The Hands-on Guide to Starting a Niche Social Network

Social Networks: Choosing a Winning Business Model



Excerpted from The Hands-on Guide to Starting a Niche Social Network

By Ric Mazereeuw

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Depending on your motivation for starting a social network, generating revenue may or may not be a driving factor. Even if your community isn’t meant to be a profit-maker, though, I urge you to read this as it may spark ideas you can use to provide even more value to your community.

So how will you make money through your social networking site? Most of the news about the profitability of social networks in the mainstream media focuses around the big names, like Facebook or MySpace. The stories often revolve around their difficulties finding a profitable business model. It’s more telling to take a look at smaller networks, to see how they are generating revenue.

More than 45% of social media leaders surveyed in February 2009 by Abrams Research considered freemiums the best way to monetize social media.

Premium Services (aka Freemium)

This is a classic Internet business model, where the basic service is offered for free, but premium services (or access) is offered for a fee. The bulk of your members will opt for the free version, but if you can provide enough value the premium payments can fuel your business.

A recent survey of online community professionals called Online Community Revenue and ROI Techniques by Forum One Communications and The Online Community Research Network provides some great examples of premium services. The respondents were asked what activities, content and services within their community they are currently charging for:



Some of the answers (like “Enhanced Gameplay”) are very niche-specific, so take a look at your niche, and what its members value most. This is where being able to get inside their heads becomes so valuable: Watch how your members interact, what they value, short-cuts they want to take, and how your busiest members use the site.

All communities — online or offline — respond to different incentives and value different things. Think about your group: Are they motivated by access, by status, by discounts, by exclusivity?

Access to Content
If your members are passionate about something, they may be willing to pay to access quality content. The Auteurs, a social network built around new cinema and classic film, successfully charges users for watching some of their hard-to-find films — anywhere from $1 to $3, per view, and is exploring subscription options.

If you’re nuts about French cinema, and live in Dakota, you’d hardly blink at spending $3 for a film the local Blockbuster is guaranteed NOT to have in stock.

What content to do have (or can you get or create) that your users may pay to access, either on-demand, through a subscription, or even buying outright and downloading it?

Hint: The content may even come from users themselves: see the sections on Facilitating Trade and Merchandising, below, for ideas of how your community can be the source of — and market for — content.

Contact Members
Charging for contact is the most popular option for generating revenue in the survey. Dating sites have known this for ages, of course, and the opportunity may make sense for some networks, especially if you’re charging one type of member for the ability to contact another type of member.

LinkedIn is a great example of this. Since its 25 million users are all professionals looking to boost their prospects, the intent becomes easier to gauge and monetize. As with any gathering of business professionals, it doesn’t take long for the sales and recruiting professionals to start networking more aggressively than the rest.

This is a dynamic that could have actually hurt the network, if members suddenly felt they were constantly being harassed and spammed. So by charging these sales and recruiting professionals for access and tools, it protects the mainstream members a bit by adding a cost to the activity.

And since getting access to prospects is everything to these pros, they will happily pay a price: The average subscription is $200 to $300 per person, per year (and the range is $60 to $2,000 per year).

In effect, LinkedIn makes money by selling access to people — not just eyeballs. It’s not unlike a dating site in that respect. Their “In-Mail” product charges you to send email to people you don’t already know, since you are normally restricted to connecting with people you know — or at least who are in your circle.

So when you watch your network, pay attention to who is most active, and what the consequences of their actions are. Do certain members have a stronger need to reach out to others than the rest of your members? These can be a great indication of a potential revenue stream to explore.

Access to Experts
A flip side to the LinkedIn model of a few people paying for access to the bulk of members is individual members paying for access to a few experts. This is a popular revenue model for technology-related community sites, where members in need of an answer are more than willing to spend a few dollars to tap into the best minds in the community.

Storage
If part of your community’s appeal is being able to share photos, music, or other media, there may be an opportunity to charge heavy users for extra storage space. Everyone from Flickr (with their Pro account) to Gmail charge a premium for extra storage.

Think about the top 5 or 10 per cent of your community: what do they want to do more of? By limiting storage (or another commodity your power users value) on free accounts, you open up a revenue stream. This is especially powerful for social networking sites based around letting people post their collections online.

Ad-free Browsing
Another popular premium feature of many sites is to offer ad-free browsing. You’ll need to weight this against your ad revenue to make sure it works for you, but it’s worth exploring if you have more ad space than you do paying ads.

These are a few of the most common “freemium” models, but there are more. Listen to your users to discover what they want (or don’t want), and watch how they use the site to uncover opportunities that your unique community may present to you.

Two-sided Platforms
One revenue model that is a natural for social networks is what’s often referred to as two-sided platforms: That is, your platform (your social networking site) serves the needs of two (or more ) sides within a niche. It brings two groups with a common focus and lets them interact in a way that benefits both sides.

