An App is Not a Business

In the movie the Social Network, there is a scene where Mark Zuckerberg creates a website in one night. While most Internet products take longer than a beer filled evening to create, it is true that the barrier to entry for most Internet products is remarkably lower than ever before.  More entrepreneurs are throwing their hats in the ring and creating mobile apps and software programs in the hopes that they’ll make millions.  As John Doerr famously says, “The internet is the greatest legal creation of wealth in the history of the planet.” What entrepreneurs need to be reminded of is that wealth does not come just because you created an Internet product.  Wealth comes to those that build long term companies.

Building product is an incredibly exciting and fulfilling process. Taking an idea, creating it, and finding the right market to enjoy your product is not an easy task. And even if you are fortunate enough to find that product/market fit and develop a product that users will enjoy, you still haven’t built a business.  A product isn’t a business. Remember this.

I wrote a few months ago about mobile monetization strategy and what’s the best way to generate revenue from your mobile app. There are a few standard ways of making money (such as a download fee or mobile ads) but creating a business around your app goes well beyond the basic strategies I laid out. Let’s discuss a major factor to consider when you begin to think about your monetization strategy for your product in order to transform it into a bona fide business.

In the early stages of your app/company, you must decide the business goal of your monetization strategy. Are you looking to follow the Amazon land-grab strategy or the slow or the steady Ben and Jerry’s model? This distinction will guide your succeeding decision process.

Joel Spolsky penned the Amazon vs. Ben and Jerry’s strategy model a decade ago. The Ben and Jerry’s model means you’re in an established industry with many competitors and you’re looking to slowly build profits.  The Amazon model means you have few competitors (if any) and you’re not worried about initial profits, but rather getting the largest user base you can. Making money with the Amazon model comes later.  This is a very important decision because each model has different monetization strategies.

The subscription model is becoming very popular and it aligns with the Ben and Jerry’s model.  But it’s difficult to use for many apps, most apps that make money from a subscription model are actually value add apps. Meaning, you make money from your web product, but a mobile app gives you greater access to the product, giving users an added value. Dropbox is an example of this model. Unlike an advertising based model that requires thousands, if not millions of users a month to generate any type of income, the subscription model can generate substantial revenue quickly.  A mere 1,000-subscriber list at a reasonable price of $20 a month means $240,000 of revenue in a year.  The Ben and Jerry monetization strategy is great for a select number of apps, but the great majority of apps are going to need the Amazon land-grab strategy.

The Amazon model is much more difficult, but has higher potential returns, which is why many entrepreneurs love it.  It’s not based on incremental growth, but rather rapid user acquisition. The Amazon model requires large amounts of capital because these businesses don’t make money for long periods of time.  This is in part because they don’t offer any revenue models to users until they have a large, engaged user base. Once this community is built, you can dive deeper into your monetization strategy.

The Long Tail theory was popularized by Chris Anderson of Wired magazine. This theory can be distilled down to more profits can be made from a high volume of very small transactions than fewer, large sales.  This is exactly what makes the Amazon land-grab strategy successful. From here, you can determine the best method to monetize your large user base. Advertising is an easy choice because there are so many different options within the advertising umbrella. Transactional fees are a long-standing method of monetization, just look at credit card companies.  Bottom line is, your creativity with monetization is enhanced when you have a large, engaged user base.

Creating an actual business from an app is more complicated than deciding if you should charge for an app or not. Not all apps can turn into a business, but if you’re looking to build a business from your app, first decide Amazon vs. Ben and Jerry’s. It will direct your app’s path from a product to a business.

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