Six Pixels of Separation - The Blog
March 9, 201110:40 PM

The Ugly Truth About Business Models And The Advertising Scapegoat

Here's a thought: when you're developing your business, think about the revenue model as you're developing your product or service.

It's one of the more fascinating phenomena of the new media world: we have these runaway successes with people clamoring to join/use them, but there is no substantial revenue model in sight. You can cry that Search Engine Marketing is losing its efficacy (I'd still argue that point), but you have to be able to respect what Google did. It took them years of working and nurturing the pay-per-click advertising model to get it to the point where it's at. It wasn't obvious at the beginning, but they kept at it and - regardless of how you feel about it - you have to respect this new form of advertising and their ability to create such a unique revenue model.

New business models are hard... very hard.

It's something that everyone from Facebook, YouTube, Twitter, Quora and Foursquare continue to grapple with. The business model is not clear. The revenue model is not clear. They're struggling with validation of their valuations and they're struggling with delivering significant revenues against hype and audience size. It's a huge issue when you have millions and millions of people coming through your doors, but you can't seem to figure out where the money is going to come from. When people ask me how companies (like the ones listed above) are going to make money, I half-jokingly reply that they may never look to their users to monetize. In fact, the only way that they will make money is when they are sold to Google.

Looking for more proof?

Today on MoBlog (via MediaPost), there was a Blog post titled, Can Foursquare Find A Business Model?, that looked at the recently upgraded Foursquare platform: "The changes to its app suggest new or expanded avenues for businesses to drive traffic and build loyalty by partnering with Foursquare. But in his blog post, Crowley didn't really get into how the company is going to monetize usage by local businesses, brands or consumers. Perhaps some high-profile new promotions are on the way, or Foursquare plans to unveil a set of new ad options soon, as Twitter did last year after taking a few years to build up its user base. But given the fading allure of check-ins and the bevy of direct and indirect competitors Foursquare faces, this would be a good time for the company to spell out its business strategy more explicitly."

The advertising scapegoat.

There's nothing wrong with advertising (I love advertising), but using it as the revenue model when nothing else comes to fruition is a dangerous and slippery slope. We tend to forget that advertising works in the mass media because it was an integral component of its creation. Having a runaway success and then pumping ads all around it (and within it) just because you haven't figured out a business model is a sure way to turn your users/customers/community members off. Advertising works and advertising is great when you have context, relevance and a willing audience. It falls apart when it's stuffed down our collective gullets because a business can't figure out any other way to make money. Advertising in those channels (at that point) also loses much of its context and relevance. In most instances, advertising may be best served as a supplement to the business' income and not the main line of business.

Advertising as a scapegoat business model lacks creativity and credibility. That's my side... what's yours?

By Mitch Joel