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Broadly speaking, there are two types of internet users, Time Rich (more time than money) and Time Poor (more money than time). I’d speculate that many of the readers of this blog fall into the Time Poor category, but the vast majority of internet users fall into the Time Rich category. If you’re starting a new internet company, its important to know who your audience is, and to make sure that you don’t let your own experience and that of other Time Poor people guide you wrong.

Time Poor

Time Poor people use the internet to get things done. They are very task focused, and their favorite websites help them use their precious time more efficiently. Great examples of websites built for the Time Poor include search engines, first gen comparison shopping engines (trying to find the lowest price as quickly as possible), ecommerce and lead gen sites where the purchase is more functional than emotional, and many of the “social news” websites that filter the news for you.

If you’re building a website for the Time Poor, your focus should be to minimize their time and pages on site. As a result, business models around e-commerce, CPC and lead generation are good matches for these sort of site – it aligns both user and site around getting to a transaction as quicly as possible. Depending on what you do, you may even be able to charge a subscription as well.

Time Rich

Time Rich people use the internet to kill some time. They are bored. They are willing to be diverted and entertained. Great examples of websites built for the Time Rich include broad based social networks, targeted social networks, picture sharing sites, anything celebrity related, anything sports related, social shopping sites (recreational shopping), social discovery websites that suggest new sites to you, all video websites and causal games websites.

If you’re building a website for the Time Rich, your focus should be to give them options to explore. Links density is the name of the game – more links means more clicks. Suggest a next click at any natural pause point, and keep people clicking within your site. Stimulate communication and community – it keeps people engaged and coming back. Give people reasons to bookmark you and come back often with fresh content and evergreen favorites.

You’ll likely monetize through advertising – sponsorship and CPM as well as CPC. Subscriptions may work for you too if you have certain features held back. If the products you sell are bought spontaneously, then ecommerce may also work for you. But don’t fall into the trap of creating extra pageviews for your own benefit and not that of your user (e.g. by splitting articles across multiple pages, or creating extra steps in a process to edit a profile page) as your users will wise up to your game soon enough. Time Rich does not mean unsophisticated. Your users spend enough time on the internet, and on your competitors sites, to know what are the best practices.

Know your audience when you build your site, keep the target clear, and you’ll have a better chance of meeting their needs.

UPDATE: New visitors, if you liked this post try the second most popular post, Three Ways to Build an Online Media Business to $50m in revenue

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Since my earlier post on “Three ways to build an online media business to $50m in revenues” was well received, I thought I’d examine the e-commerce industry as well.

The margin structure in most (physical) ecommerce businesses is dramatically different from that of online media businesses. Whereas online media businesses can enjoy gross margins of upwards of 90%, and net margins (at scale) of 50% or higher, many ecommerce businesses have gross margins in the 20-40% range and net margins (at scale) in the 5-10% range. As a result, ecommerce companies have to grow to a much bigger top line to achieve the same value. We’ll target $500m in revenue to get to net income in the same range as a $50m revenue online media business.

There are three ways that an ecommerce company can get to this scale:

1. Build up $500m in sales in a single vertical. You’ll need to ensure that the vertical that you’re addressing is large enough in online sales to accommodate your size – books, music, consumer electronics, shoes and groceries are all good examples. You’ll likely need to be number one in your category, which implies industry leading cost structures. You’ll probably be holding inventory and operating multiple distribution centers, dealing with returns and generally operating a very large scale business that gives you certain margin advantages because you’re one of the largest retail channels for your suppliers.

You’re probably able to spend on building a brand (vs performance based marketing only) and you likely think about customer lifetime value. Hence you may be willing to pay more to acquire a customer than you’ll realize from your first transaction since you sell a product that is bought frequently. As a result, you obsess over customer service because you need your customers to have a great experience and have confidence and recall to buy from you again in the future – ideally by typing your URL in directly into their browser.

$500m in a single category is a lot. In 2005, according to Internet Retailer, only four pureplay ecommerce companies exceeded $500m in online revenues (Amazon, Newegg), Overstock and Netflix. The remaining 22 companies who had sales over $500m online were very large multi-channel retailers like Office Depot, Gap, Dell, Circuit City and Walmart.

Other companies who likely have already reached this revenue level since then, or will soon, include companies like Zappos, Freshdirect, Drugstore.com and Buy.com

2. Build up $50-100m in sales across each of 10-5 verticals. This could be by being a smaller player in a larger category (such as the verticals discussed above), but you’re likely number one in a smaller category. Say Ski gear, nutirtional supplements, autoparts or power tools; smaller categories than books or shoes, but still pretty big. (Note – the links are to examples of companies that are at or could get to $100m in sales, but they are not parts of companies with multiple verticals each doing $100m in sales).

Since in many cases there are not that many synergies across categories (little or no ability to leverage supplier relationships for example) you may be a result of a rollup to get to critical scale. You may see some ability to leverage your distribution infrastructure, but in many cases the pick, pack and ship needs of different products are quite different and may not support shared infrastructure (small vials of pills looks very different from aftermarket auto parts). You likely hold inventory and operate your own distribution centers, but if you are in a category with large and unwieldy items that often get built to order, you may be able to dropship from your manufacturers.

