
The depressing math behind consumer-facing apps - revorad
http://www.gabrielweinberg.com/blog/2013/02/the-depressing-math-behind-consumer-facing-apps.html
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nhashem
This post should be renamed _the depressing math behind consumer-facing apps
without a business model that operate by setting money on fire._

I think Gabe is generally right with the metrics he quotes. It's going to be a
long slog to go from 1 million users to 10 million users. But it is completely
mind-boggling to me how he discusses 1 million users as an _emergency
condition_ that needs to be rectified as soon as possible.

If you're a startup with a consumer-facing app with some sort of business
model (ie. some way of making money besides chucking up ads) and operating
relatively leanly (ie. not having a huge sales force) then 1 million users
should provide plenty of revenue/profit to let you reinvest into the marketing
channels he describes and optimize accordingly.

Let's take our theoretical site with 1 million unique visitors a month. If you
figure out some way to get 1% of them to pay you $10 a month, then you are now
clearing $100,000 a month. Depending on the product, there are lots of
different ways to do this. Just because "freemium" is cliched doesn't mean
it's not effective. Just ask Dropbox. _And that revenue is on top of any sort
of ads you'll serve!_

The only reason to be depressed if you have a million users is if you have no
business model, and your operating costs are so high that making over $1
million in revenue a year is not enough to pay the bills.

Sure, there are some companies where there was an early conversation at some
point where someone said, "we're going to hire a huge sales force, and get a
ton of users, and not figure out any way to make money on them besides ads"
and everyone else replied "brilliant!" and they all toasted their Guinness and
got so drunk that they never realized how absurd that was. They should be
depressed. Everyone else with 1 million users though, I'd say, is doing just
fine.

~~~
dgreensp
Thank you for saying it better than I could have.

Alarm bells should go off when someone with a million users is talking about
_spending money to get more_ and not about converting existing users into
customers. Free users are not customers. Strategies for spending money to
acquire customers make sense because you end up making more than you spend.

~~~
niggler
"Free users are not customers."

Free users are the product. The point is to develop the product until you can
sell it.

EDIT: to clarify, "converting existing users into customers" suggests that the
parent assumes the users are the customers. In an advertising driven business,
the users are the product (time spent by people on the app) and the customers
are advertisers wishing to advertise to the users. Think about google: gmail
is free, but its revenues come from advertising and not from the users
directly.

~~~
dgreensp
Ha. I'm not sure I get the metaphor, unless you are talking about trying to
get acquired based on your user graph, or applying "greater fool" theory.

~~~
lsc
the idea is that your 'users' are the product you are selling to advertised.

~~~
dchuk
Isn't DDG inherently fucked here though because of their whole privacy deal?
The massive advantage the Internet creates is extremely targeted tracking and
advertising methods, which DDG is explicitly against.

It's like they're against the most proven business model for search engines
yet expect to survive somehow.

~~~
niggler
DDG does show ads:
[https://www.dropbox.com/s/9r0hxyxew3aiddr/Screen%20Shot%2020...](https://www.dropbox.com/s/9r0hxyxew3aiddr/Screen%20Shot%202013-02-22%20at%207.01.59%20PM.png)

They are trying to build an advertising model that doesn't track or store your
searches (just show ads based on the search at hand), which is actually
plausible

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reinhardt
So sick of this vile greedy a-million-X-isn't-cool mentality. This Disqus
comment sums it up for me: "OR you can skip the VC bullshit and build a
sustainable business that makes you boatloads of money and generates hundreds
of great jobs with a <1 million user base."

~~~
mikeash
Seriously. From the title, I figured it would be something like, "There are
sixteen godzillion apps in the various App Stores to compete with, and umpty
million app-buying users, so you're likely to only sell X thousand copies,
which won't pay for your time, unless you can somehow get ahead of the pack."

Instead, I'm supposed to be depressed that it's hard to go from 1 million
users to 10 million? Holy moly. If you're not doing well with a million users,
maybe you screwed up.

~~~
ori_b
There's the second half of the question: How much money are you making from
your users?

If you're able to effectively monetize a million users, that sounds great. If
you're making millicents per user a year, a million users is only a few
thousand dollars. And if you haven't figured out monetization, and are just
hoping to make an exit, you probably need a larger number of users to catch
the attention of BigCorp(r) if you want them to buy you out for a reasonable
amount.

The numbers of users that you need to be doing well depends on the product,
the market, your goals, and umpteen other factors. If a million users is
enough to keep you afloat sustainably, congrats!

~~~
ahoyhere
> If a million users is enough to keep you afloat sustainably, congrats!

If it's not, perhaps you need to ask yourself why you chose that business
model (or lack of business model) to begin with. Startups don't happen _to_
you. You design your startup from day 1.

Take this kind of thing as a warning not to design one you'll certainly fail
at.

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ChuckMcM
Awesome post Gabe, and so so true.

It doesn't help that a million different people and organizations are trying
to get through to you, the end user. My wife expressed it pretty clearly to me
when she said "I feel like I'm being attacked by a million marketing
mosquitoes trying to grab their bite of blood." There are advertisements
everywhere, they become the digital snow of the electronic generation.

Getting through that organically takes a long time, years. You can blast
through it with a big chunk of cash (temporarily light up the sky) but you
risk resentment from the folks who don't care. Leanness and frugality are the
traits to cultivate when you're in it for the long haul.

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rexreed
If you think getting past the first million users is tough, try reaching the
first $1M in revenue and growing to $10M... many of these consumer-facing apps
have no idea how to get to that first million, let alone the tenth. When I
work with other startups, that's usually my first question: "How are you going
to get to your first million dollars in revenue?" Even for those that have an
answer as to WHAT they'll do, they haven't thought through HOW they'll do it.
In many cases, for these consumer-facing apps, it will cost $2M in customer
acquisition to get to $1M in revenue... if they can get there at all. Many are
building to flip - hoping that the music doesn't run out before the money
does.

