the Lenders are likely to re-invest their money and keep the returns coming in.

How does the economy affect YOUR startup?
This example of Prosper is an interesting datapoint of one particular company is being affected by the economic downturn. Being in the loans business obviously makes them affected by the fact the economic downturn has its underpinnings in the credit markets – but it’s still a non-advertising business affected by the recession.

If you liked this blog post, you can get updates by email or RSS here.

If you want to grab these in real time, you can follow me on Twitter at @andrew_chen.

As always, I can’t promise they are all work-related ;-)

• omniture blog actually has some good stuff on it – uncommon for corporate blogs: http://blogs.omniture.com/
• good whitepaper from quantcast describing challenges of user measurement using panels, pixels, vs cookies: http://snurl.com/3kuhm
• introing fortune cookies to china: “they would put the cookies in their mouth, and then be surprised” http://snurl.com/3kbku
• list of problems solved by macgyver: http://tinyurl.com/9k8v7
• why parents in china save so much money, via kedrosky http://tinyurl.com/57nulo
• “Every myth on this planet tells us the purpose of life is death… I think the purpose of life is life.” http://is.gd/1Wnq
• an oldie but a goodie – single men/women by geography: http://img91.imageshack.us/img91/4701/ngsinglesze4.jpg
• new trailer for world of warcraft expansion: http://www.worldofwarcraft.com/wrath/intro.xml
• article from habbo designer on MMOG monetization in the US: http://tinyurl.com/6m389u
• article on latency and how it impacts your business: http://tinyurl.com/5g8mp2
• warren buffet CNBC interview transcript: http://tinyurl.com/6dppmj
• current state of the art for computer animation of faces: http://tinyurl.com/6745dj
• what are the most important avatar customization features? hair style and color, it turns out: http://snurl.com/3jcqn
• new flash game by the makers of bloons out! http://is.gd/1Sqp
• slate article on an econ experiment to increase the productivity of field workers and fruit picking: http://www.slate.com/id/2197735
• hilarious new FF extension hides youtube comments with bad grammar: http://www.flickr.com/photos/waxpancake/2790444683/

The $12MM/year Facebook app
There has recently been a lot of news about a single Facebook app generating $12MM in revenue per year, called Mob Wars. Here are some articles from Eric Eldon of VentureBeat, here and here.

Here’s some predicted numbers for some of the other apps as well:

Virtual currency tips inside of Facebook
Justin Smith from Inside Facebook did some more digging on this. They recently had a great interview with the founders of Super Rewards, the company that’s powering much of the virtual currency-based games on Facebook along with Offerpal and others.

There are some great comments related to Facebook-specifc strategies, and also on performance metrics like below:

The core metric we use is dollars per click. We hope our developers can get 25% of their daily active users through a Super Rewards page at some point. Of those, if the economy is balanced correctly, you should see a 40-50% click through rate, and ultimately a net 8-10% conversion rate. Developers get about $1.00-$1.50/conversion for US users, but less for international users. We’re lucky to get $0.06/conversion in China, but we have games operating in Europe and other parts of Asia at $0.25 and up.

So assuming all of a developer’s traffic is US traffic, the developer could see up to $83 per day per thousand DAUs. However, on an average basis across all geographies, we are about half that number. It goes without saying that there is a wide distribution around the average based on quality of app and balance of virtual currency economy.

There are some other comments about how users stop monetizing as well once they are leveled up and aren’t buying as much. All worth reading.

The history of incentivized leads
Note the flow of how money flows into the Facebook ecosystem:

• People install a social gaming app
• They play the game, then want more money
• To get more money, they fill out lead forms for auto insurance, etc.
• The users get the virtual currency
• The social game publisher gets their payout from the lead itself

Now if the leads end up being poor quality – like if the Facebook audience is putting in garbage data, or signing up for things they are going to cancel, ultimately that will affect the value of the lead. The reason is that if the Facebook user has a lower LTV, then the acquisition price that is willing to be paid for that user will be less.

A cycle repeated itself online over the last few years where leadgen companie liked Gratis used a lot of incentivized offers, using offers like below. You can read more about Gratis on their Wikipedia entry here or a Wired article here.

Ultimately, these leads weren’t of terribly high quality, tricked the user, and a bunch of other bad things. So that industry has slowly transitioned itself out as a result.

The question is, are incentivized leads from Facebook any different? How will the quality compare to the now low-value leads generated from companies like Gratis? I suppose it will not take long to find out.

