Andrew Chen Archives

Need a solid business idea?
I’ve recently been asked by a couple people who don’t have solid business ideas that they want to work with. In fact, maybe they have something fun and entertaining, but they don’t know how to shift it into a model that works.

For all those folks out there, here’s the blog for you. Here’s a template for how to find a good business concept quickly, using many analogies that are already out there.

Before jumping into this, here are a couple older, related posts that I’d encourage you to read:

• Is Facebook killing dating sites?
• Revenue implications of non-sticky sites
• Eyeballs versus Revenue: What should startups focus on?

Proven transactional models are everywhere
When the Web 1.0 bubble collapsed, some of the only companies left standing were "transactional" sites that weren’t dependent on advertising. You could see them everywhere:

• Retail (Amazon, Buy, etc)
• Travel (Expedia, Travelocity, etc)
• Dating (Match, eHarmony, etc)
• Jobs (Dice, Monster, CareerBuilder, etc)

Even these days, you’re seeing an entirely new generation of companies focused on tickets, like StubHub, or advertising networks like RightMedia. All of these businesses are real money machines.

How categories have matured, and the battle over users
The only concern for most of these companies, as they scale up, is that their proven business models end up stagnating as other competitors enter the market. Because it’s very hard for most of these companies to develop relationships with customers, they end up in a lead generation knife fight.

This means their growth and/or margins whittle down as they engage in ever-competitive user acquisition battles.

Here’s some numbers:

The U.S. online dating industry is expected to climb 9 percent
year-over-year with revenues of $516 million in 2005 coming from
consumer subscriptions alone, said Nate Elliott, an analyst at Jupiter
Research. That’s slower than the 19 percent growth in 2004. And when
compared with a 77 percent jump in 2003, the latest revenue trends seem
cause for real concern. (Source)

Online corporate sales will climb
to $37 billion. In spite of those numbers, the US online travel market
is maturing and growth is slowing down. (Source)

In fact, one of my favorite blogs, Jeremy Liew from Lightspeed Ventures, recently wrote an article on the deterioration of margins within the lead generation industry. (Think online education, insurance, car quotes, etc.)

Where can social media companies fit in?
Given that the real leverage point within these transactional industries is user acquisition, I’ve come to believe that you can apply social media techniques to build solid businesses that are upstream from the transactions.

The advantages of Web 2.0 sites over the transactional sites are:

• Viral, organic growth in traffic, versus paid user acquisition
• Sticky traffic that can be converted to transactional, versus one-time user visits
• Upstream position from several mature sites means "auction" dynamics

I think the first two are pretty obvious, but let me explain the third one: If you built a site that everyone would visit before they went onto the job sites (for example, a professional social network), then you can "funnel" users to the transactional sites. In fact, you could do one of the following:

• Auction the user off to the highest bidder
• Auction the user off MULTIPLE times, like to the three highest bidders

The latter case is pretty interesting, since if you are able to establish those dynamics, you will have a stable place relative to your downstream partners. They won’t be able to pay as much as you can to acquire a user, since obviously Monster would never sell one of their users to CareerBuilder.

Focus on the right social applications
Of course, no one wants to do a social network about jobs, or insurance. Instead, you have to focus on high-interest mass market topics that are upstream to them. For example:

• Retail-> Celebrity gossip and fashion (like PerezHilton)
• Dating -> Hanging out (like MySpace)
• Jobs -> Professional contacts (like LinkedIn)

In each of these cases, you end up with more daily traffic, more unique users, but fewer % of people who are "transacting" at any given time. The idea, of course, is to build a large enough user base that you can a large absolute number of people who are in the transaction stage.

In conclusion, this is a quick way of brainstorming a bunch of interesting social applications that have solid revenue potential. Just look at any transaction that people make over time – be it services, or big ticket items like cars or real estate. Each one of these transactions should have a larger social application to tie them together upstream. By using viral growth techniques, paid advertising, and sticky content, you can engineer a lead generation machine that throws off actual revenue.

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