This is the second article in the series about managing an online business. It will focus on what you actually do in an online business, how can you measure it, the various stages of each project and how you can monetize your work. If you came here directly you can go back to the summary of the whole series or you can start with the first article which deals with starting your own business.
Please keep in mind that this post is rather long, more than 3000 words, so make sure you are away from interruptions when start reading it. If you can’t read it now, you can bookmark it and come back later.
More than in any other business, in the online universe, a product (i.e. a website) is more like a process and not like an object.
If you are in the furniture business, you’re selling objects. A chair, a table, a couch. Every once in a while you change a little the design, but you are largely selling objects.
In the online field, you sell things which are continuously shaping. An online service is by definition dynamic. Your websites need continuous upgrade, otherwise they will fade as importance and eventually lose their audience.
The online has a high availability, which means your potential audience is huge. But the online has also a high volatility degree, which means that the potential huge audience is very easy to be moved toward your competitors.
Online Projects Metrics
You need a way to quantify the behavior of your websites in order to measure their success. Otherwise you’ll be lost in the jungle of millions of other websites, portals, forums, blogs or online shops. I worked with only three main online project metrics:
– traffic, the total number of users that accessed that website in a given time interval
– money, the total amount of money that website produced in a given time interval
– resource consumption, how many resources (people, money, assets) that website consumed in a given interval.
Although it seems pretty straightforward, the way in which those three metrics can combine is infinite. You can have projects with minimal traffic but with good money flow in. You can have websites with little or no money in, but with huge traffic (I guess the most famous example is YouTube in this area). Or you can have websites with zero resource consumption (auto-pilot websites) with no money in and just a decent traffic. but still consider them as successes. Each combination of those factors can play a role in the bigger picture and you must not overlook any possible outcome.
Now, let’s take each metric and see how you can interpret it.
Roughly, the traffic is measured in unique users and page impressions. Traffic in itself is composed by many other metrics and studying it it’s a fascinating activity. I highly recommend you to have at least a basic understanding of concepts like: page impressions per visit, new visitors, referrals and bounce rate before you dig into having an online business too much. There are also more specialized measurement tools on the market which can bring even demographic data: how many people living in big urban areas, over 25 years are reading your page, for instance. Usually those are paid tools and not on the cheap side either. You will not need such a monster, but you will need a decent traffic measurement system (Analytics will do for 95% of you, I suppose)
As a business tool, traffic is a measure of the impact your website generates. Your website will have an audience and by looking at the traffic you can estimate that audience. Please note the audience is not your traffic, it’s usually bigger than your traffic. In this case, rough numbers are your enemies, and not your friend.
Why? Because traffic is a close function of the goal of your website. If you launched a niche website and get a huge audience, something is wrong. You may have a huge traffic but you don’t sell what those people want. If you have a good traffic but in the wrong demographic segment you’re also on the wrong track.
You always have to judge a website traffic related to the initial goal for the site. Otherwise you’ll be fooled by meaningless numbers.
A personal story
In 1999 I launched a recipes website. The audience wasn’t great but it was steadily growing. Year after year the website had a constant growth. But at the same time I had other projects, a car portal for instance, which had an instant traffic boost. The differences between those two sites started to become bigger and bigger: the car portal was soon the best in its field, while the recipe had only one third of that audience..
But I kept the recipe website running despite the fact that the numbers were low. And slowly, in 5-6 years the site become extremely successful. I was suddenly aware of that success when I first saw the site copied on CD and sold publicly (yes, ’twas a content theft). The traffic was still not sky rocketing compared with the car portal, but the impact of the website was huge. It was the only reliable source for recipes in Romania for years. Even last year, when I made my exit there were at least 7-8 successful clones of my site floating around (and you measure your success by the number of clones too, by the way 🙂 ).
The strong point was that behind that site was a community. A female community with a very good demographic data. So, despite the fact the traffic was somehow small (well, not quite small, it was still around 250.000 – 300.000 unique visitors by month) the impact of the site was huge. And there was a big potential for monetization but will talk about that a little later in this post.
