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June 09, 2008

The real business model for Web 2.0: corporate clients

by Josh Bernoff

Bubble Everyone seems to want an answer to the question "When will Web 2.0 startups start making money?" The implication is that unless we can answer the question, the "bubble" of Web 2.0 will burst and all of us who believe in this stuff will be revealed as fantasists.

The fact is, it's incredibly hard to make money as a Web 2.0 startup aimed at consumers.

There are hundreds of these companies, and they all clamor to brief us at Forrester. Each has its own twist on blogs, social networks, ratings, user generated video, or whatever. It's hard to get people to pay attention to a new tool, and the value of the tool depends on lots of participation -- the classic chicken-and-egg problem. You competitor is always one twist ahead of you. Some of these startups will succeed but the odds are one in a thousand -- you need just the right idea, at the right time, with the right push or set of potential customers, and you need to take off with such velocity that you leave the competition in the dust.

Once a startup like this does take off, there's that other pesky little problem -- monetizing the success. Google transformed the online world by first generating huge traffic, then finding a business model. But Google's success was based on a fantastically clever advertising mechanism that was automated, attracted new advertisers, and served searchers nearly as well as it served advertisers. Facebook hasn't yet unlocked that advertising gold mine, and flubbed up its most prominent try with Beacon. Twitter has no business model yet. Ning has hundreds of thousands of visitors, but still runs Google AdSense ads. And these are the successes. No wonder people are skeptical.

A few of these companies may (and likely will) unlock that genie as Google did and take off. But for any given startup, the odds are astronomical.

The amazing thing is that there are a class of startup companies making good money right now from Web 2.0. They're not flashy and they don't grow like mushrooms. But they've got all the business they can handle and they are growing. I am talking about companies that serve corporate social application needs. This isn't the typical Web 2.0 business paradigm, since serving corporate customers means lots of client service, which is people-intensive -- it doesn't lift off miraculously like a pure technology startup. In fact, in many of these companies, the technology itself is positively mundane. But the startups grow because they deliver value for which they can charge a premium and get customer loyalty. The customers of these companies don't defect when something shiny and new comes along, because they like the service they're getting.

Here are some examples, listed by the objectives they help companies accomplish (for more on these objectives see Chapters 4 through 9 of Groundswell).

Listening. Communispace now has hundreds of private communities that its client companies are using to learn about their customers. It succeeds because it's unlocked the key to running and moderating these communities effectively, and grows despite charging $150K or more per year per community. The other class of listening companies are the brand monitoring companies, and the track record here is great. Research giant Nielsen bought BuzzMetrics. Another research giant, TNS, bought Cymfony. J.D. Power & Associates bought Umbria. MotiveQuest, which is still independent, has typical clients happily paying $70K $30K and up to work with it.

Talking. Talking with the Groundswell is tricky, but there are plenty of agencies ready to help you with it. After building dozens of campaigns and sites, Blast Radius was bought by mega-agency Wunderman. Brains on Fire ignited the spectacular success of Fiskateers. The digital divisions of companies like Edelman also compete in this space, as do the big Web service companies like Avenue A/Razorfish (now part of Microsoft).

Energizing. Ratings and reviews are the easiest way to energize customers to sell others, and the companies that provide them are taking off. On behalf of its clients, Bazaarvoice's clients have generated over 10 billion customer reviews has served over 10 billion reviews to consumers. PowerReviews works with over 200 retailers. And ExpoTV has built a business around consumers creating reviews on video.

Supporting. Support forums work -- they please customers and they reduce costs. Lithium has an impressive client list including Dell, AT&T, Comcast, and Sprint. And forums are just one type of community. The community space is crowded, but other companies with growing client lists include Jive Software, Awareness, and Mzinga/Prospero.

Embracing. Startups that enable clients to source ideas from their customers have a bright future, because customer-generated innovation is hot right now. Salesforce.com bought Crispy News and turned it into Salesforce Ideas, which powers idea sites for Dell and  Starbucks. And Innocentive is growing rapidly, with 50 companies including Procter & Gamble offering prizes of $10,000 or more to innovators that can solve their problems.

While many were distracted by sparkly consumer-facing startups, these companies were building and growing solid businesses. Look how many of them were acquired! This is no bubble, because companies that deliver business value to clients have durable growth potential. Could this be the Web 2.0 business model everyone is looking for?

If you're interested in what this means for marketing people working with startups (and you're a Forrester client), see our related document, going live today.

Photo credit: Jeff Kubina

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Comments

John Caddell

Josh,

Product-support Forums seem to be everywhere now. It occurred to me that the wiki format might be useful for user's guides to products. Do you know of anyone using this model to build a product users' guide?

Regards, John

Tom O'Brien

Josh:

Thanks for this excellent compilation of companies operating in this (large) space.

FYI, our (MotiveQuest) projects start at only $30k ;-)

TO'B
MotiveQuest LLC

Josh Bernoff

Tom -- that number was based on my conversations with your CEO. I will fix . . .