Unlike advertising (which tends to be a one-way conversation) or pay-for-access (which tends to happen within a single group) two-sided platforms allow marketers or producers a chance to participate in the community in a creative and productive way.

Facebook’s Pages are an example of this model at work (though they don’t charge — yet). Coke has more than 4 million Fans on Facebook, and in a recent study 40% of consumers report having “friended” a brand on Facebook and/or MySpace.

For smaller niche social networking sites which are built around people’s passion, this kind of revenue model makes even more sense.

Cork’d, a wine-based social networking site, does this as well, by bringing together wine lovers with wine producers. In an industry where people routinely spend their vacations touring wineries and meeting vintners, this is a perfect mix.

How often does the average wine lover get to take a trip to visit their favourite winery? When they do, it’s about meeting and interacting with the owner and vintner, getting the inside scoop on next year’s release, perhaps getting a deal or just feeling more connected with something you enjoy so much.

Cork’d offers wineries the chance to create “Verified” profiles for $999. Once they get verified, they can start communicating with their fans, manage their online listings, link to their site and more.

Note that this isn’t the same as an advertising model: the advertisers aren’t limited to static banners or ads on the site: they are treated as a member of the community, and the value for them comes in being able to interact with people who want to interact with them.

Advertising
In traditional offline media, advertising is all about the mass message, and advertisers pay for readers in bulk, where cost is usually measured by the number of readers or viewers, and the typical unit is known as Cost per Thousand (CPM).

The truth is, anything that you measure by units of one thousand is by definition a bulk commodity, and relatively cheap. And while targeted publications or TV shows can always command a higher CPM than general ones, they are still broadcasting their message, shotgun style.

One of the challenges the mainstream social networks have with the advertising model is that their users are a very broad mix — much like TV viewers. What’s more, since they are on the site specifically to interact with their friends, they are distracted from the ads. The result is that general social networks have a miserably low CPM.

One reason often given for social networks’ lousy performance as advertising networks is the lack of “intent.” That is, if I go to Google and search “how to train my dog” I have arrived with a very clear intent: I want to learn something. The very action I take (searching) defines my intent: I want something. That means Google can show me a bunch of ads for books or videos telling me how to train my dog, and I’m going to be very receptive.

With general social networks, on the other hand, the intent is around connecting with friends, which makes it tough to target. People aren’t responding to the ads because they’re busy. The only thing they want is for the ads to go away!

This is where you’ll be glad you focused on a niche: Instead of just focusing on each other as they do in general networks, your members will be attracted by the shared passion, and will also focus on that.

And that’s great news when it comes to attracting advertisers. Not only can you connect them with people who are passionate about their industry or product, but you can also connect them more naturally and effectively than most other media.

Point in case: Ravelry’s founders wanted to protect their users from a bombardment of unfocused ads, while supporting small companies that in turn supported them.

That meant creating a custom ad-serving and billing system, rather than settling for Google AdSense or other publisher solutions. They keep the prices low, and offer a range of creative ways for their more than 400 advertisers to get involved, including sponsorships, and a mix of per-impression and per-click ads. To keep the upkeep low, the advertisers manager their own accounts.

Advertising now covers the site’s day-to-day costs, including salaries. This is not surprising, given their CPM runs as high as $2.85 for some units. This blows Facebook’s self-serve advertisement CPM of $0.15 to $0.40 out of the water. Ravelry’s PPC program, where advertisers pay for every time a Ravelry user clicks on their ad, goes for 25 cents a click, which is also very healthy.

These strong rates, and a waiting list for advertising spots, show the value in having a niche market as the core of a strong community. To reach knitters and crocheters in an environment built of trust is very attractive to advertisers.

Plus, most social networks can provide an even more focused advertising climate, if they harness their users own profile information, so advertisers can target by location, gender, experience level, or whatever other parameters are included in your members' profiles!

Remember not to go overboard and make the same mistake Facebook made with their Beacon ad service, which violated most members' sense of privacy.

Facilitating Trade
Think about what makes your community unique, and about the “glue” that ties everyone together. Chances are there’s something about it that provides an opportunity for you to act as a facilitator — a middleman if you will—between members.

Take a page from some successful bloggers, like the crew at 37Signals, and their design-focused blog. They’re tapping into a bigger revenue source in their job listings focused around their niche — thoughtful simple applications and design. When I was there last, they had around 60 jobs listed, and they charge $300 a month to post one. I’ll do the math for you: That’s $18,000 a month revenue from a side project.

What does your community want to trade? Jobs? Gear? Their own creations? It may be a classified system that allows your members to exchange products or services within the niche community.

Data Mining
Sometimes, the value of a social network lies in the information users contribute about themselves and the site’s focus area. Astute entrepreneurs who can identify the value of the community’s aggregated data can mine that information to fuel their business and revenue, as long as it’s done openly.