Any website must give you money back in one form or another. That sounds a little dumb, but well, it isn’t. The key part of the sentence is “one form or another”. Which means, yes, you got it: you can make money indirectly.
One thing that I noticed during my 10 years of online business was the “network effect”. When I first launched my sites, back in 1999, I started 6-7 at once. Didn’t know about the “network effect” at that time, I was just enthusiastic. And I was lucky. If I would focus on only one single project, maybe I wouldn’t succeed. And that “network effect” is the fact that the traffic growth in a network of related websites is far more rapid than in a single site. I won’t go into details about that, just note that in a network of websites you can make a lot of money indirectly.
So, you will receive money from various sources (see below the chapter about monetization) and you must monitor those sources carefully. If a website doesn’t bring in at least 200 EUR / month in 6-9 months, you can forget about it.
The 200 EUR amount is not random, it’s basically a number that works pretty well with various costs that are supposed to appear when you start and maintain a website. But more on that, in the next metric description.
3. Resource Consumption
A website is made from software, servers, bandwidth and operational costs. Each of these components can be split in turn in many others, but the good news is you can’t refine them more. So, even if you’re going to have big and diverse operational costs you will only have soft, servers and bandwidth to add to it.
Those are resources. They can be usually obtained by spending money or applying skills form human intervention. A website will require those resources in order to function properly. The ideal situation is when your resources costs are covered from money you get on the website. It will not always be like that, and yes, YouTube is again the example here: I’m not sure the resources for making it work are covered by the money obtained from display advertising. But that’s another story.
Getting back to that 200 EUR I talked above: if you reach that level in 6-9 months it means: you have hosting covered, you are prepared for some minor hardware upgrades and can buy a dozen of support hours for keeping the site working. Out of those 200 EUR, around 130 are for human intervention, and the rest for covering hosting, bandwidth and potential hardware upgrades. There will be a separate post about how you spend money in an online business later on this series, so I won’t insist on that one for now.
These numbers apply to a specific market, Romania, and can have a huge variation based on your current market. If you can reach to cheap human intervention (maybe in India, for example), you can cut a little from those costs.
Monitoring those metrics is very important. As you will see below, there is a stage in which you have to measure everything you’ve done so far, and at that stage you will need these numbers.
4 Reasons For Starting An Online Project
Ok, enough with the boring metrics part, let’s get juicy. Why would you start an online business anyway? Which are the causes that can bloom their effects as a web project, after all? From my experience, there are only 4 reasons for an online project:
1. exciting / new / interesting ideas
2. things you like (your own passions, pets, cars, cooking, going out)
3. things you want to improve (create a better portal, a better car site)
4. things that doesn’t exists yet (twitter ?)
I successful launched about 20-30 projects and I covered almost all of those areas, meaning I had projects with exciting and new ideas, projects about my passions, there were projects in which I thought I can do better than others and of course, completely new beasts.
I’ve been successful with projects located near point 1 and 2, but that doesn’t mean you can’t tackle a project from the point 3 or 4. As in any other type of business, it’s about creating genuine value. Doesn’t matter if you pursue your hobbies or if you improve other existing products. If you deliver genuine value, you will succeed.
The reason I’ve been successful in the first half is something related to the big numbers law, I suppose: almost 75% of my projects were about my passions (cars and cooking, for instance) and only 25% about areas in which I thought I can improve stuff (general portals, for instance).
The 3 Stages Of An Online Project
Ok, you have the idea, now how can you actually implement it? There are three main stages for an online project:
This is the first and most dangerous stage. Why is dangerous? Because you can spend all the time you have only in this stage and avoid actually doing it. I’m sure you know the pattern: a friend who talk with you for weeks about his idea, but never start to work on it. He’s still enthusiastic and all, but he just can’t get to work.
