Small Business

No Free Lunch on the Net


By Karen E. Klein For years, consumers have been conditioned to expect free information,

services, and even products from the Internet. But with the dot-com bust and this year's economic slowdown, many companies with major online investments have to make their Web sites profitable or shut them down. "Monetizing the Web" is a concept that branding consultant, author and speaker Rob Frankel (www.RobFrankel.com) is teaching to companies facing that dilemma. Frankel, based in Los Angeles, spoke recently with writer Karen E. Klein.

Q: For several years, we heard experts say that Web sites did not need fee-based business models. What happened to that thinking?

A: First, it was the venture capitalists telling everyone, "Hey, don't worry about profitability -- it's the lifetime value of a user that we're concerned about." Originally, people thought that if they could grab market share, customer loyalty would automatically follow. So, theoretically, it didn't matter if you spent a large amount to grab a customer's attention, since, over the long haul, you'd make that money back through the business you'd do with that customer....Web businesses were paying $100 to $200 per customer just to get people to their sites, through advertising, freebies, and no-cost services. The measure of success was in body count -- how large was your user base?

There were two big flaws in that theory: Online businesses were losing money with every transaction, and Business School 101 tells you that's not healthy. But more importantly, there were few brands established that cultivated user loyalty. Most sites never gave people a reason to invest their hearts, minds, and wallets into their brand, so everybody flocked to online businesses, raped them for whatever they could get, and left. Since the focus was on customer acquisition instead of building a solid, brand-loyal business base, most of those businesses melted down as soon as they ran out of funding.

Q: What about the advertising model? It works for radio and TV -- why not the Internet?

A: Patterning Web-site advertising after a mass-media model was a complete failure that went bust when it became clear how low the advertising click-through rate was. The ads vaporized as soon as the traffic dropped off, which was when the free stuff disappeared, which was as soon as the funding dried up.

The problem with Web advertising is that if you don't bring targeted messages to a targeted group, they're not going to click because they're not interested in what you've got to sell. Television has maybe 200 channels, even with cable, and you can still segment most shows' appeal, demographically. The content that is offered acts as a funnel to direct viewers to advertising and sets popular consumer trends.

The Internet has got billions of sites that can be accessed any time, anywhere. You can't funnel ad traffic through that big and diverse a medium, it's too complex. It's like selling advertising on trucks driving across country: It sounds like a great idea, because lots of people on the roads will see those ads, but it doesn't work because you're not reaching a targeted audience.

Q: Where does that leave the business owners who have invested time and money in the Net?

A: Most of them are freaking out about how to generate revenue, and they're scared out of their minds. The problem is that a lot of them are making the same mistake and they are going to get destroyed: They're taking what was free and charging for it. Nothing [angers] the customer more than changing the rules on them. People hate to be muscled. And they feel ripped off if you do something like change your online privacy policy, and let your customers know that you're going to sell their names after all, or you tell them you're going to take away that "free e-mail for life" that they signed up for six months ago.

It was really scary the other day. I was talking to the moderator of a

Web-based list group that has 120,000 subscribers, and he said, "I'm going to start charging $30 a year, and if we lose 90% of our subscribers, we lose them." What an attitude! There's no need to lose anyone, because if you know your brand strategy, you can create new products and not alienate your customers.

Q: How do you accomplish that?

A: If you started out charging something, you can hike your prices. People don't mind a price rise, because that's not changing the rules on them. They expect to pay something going in, and if the price goes up, they can handle that. But most people are in the place where they started out: offering something for free. It's become viable, but now they realize they have to start making money with it. What I teach them to do is find value-added products to offer their customers for a fee. If they can solve their clients' problems, they become heroes to their end-users, and that's the name of the game when it comes to brand loyalty -- especially online.

In my case, I have several thousand subscribers to my FrankelBiz List, an online, branded community I created three years ago that offers members a chance to exchange business opportunities. It's free, as long as you follow the FAQs and maintain a high standard of ethics. Here I had a growing group of entrepreneurs, consultants, business people, designers, and others working in e-commerce. I sell advertising and make a small amount of money that way, but I wanted to make the opportunity more profitable.

What I started to notice is that some of the members were more serious than others, and a lot of them asked questions about business, but they never got posted to the list because it's not a discussion group. I saw an opportunity there, so I started FrankelTips.com. I gave everyone on the list the opportunity to sign up for a weekly e-mail newsletter at the cost of $24 a year that would give them advice, expertise, and answers. Within two weeks, 25% of the group members signed up for the paid subscription model. Not one person whined or complained about it, and I up-sold a good portion of my customers into a brand-new, related product, so I now have ongoing revenue from both sources -- paid subscriptions and advertising fees -- and everybody's

happy.

That's a model that can be followed by a lot of other Web companies, and it doesn't have to cost a lot. Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 6th Floor, 2 Penn Plaza, New York, NY 10121. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


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