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Traffic Model vs. Business Model

September 29, 2010

House is the middle of nowhereOver the past few years I’ve spoken to countless entrepreneurs with ideas and business plans. Through StartupCamps and pitching competitions I’ve seen even more investor pitches and the 2 common questions investors will ask are “What’s your business model?” or “How will you make money?” and “Where are you going to get your first customer from?”. These are valid questions, but in the online space I feel the most overlooked question that should come before all others is “How will you get a sustained flow of customers?” or “What is your traffic model?”

If you open a restaurant, you will start with a certain amount of free foot-traffic. Online however, opening a website is like opening a restaurant in the middle of the desert. Nobody will show up unless you direct people there. Luckily there’s a huge range of customer acquisition strategies. Every start-up is different and will have to use a mix of strategies that provide enough customers with a good return on investment. Every strategy will have a cost associated with it and over the lifetime of the customer you’d ideally get that investment back.

Let’s say you were starting an online CRM site that’s 10 times better than SalesForce and you only charge $50/year. Your cost of hosting is only $5/year and support is $20/year, so this seems like a good idea. To get customers you’ve decided to invite all your friends on Facebook and to use Google Ads. First you invite all your friend on Facebook and one friend signs up, so you’ve just annoyed all your friends to make $25/year. Next you go off and buy some Google Ads, only to find that any keywords around CRM cost about $40/click. Your conversion rate is about 10%, so the cost of acquiring a customer is $400, which will take 16 years to make back and it’s unlikely your customers will stay that long. So you’ve done 24 months of product development and you’ve got one customer at $25/year profit. Time to rethink your traffic model and/or business model.

I believe many many web start-ups fail, not because they have a bad product or a bad business model, but because they lack a traffic model. Over the next few weeks I’ll discuss a whole range of customer acquisition strategies such as SEM, SEO, affiliate marketing, ads, sponsoring, offline marketing, spamming, building a tribe, “viral” marketing, twitter, etc, etc…

What is the most innovative traffic model you’ve seen lately?

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From → Rubbish

2 Comments
  1. That example sounds mildly familiar….
    Loving the new blog, Bart! Keep it up 🙂

    – Adam

  2. > What is the most innovative traffic model you’ve seen lately?
    1. obviously gaming. Offerpal etc sit on top of Zynga
    2. I think LBS is the new kid on the block that will be low volume but high conversion.

    For this reason, I think it would be nice if you can (before talking about acquisition deeply) that you talk about some conversion assumptions. I don’t mean for a whole treatise on analytics and bounce but just broad metrics you experienced personally.
    d.

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