Whenever I got excited about something I tried to talk with somebody about it. Take out the excitement, exhale my impatience. If I was still enthusiastic about the idea after several rounds of talking it out loud, then and only then I reached to the second level. This enthusiastic period, that sudden surge of adrenaline was anywhere from several hours to several days. If I was over a week and still enthusiastic about, I knew I had to abandon the project: too much hype.
I never did SWOT analysis myself (although I remember that I precisely asked that from my marketing team several times). I read them, but I don’t build the decision on them. I build the decision on my quantity of enthusiasm.
Why? Because without enthusiasm you can’t really get involved. Maybe a SWOT analysis will give you a green light, telling you that the project will be successful but you don’t have the drive anymore. It’s like having a map but no need to hike. Putting something together is a question of enthusiasm and involvement.
That is the stage when you actually start the project. You start to take care about the hosting details, you buy domain names, you start coding and prepare for launch. The involvement period is something that is going beyond the actual launch of the project. After the launch you will still have to take care about all the feed-back. You have to repair bugs, respond to comments and establish partnerships. Not to talk about monetization.
Some of my involvement phases lasted more than a year. In fact, just before the launch I made a full redesign of all my network of websites which consisted in upgrading basically everything, from the software platform, to layout and new features. This was the longer involvement stage I’ve ever had, almost 1 and a half year.
As a personal note, the involvement stage is the most comfortable one for me, I just enjoy doing things.
This is the most ethereal stage of all. Although it seems the most exact one, in fact is the more sensitive and changeable. In this stage you are actually starting to apply the metrics defined above and prepare for a decision. In fact, you prepare for 3 possible decisions:
1. let the project running as it is
2. change it (as in upgrade it)
3. drop it (as in stopping it)
The beauty of the measuring stage lies in its endless field of possibilities. You can create a traffic giant (I mean a big traffic website) but without any money flowing from it. At the same time, you discover that the traffic giant can drive a portion of it’s users to another project you have, which happens to be a money maker. Hooray, we’re touching base here, right?
But then you realize that the resource consumption of the traffic giant is growing faster than the money produced can flow in. Bummer!
To let or not to let? To drop or not to drop? These are the questions you will fight every minute of the measuring stage.
As a personal note, again, I hardly had any project which I could let as it was. I always had to improve here or there, always have to invent something more. I never recall to have more than 2 months without a significant upgrade on one of my websites. And I also had a lot of projects which I had to drop. It’s sad. But necessary.
Monetizing An Online Project
Besides measuring, that’s the most time consuming operation in managing an online business. Yeap, of course, it’s about making money online after all. Once you have a bunch of running projects, with decent traffic and decent operation costs, you will start to look at the money factor.
And by all means, it’s a very important factor. I made money using one of those monetization techniques listed below. I will start with the less important and get to the most important in terms of cash flow:
1. Display advertising
I mean banners and links. Traditional advertising as we call it. Overall it was between 15% to 65% percent of total revenues. It was never ever 100%. Not even 90%. Not even 80%. I think this is a very important warning for anybody starting an online business. Display advertising is so overrated. It works of course, and it’s a residual income (you don’t have to invest every time, you just sell pixels) but it’s hard to make a living only on display advertising.
Co-branding is a technique in which you exclusively sell subsections of your website to only one client for a reasonable long period of time (6 months minimum). You sell visuals (banners), direct exposure (newsletters) and maybe contests with prizes. I did this several times with moderate good results on all my websites. Compared to display advertising, it’s better in terms of income, but it requires more action: you have to tweak the page to fit the sponsor needs, to manage contests, to prepare newsletters, etc.
3. Revenue sharing
Revenue sharing was one of the best sources of income I had. Because our sites were so popular we partnered at some point with a telecom operator. We started to make our content available on their platform (at that time there was WAP, I guess) and split the revenue telecom received from the user. We did a lot of work for several months in a row, making all of our websites available in mobile (WAP) format, but we received money almost 4 years, without any other effort. Not a lot of money of course, but it was comfortable. Revenue sharing can be made working with other information carriers of course, not only telecoms. You can partner with printed magazines, for example.
