Thursday, April 10, 2008

Free Sample--The Middle Ground

Jesus said it is in giving that you shall receive. But I'm not sure Jesus ever ran a retail store. What about the free sample? To what extent should a business entrepreneur integrate this strategy into his or her business plan?

The first question has to be what does the free sample cost you? In the electronic world, the answer to this question is often zero. My online legal forms business gives away free samples of its legal forms. The system is self-service and the form are created on-the-fly through a web based app. We provide user support via email but that is generally minimal for the free trial. But what about the opportunity cost? The legal form given away is a form that could have resulted in a sale. For a struggling small business, every sale counts.

Years ago, we hit on the middle ground strategy. Users have a right to toy with the online app, see how it works, ease of use, and (importantly) view the actual form they will be purchasing. The kicker: free trial users only get an encrypted, non-printable PDF version of their legal form. Purchasing users get a printable PDF or a document convertible to MS Word. Is an encrypted PDF hackable? Sure but how many people are going to go through the trouble of hacking an encrypted file just to save $13? For our business, this middle ground compromise has been a win-win.

There has been a proliferation of free trial for PC based and online apps. Most are of limited duration and do not allow the user full access to all features. I, as a consumer, appreciate the ability to monkey with the program prior to plunking down my hard earned benjamins. Fast forward to the music download controversy fueled by the fanatical position of the Recording Industry Association of America (RIAA), a front organization for the major record labels. They've taken to suing kids, mothers, and grandparents over what they have determined to be illegal downloads of music. Rather harsh to bite the hand that feeds you. From their standpoint, the record labels view free downloads to be their death sentence. Maybe they are right but, I note, electronic sales of music (including ring tones) have ultimately saved the record labels collective butts. Sales of CDs are as dead as 8-tracks. Apples' online music store sells songs for a modest $1 apiece. A nice compromise.

But what about the free music trial? Well, under current formats, you can hear the first 30 seconds or so of a song for free on the Apple music site and other sites like Amazon. I want to listen to the entire tract and more than once to let a thumbs up or down sink in. is shooting for this middle ground in the music sample business. They have 5 million songs in their library and let you listen to any song in their library free, the entire song. The catch: after three plays of any song, the free listen is cut off and the users is direct to one of's online partners for purchase. I've been listening to Van Morrison and the Grateful Dead on while writing this post. Seems like a fair compromise to me. I wonder how they track the 3 free plays? Must be by IP address. If so, I get 3 free plays on my PC and another 3 free plays on my laptop! Nice deal. The downside for the user: they only list four songs for each artist. How can a fan be limited to four Grateful Dead songs! If wants this format to mature and blossom, they'll need to ditch the 4 song limit. I imagine that limit was imposed by the RIAA members while evaluating the model. Needless to say, these girls are skittish about giving away anything.

Friday, April 4, 2008

Evaluating Internet Ad Revenue Potential

The story of is astounding. As of October, 2007, this one man dating web site was generating $3.5 million annually solely in online ad revenue (expected to go to $10 mill in 2008). As an internet entrepreneur, I applaud Markus Frind as one man wrecking crew in the online social networking space. But something else caught my eye in regard to POF--it's high click through rates. Companies such as POF which rely mainly on online ad revenue get paid when visitor clicks on an ad. Therefore, the most important metric for the company is not number of daily unique visitors or even page views but, rather, how many ad clicks. A web site with a high click through rate can generate larger revenue on a smaller number of page views than a site whose click through rate is lower. "Markus told me that per page view, Plentyoffish has 5-10 times the click through rate of Facebook. So by his calculations, POF's 1.2 Billion page views per month is the same as 5-10 Billion Facebook page views per month." Link.

To be sure everyone is one the same page, "click through rate" is percentage of online ads that are clicked on by a visitor. For example, a web site with 1000 daily online ad views and 12 clicks per day has a click through rate of 1.2%. If you have a Google Adsense account, they give you the click through rate in the ad campaign reports. Frind argues for a valuation for his company using Facebook as a baseline and each company's monthly clicks. Good luck Markus.

On the topic of business plans, it is important for online companies who intend to rely in any meaningful way upon online advertising to discuss click through rates in making your financial projections. Hopefully, your company has past operations data to use for establishment of click through rates (CTR) and ad revenue per thousand ad impressions (CMP). Thus, when projecting future revenue for the business plan, you will possess historical revenue percentages that can be applied to future traffic projections. Get a solid projection on future page views then use the historical CTR and CMP to project revenue. For example, let's say your online business is a social networking site for Wiccan priests and priestesses. You're about to expand to other pagan faiths. Current daily page views are 20,000 (one ad per page) with CTR of 1.2% and CMP of $8. Thus, ad revenue is $160 per day. I have no idea the actual number but let's say there are twice as many Celtic worshipers as Wiccan in your target geographic market (North America). Thus, within one year, you are projecting 40,000 daily page views on your sister Celtic site (twice the Wiccan number) with combined daily ad revenue of $480. The historical CTR and CMP rates are what give your projections teeth, thus, helping the entrepreneur sell his business to investors.