~~~
hayksaakian
I don't think that getting 1 million users is something to scoff at.

It demonstrates that 1M people think that the service is valuable. Deciding
how to extract money from them is a first world problem.

~~~
rexreed
I agree with you -- who's scoffing? What I'm saying is that without the
revenue model, the million users gets you something that's impressive, but not
quite yet a business. And without it being a business, it's hard to see how to
sustain that million user base. Isn't that the whole idea of the Underpants
Gnomes? Yes, you can get the users, and yes you can get profit... but exactly
how? Many times you can make it work if you can figure out Step 2, but if you
don't have enough capital, you can't.

~~~
lifeisstillgood
Underpants Gnomes ?!

~~~
lanstein
<http://en.wikipedia.org/wiki/Gnomes_(South_Park)>

~~~
lifeisstillgood
Thank you, I think this is one of those times you need to see the episode to
understand.

I'll live :-)

~~~
rexreed
check out the video on this page:
[http://onstartups.com/tabid/3339/bid/8608/Startup-Lessons-
Fr...](http://onstartups.com/tabid/3339/bid/8608/Startup-Lessons-From-The-
Underpants-Gnomes-PROFIT.aspx)

------
AznHisoka
I find the math behind any consumer apps that depend on online advertising
very depressing...

Let's say you get a million visitors a month. With a CPM of $5 (very
optimistic), and each visitor = 5 pageviews, that's just $25,000/month. Great
if it's just a lifestyle business. Depressing if you're trying to build a
company around it.

~~~
Agustus
The concept is to not get depressed about $25,000/month, but excited. If you
are able to come up with a number of simple products that have a quick
development and production time, then with five hits, you are at the
$125,000/month. Look at the <insert name of the company that makes that
ridiculously simple conversion program that posts here to Hacker News alot
whose name currently escapes me>, they have three hits on their hands, and
would assumedly be at $75,000/month.

~~~
AznHisoka
It is easier said than done - you'll be lucky to develop 5 products that total
$25,000/month. It takes a lot of manpower to make 1 hit, let alone 5.

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shawnreilly
Great article. I totally agree; User growth is an uphill battle that requires
a well thought strategy to 'cross the chasm' and beyond. However, I did not
see any mention of Value, which I find to be inherently important. When it
comes to User Acquisition (or I guess what we now call Growth Hacking), I
believe that Value is one of the most important (and sometimes overlooked)
aspects of any project. Solving real world pain points creates inherent Value,
which in many cases facilitates organic growth. If your App or Service is
Valuable, then people will naturally _want_ to use it, no promotion necessary.
I've found that the Value of a project is usually tied to the Vision of the
Founders, what types of problems they want to solve, and how painful those
problems are. I try to make all my Projects High Value, but many are still in
the beginning stages, and how successful (or unsuccessful) they will be has
yet to be seen.

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jacques_chester
Most of the money in the world isn't in the hand of consumers. It's in the
hands of business.

"I've heard of them" is not a useful metric for success. It gives you sample
bias towards thinking consumer-facing businesses are good, because the only
thing mass media journalists have in common is that they're mass market
consumers.

<http://chester.id.au/2013/01/05/on-selling-to-consumers/>

~~~
Alexx
In the USA consumer expenditures represent 70 percent of gross domestic
product, in pure 'output'. Though Economically business investment is a
stronger driver, (business moves more money around), it's not the larger slice
of the final pie, or 'in their hand' as such.

~~~
jacques_chester
The point is that at any _instant_ in time, almost all the current "stuff" is
_not_ in the hands of consumers. It is situated in the structure of
production.

Read the Hayek essay I mentioned, he explains it better than I have.

~~~
Alexx
Maybe I communicated my point poorly - I agree. Supply is the driver, not
demand. I was just annotating the use of the phrase 'most of the money'
comparing the difference in final output (as GDP), and throughput. In the
context of this discussion, internally the mechanics of the economy _are_
driven by business spending (which is most likely more than double GDP alone).
But if you take final output, consumers do hold the larger portion.

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droithomme
Very good comments here. If you can't make a sustainable business with a
million customers, then you have a lot of problems, and getting even more
'customers' isn't one of them.

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sixQuarks
As soon as I saw dark background with white font, I closed the tab. Sorry, but
it hurts my eyes to read like that. Why the hell do people still do this?

~~~
lazugod
Because the opposite hurts their own eyes.