4. Lead generation
You make a great niche portal about cars, and then you start putting in contact potential buyers with potential car sellers. This is Business To Consumer, not classifieds (we did have classifieds but I don’t consider this a monetization technique, but more a specific online product). When the new local car created by Dacia in collaboration with Renault was to be launched, several years ago, we partnered with a Dacia dealer and started to sell Logans (that’s the name of the car, Dacia Logan) in advance. By using the site, of course. It was a huge success, we sold over 100 new cars in two weeks or less. Unfortunately, the dealer somehow violated Dacia internal rules with that so he had some troubles later, but the monetization was extremely effective. Of course, we had lead generator for various other niches later, most popular being selling financial products / credits.
5. Parallel services
This technique is a little bit unusual. It brings together a niche (let’s say cooking sites) and an online ordering service (food companies). We did this on one of our websites and it worked pretty well. We kept it for more than 4 years which is quite a lot. Parallel services are layers of functionality added on top of already successful websites. Those features must be related to money, of course. In the above case, we had a parallel layer of online shopping for food, but you can also think as something like a paid membership layer.
6. Direct packages
The most successful technique was something that I call direct packages. It was a mix of exposure, measurement, broadcast and sponsored content. Basically, in a car portal the client received a banner, a monthly report about his car make behavior compared with the competition, a lead generation system and direct links in some hot spots. We split this product in several price ranges and started to sell it directly to the car makers. The reaction was unbelievable. That was the most important revenue source for my online business for years.
Please note that we didn’t use affiliate programs at all, I guess Romanian online market is not so crowded with that.
I’m sure there are other monetization techniques, but I guess they can be simplified more or less in one of the above.
Still Want An Online Business?
If the answer is yes, then stay tuned for the next article in this series. Meanwhile, I would love to hear from you in the comments.
13 thoughts on “The Making Of An Online Business – The Projects”
@casey kochmer Thank you 🙂
A good review of working on a online project. Thanks
@BunnygotBlog thank you, I’m really glad you find value in this 🙂
This is a fantastic article with very interesting factors. This is what I was getting at when I posted my last comment.
@Mike King thank you for your comments, I started to look after them on each post I write 😉
About that 200$ part, well, that’s a milestone discovered by trial and error, and it’s about the potential of the product/website. What I should specify more in the beginning of the post is that an “online business” is something related to content generation, publishing or communities. It’s not about creating sites for clients, which is a service, or having a corporate website for a, let’s call it, “real life business”, which is basically a way of attracting clients for something else. These are completely different businesses.
And to finally set things right: if a website built on content generation or community is producing at least 200$/month in the first 6-9 months, there is potential for more. That’s a thing I learned the hard way, that’s what “trial and error” usually means 🙂
Dragos, this is a great article that covers a lot of areas of targeting the market and monetizing the business as well. You are definitely right how so many people think advertising is enough to base a business on (look at all the hopeful bloggers out there) and it is most certainly not. It is a small piece of the earnings like you’ve suggested.
One thing I’m not too clear on, is your $200 breakpoint. Are you talking about all of it’s revenue generation or just the the automated portion of the site itself (ads, online product sales etc). I would think you need to guage what revenue the website is serving as it could be valuable enough in the other areas like parallel services or lead generation to keep it without any earnings. My own site for my 3D business I had for years before selling anything directly on it, and it led to 100% of my services for years so it had it’s value. I assume that you mean any revenue earnings on that subject?
Ooops. I skipped just that part when reading. 🙂
@ibz it’s already described in the #5 Parallel Services, if you read carefully. Paid membership is just a parallel service, on top of website’s features. I had good experiences with that, especially when it is combined with a reward mechanism (points, levels, etc).
What about selling membership packages (like Flickr’s PRO account)? I think that is one of the best monetization techniques. Of course, if it applies and if people buy it.