Why Startups Don’t Make Money Anymore
Investors and pundits are forever lamenting the lack of revenue in web business today. Many ventures don’t attempt to monetize their services at all, while the majority simply place ads on their sites. Social Media in particular has become infamous for it’s lack of imagination where revenue is concerned. But what changed? Why did entrepreneurs lose their ability to profit from their ideas?
Well, it’s not so much that entrepreneurs have changed, as that their circumstances have. In realiy, they’ve never been any good at monetizing ideas, because it wasn’t a skill that needed cultivating in the past; so long as you were able to think up a product or service people wanted, you could sell it to them. But this hinged on the fact that it cost you something to produce: build a product, mark it up by a few percent, and there’s your profit.
This system breaks down, however, when products stop costing anything to produce. The cost of provisioning service to a single user of a site is effectively zero, close enough that it can seem worthwhile to give it away in order to expand your userbase. Unfortunately, in doing so, you lose the revenue stream which has supported businesses since the dawn of commerce.
Note that it’s not only web-based startups which are running into these problems - all industries, even established ones, whose marginal costs drop to zero have to find new business models, and none of them are very good at it - just look at the music industry.
Entrepreneurs now need not only to be able to come up with a good idea, but they have to be able to find an innovative way to monetize it. They haven’t lost a skill, they’re just being forced to learn a new one.
I don’t really think that startups have to create some new, innovative monetization method. They just need to charge people for their product or service.
http://www.fortworthstartups.com/2009/01/05/how-to-make-money-in-2009-with-your-web-startup/
You make a good point, startups are especially unwilling to charge for their services, but their strategy is not without merit either; just about any social media site can be easily cloned. To charge users, you need to offer something more than the base code. In the case of social media, this is usually your site’s community, but that community develops because people are able to use the service for free.
If Twitter, for example, started charging all of its users, it’d most probably survive, but I expect that it would be overtaken in short measure by another startup offering the same service for free.