Tom O'Brien

Thanks Josh - I'll have a word with him!

TO'B

Jonathan Mendez

Josh -

I think you're giving way too much credit to Google for "unlocking the genie." They didn't invent search, the idea of PPC and they pretty much admitted to infringing on Overture's patents. As far as AdSense that technology was the purchase of Applied Semantics.

They executed all these things brilliantly but that is less about a business model and technology IMO and more about their leadership, culture and decision making (and lack thereof for the competition). Likely the same factors that will separate the 2.0 winners and losers whether they serve consumers or corporations.

Laura

Great article..!

Justin Hunt

Josh - like your blog and the book which was really interesting. How about looking across the pond to some social media agencies in the UK...? We're starting to make headway with clients on social media (www.itsopen.co.uk)
best wishes,
Justin

Chris

great post, very thoughtful, usual thing, the companies away from the limelight are making all the money

Rebecca

You don't have to publish this comment, but thought you might like to know you have several broken links in this post (have appended your own url to the urls of hyperlinks throughout). No way to contact web master, only speaking engagement sales-y contact stuff...

Philipp Sauber

interesting post! you mentioned adWords by google that made them make a lot of money. i wonder if other sites like facebook or twitter ever come up with such a clever idea - if there are anymore at all? i will follow the subject!

Chris Yeh

At PBwiki, we started off as an advertising-driven play, but realized that there was much more money to be made selling premium services.

We turned off ads completely a year ago, and now generate revenues that are nearly two orders of magnitude greater.

If you create value for people, they're willing to pay, especially if they're businesses. PBwiki has thousands of paying customers.

Hypnosis Melbourne

Perhaps we need to consider the monetization of 2.0 more closely.

I know many people aiming promotion at 2.0 in the expection of monetary return and upset when it doesnt eventuate.

Vlad

interesting post! you mentioned adWords by google that made them make a lot of money. i wonder if other sites like facebook or twitter ever come up with such a clever idea - if there are anymore at all? i will follow the subject!

SuggestionBox.com

I agree.

Connecting People with People is helpful.

Connecting People and Business is valuable.

home business

Business opportunity websites that offer multiple income streams have been proven to be a very profitable business opportunity.

Martin Edic

In addition to being a social media measurement provider we're also using SM to raise awareness of who we are and finding it extremely effective for B-B marketing. Part of it is the ability to be highly relevant if you're listening and the ability to 'unearth' prospects who come to you because they were also following the conversation. This kind of granular marketing is very different from any existing model (BTW, Groundswell was very helpful in turning on the lightbulb for me in this area).
Though we're B-B, we've successfully used a common web 2.0 convention: The freemium account. The difference is that the people who sign up for it are genuinely qualified prospects- who would bother signing up for a social media monitoring tool otherwise? In a B-C model you get a lot curiosity-seekers that seldom convert to paid. Just the opposite for B-B.

cneil

I think the trick is not to have small proprietary corporate Web 2.0 companies.
The big companies that give users power to do what they want will be the ones that are most successful.
Image if Facebook integrated a little better with e-mail, Twitter, and Myspace. Then they started charging five dollars a month. If it could serve as the key to linking everything together consumers wouldn't have a choice but to by the product. And there would be millions of consumers buying that product.

Taylor Walsh

The link for Salesforce Ideas should be:

http://ideas.salesforce.com

Alex Osterwalder

You nicely discuss the revenue side of Web 2.0, but it can be interesting to also consider the cost side. With services like Amazon S3 it has become much less costly for "hobby" entrepreneurs to float/implement new ideas. In fact, many of these "entrepreneurs" I know are fully employed and build Web2.0 sites at night. Because of services like Amazon S3 they can benefit from building their ideas on world-class infrastructure without having to buy the hardware. There initial investments are only time (and sleepless nights)...

The consequence is that innovation and new Web2.0 sites have skyrocketed. That in itself is a great thing, since 1 in 100 might make it to the next level and offer a great new service. Unfortunately, many of these "hobby" entrepreneurs have relatively weak business skills and don't evaluate different business model options for their services... Or some are clearly more interested in technology than business issues.

However, what counts at the end is that consumers (retail & business) benefit from increased innovation from those sites that really make it to the next level (= sound business model)

ray

Josh, i mostly agree. however, there are many instances where communities manage to unlock, then unleash so much value (esp hyperspecialization gains - niche) that finding a dominant business logic is not always so difficult (even in the 2.0 world).

Yes, all information on the internet wants to be set free, but it also can be very (in fact very) expensive if it wants be. this fits, w/ your reference about targeting enterprise, but there are instances where consumers are willing to pay.

my $0,02

ray

ray

Alex, i read your blog from time to time. just read your comment before i posted mine. imo you make a very valid point. exploring, experimenting and finding the right logic is almost certainly a function of startup costs. hopefully there will be more innovation in models.

German Romance

Thank you, this is great information!

jack

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