Facebook is winning on traffic
Several articles have recently come out that speak to Facebook’s tremendous growth overall, and particularly, overseas:

• As Facebook hits 100 million user mark, twenty percent have already opted in to the redesign
• Facebook v. MySpace In The U.S. Market: The Music Factor

As TechCrunch points out, among the key factors that have led to the growth relate to the Facebook’s strategy of letting users translate the site, allowing it to roll it out quicker to new countries:

Most of Facebook’s growth is international, where they’ve executed on a brilliant strategy for quickly rolling out localized versions of sites by getting their users to do the translation work for them (MySpace, by contrast, expands via a command-and-control infrastructure that puts people on the ground in each new international market).

This will have a big impact on the global outlook for social networks. The international market has traditionally been much more fragmented, more viral, and as a result more startups have targeted it as a niche to get some traction. But as MySpace and Facebook strengthen their grip in more countries, perhaps even that will be harder

International users suck at monetization
As I’ve discussed many times on this blog, international users are extremely hard to monetize, unless you’re Japan/UK/western Europe.

Mostly the reason for that is 3-fold:

• For direct response advertisers, payment processing for credit card transactions is a pain – either they don’t have credit cards, or there are potential fraud problems or high transaction costs
• There are natural inefficiencies like language, culture, and geography which may cause advertisers to convert more poorly and otherwise not be able to deliver their goods and services
• Brand advertisers mostly care about influencing US spending, or spend their dollars with US-based agencies and multi-nationals, unless your social network has reached scale

An interesting follow-on to the last point is that for some companies – and Hi5 and Friendster come to mind – they may have achieved enough scale that they have an interesting flow of brand advertising dollars from local international brands. When you’re a top 5 site in a country, dollars might follow you, and that’s a good thing. Certainly Facebook has reached this point in countries like Turkey or Canada.

My argument here would be that Facebook knows that international users suck at monetization, and if the primary source of traction is overseas, other than acting defensively, the company will start focusing on the next stage of monetization for the site.

The next steps for Facebook monetization
Given the fact that the team around Facebook hasn’t stumbled much in the past, it’s likely that they will continue trying some Hail Mary products around advertising that, if they work, would generate a huge amount of revenues. Among other ideas, this would include variations on Beacon (both inside and outside of Facebook), trying to monetize their user data via sharing or syndicating newsfeeds, integrating ads into Facebook Connect, etc.

If they decide to get boring and try to monetize in normal ways (and in particular following MySpace’s lead), then it would make sense for them to:

• Build out contextual sections like Games/Music/TV
• Add advertiser-friendly ad units like leaderboards rather than tiny proprietary spots
• Allow for homepage takeovers by brands

OK, let’s just admit that none of these things are likely to happen :-) And if they do, it’d be a big deal because of Facebook’s very user-leaning stance on interfaces, clutter, etc.

And yet these things were there from Day 1 on MySpace.

MySpace’s secret weapon: FOX ad sales
This brings me to my final point – Techcrunch says that Music is MySpace’s secret weapon. I disagree.

It’s a possible reason why users like MySpace, but ultimately I think that the key issue around monetization will be that MySpace has access to the FOX ad sales team where Facebook does not. This leads to a huge increase in brand dollars flowing MySpace’s way that would otherwise be difficult for Facebook to access. Think about it this way – here’s the revenue information for News Corp/FOX:

Revenue for the year ended June 30, 2007 was US$28.655 billion with an operating income of US$4.452 billion. Almost 70% of the company’s sales come from its US businesses.

And of that $28B/yr in revenue, obviously a very large portion of it comes from advertising. Now it’s not like MySpace has access to everyone who’s selling ads across News Corp, but certainly the conglomerate knows its way around the ad inventory. And very importantly, some percentage of the entertainment-related properties across FOX/News Corp will likely bundle MySpace inventory as part of every deal. This makes it so that a big record studio can go and launch a new artist, reach millions of people, and only talk to the folks at FOX to make that happen.

Ultimately, my guess is that the monetization futures of both Facebook and MySpace will diverge strongly as they establish themselves to be very different companies with different goals and strengths. It’s fun to pit two folks in a sorta-related category together, but I think that Facebook and MySpace are after very different goals and that will play itself out soon enough.

Moving the blog…
If you’re reading this, it means the blog migration went well! Woohoo!

Having problems?
Otherwise, if you are having any problems, shoot me an e-mail at voodoo [at] gmail.