In 2005, according to Internet Retailer, only 155 companies exceeded $50m in online revenues, and only 45 were pure play etailers, including Blue Nile, Redenvelope.com, Shoebuy and Furniture.com. However, there are a number of companies who are taking this approach, including Musician’s Friend, Provide Commerce/ Liberty Media, and Blue Lava

3. Build up less than $5m in sales in each of 100+ categories.
According to Internet Retailer, there were 479 ecommerce companies with sales over $5m in 2005, including Batteries.com, Junonia (plus sized activewear for women), iGourmet, artbeads.com and thinkgeek.com. As you can see, even relatively small niches can sustain $5m in sales. You may be able to rely on your manufacturers to drop ship, and you may need lower levels of dedicated resources against each category with less depth of industry merchandising expertise.

Rather than building a brand, you can rely more on performance based marketing, particularly paid and organic search and shopping engines. You may not even need to be number one in your verticals – if they are big enough you can still win some share of the market to get to $5m.

What is hard is getting to this level of sales across so many verticals. To be able to do this you need a level of shared technology and processes that can be applied across many stores. Winning becomes less about any one store, and more about applying best practices across all the stores. The challenge is in being able to enter a category cost effectively, and to run a store against low volume in a very low cost way. Processes and cost control become paramount because any sub optimal practices get magnified across 100 stores. Although no one has hit $500m in revenues through this approach yet, there are a number of companies who are taking a shot at this approach, including Mercantila (a Lightspeed portfolio company)CSN Stores, Netshops, Niche Retail, and others.

All these models are viable. As in most cases, the first $20m in revenues are the hardest! I’d love to hear from people on any of these paths.

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As my previous post indicated, it is not easy to build an online media company to $50m in revenue. Depending on whether you’re broad reach, demographically focused, or can support endemic advertisers, you need to get to top 10, top 25 or top 125 levels of US website traffic.

A couple of interesting studies have come out recently that underscore how difficult this can be.

At the Online Publishers Association’s Forum on the Future earlier this month, Marketspace (a consulting firm associated with Monitor) announced the results of their research which showed that 92% of 2006 gross online ad spend in the US went to only four companies; Google, Yahoo, MSN and AOL. Although some portion of that ad spend was subsequently distributed to independent sites through ad networks (e.g. AOL’s Advertising.com, Google’s Adsense, Yahoo’s Publisher Network etc), that is a big proportion of the total. Furthermore, that is an INCREASE from the 88% that went to those four companies in 2005.

Now According to the IAB and PwC, internet advertising revenues for 2006 were estimated to be $16.8 billion, a 34 percent increase over $12.5 billion in 2005. So doing the math, that suggests that the online advertising that didn’t go to the big four actually DECREASED from $1.5bn in 2005 to $1.34bn in 2006.

For companies in the broad reach/$1 RPM bucket, this probably doesn’t matter much. Ad networks owned by the big four sell a lot of their advertising anyway. But for companies that target endemic advertisers, this is sobering information. To be able to realize RPMs in the $20 range, companies will need to have their own sales force. And if these numbers are to be believed, this sales force is actually competing for a share of a slightly shrinking pie.

These numbers don’t quite match to the numbers in Avenue A/Razorfish’s 2007 Digital Outlook report, which is well summarized at Paidcontent, but they agree directionally. Avenue A says that portals have increased their share of online ad spend by 85% from 2005 to 2006, from 13% of overall ad spend to 24%. (This report breaks out search and ad networks separately – the big four would be a combination of these categories).

It would appear that advertisers are seeking consolidation in their spending patterns.

This isn’t entirely a doom and gloom story – online advertising revenue as a class is still growing at 34%, and $1.34bn of online ad spend among the independents is still plenty of revenue to go around. But it does underscore the need for websites to have a compelling story for advertisers, both about user targeting and about volume of traffic.

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I’m speaking at the Web 2.0 Expo in April. Its a “how to” conference for people who are starting in or working at web 2.0 companies and companies that aspire to be “web 2.0″. The organizers have lined up a …

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Josh Kopelman has a good post this weekend about the friction between free and one penny when charging consumers for goods that can be delivered digitally (e.g. articles, video, music, information etc). As he points out, price elasticity is not …

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Thanks to a glitch in my Netvibes reader, I got exposed to an old but very useful post by David Cowan on “How to NOT write a business plan“. It sparked me to post on how to get …

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As a venture capitalist, I often get the question, ‘Is it people or market?’

My answer is ‘Yes.’

There’s no doubt that great markets facilitate the building of great companies. But as we saw during the bubble, great markets can …

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Viral marketing has evolved from word of mouth to a much more scientific endeavor in the online world. Based on my previous posts and some additional thinking about the subject I’ve defined seven mechanisms that companies have used to successfully …

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There is lots of coverage today of the acquisition of Insider Pages by CitySearch. My first job in the internet industry was at CitySearch, in 1996, and some of the lessons I learned about how difficult it can …

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As a venture capitalist, I’m interested in investing in companies that could be big one day, that could get to at least $50m in revenue.

Here are three ways to get to $50m in revenue as an online media business; …

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