Sermo and PatientsLikeMe are two health-based social networks that very openly and transparently monetize their communities’ content and activity by aggregating it anonymously, and selling the data to health care companies. PatientsLikeMe encourages members to document all the details about their health — like diagnosis data, and treatment and symptom information — and in turn collects a treasure trove of real-world medical data. As they explain on their blog:

“The PatientsLikeMe business model is straightforward. We build online communities where patients share structured information about their disease to help themselves and others. In turn, we make money by selling that data. We are open with our patients about how and why we sell this data (and specifically what data we sell).

They understand this exchange and they’re all for it. “Sell, sell, sell” someone recently wrote in a discussion about our business model. Why? Because they know our goal in selling is to help pharmaceuticals companies, medical device companies, healthcare providers, and others in the industry learn more about patients. We’re giving those companies the kind of information that can help improve the products/services they’re creating for patients.”

Health care is just one industry where this is possible. Another example of data-mining in a social network is the indie-film site B-Side. They provide fully-featured websites for film festivals, which include a social networking component. Users can rate previews, add films to their calendars, and interact with the film listings.

They consider these social sites market research, which they then monetize through their distribution business: “B-Side uses audience opinions gathered from film festivals to make intelligent decisions about film distribution. The festival services are regarded as market research and revenue comes from the company’s distribution activities.”

To make this model work, you need a group of members who benefit from tracking and sharing information in the community. The second element is marketers or researchers who are trying to understand a certain group’s behavior. If you can provide a secure, respectful and private way of sharing the aggregated data, almost any community can profit from this model.

Keep in mind that what makes this model work is complete openness about what information you are collecting and how it will be used. Be up front, and don’t apologize for data-mining if this is your business model, and you protect your users’ information while also providing them with value.

Gifts and Other Digital Content

Facebook’s “Give a Gift” feature is a brilliant revenue generator. Members can “give” each other a gift — a little image of a shot glass, rose, or something. They can be private, anonymous, or public. Of course, your network sees the anonymous or public ones, so it’s a bit like getting flowers delivered to the office: you’ve got the gift factor, but also the public giving, which encourages similar behavior.

To create a sense of scarcity, they limit the number available, ranging as high as 10,000,000 and as low as 15,000. Think about it: This is a zero cost proposition for Facebook — it’s all images.

They only cost $1, but I have to admit it’s the only time I’ve ever pulled out my credit card for such a small online purchase. And I’m not alone. Venture capitalists Lightspeed Venture Partners crunched some numbers recently, and estimate that Facebook rakes in $35 million a year, and growing.

That’s $35,000,000 rolling into their bank account from people sending virtual shot glasses back and forth. Sure, that alone won’t cover Facebook’s operating costs, but the same report figures it makes up around 10% of their total revenue.

Whether it’s a virtual gift to demonstrate public affection or gratitude, or a badge as a way of gaining status or rank, these virtual icons could represent an opportunity in the right community.

In fact, one type of digital content that can apply to all of these business models is virtual cash. In all of these business models, consider if instead of charging real money, it makes more sense to charge virtual cash, to create a currency on your site.

People could earn “cash” by doing things you want them to do — adding content, reporting violations of the terms of service, inviting a certain number of friend — and spend it to get premium services, access to content, to contact other members, etc.

Of course, there will always be the opportunity for people to top up their supply of virtual cash with real money, and there’s a revenue stream for you!

Donations

Don’t dismiss donations as a revenue model, for at least part of your needs. Wikipedia, for example, relies on donations as a nonprofit. But even for-profit ventures can turn to its members for help.

When Ravelry needed to buy a new server to accommodate the always-expanding demand for memberships, word got out that they were short on cash, so member Julie Frick started a Ravelry group (dubbed the 10 Lousy Bucks Group), to help with fundraising. Within a week, they had helped collect the $5,000 needed for the new server, and came back to Jessica and Casey to see what else they needed!

In 3 weeks, 3,457 Ravelers donated a total of $71,000 to Ravelry, enough to pay off the start-up costs and provide some breathing room for the founders, who had invested considerable time and money into the project.

And apart from this one drive, the donations continue to come in. There’s even a discussion list where members are asking Casey to set up a PayPal subscription option, so they don’t miss making a monthly donation.

Once members are asking you for ways to donate more money more often, you know you’ve hit a chord. The key is you have to be seen as genuine, and motivated by the community itself, not by profit.

Merchandise

If they come to your community because they can’t always find like-minded people to interact with, then chances are they can’t find the tools and materials they need, either! What hard-to-find material or collectables are they hunting for? What tools or gadgets do they use? What accessories might they need as they pursue their passion?

This doesn’t mean you have to go into the retail business and worry about warehousing a huge inventory: You can do it cleanly through affiliate programs (where retailers pay you a percentage of each sale you send their way) or simply by stocking a few key items.

Even items branded with the community name can be moneymakers, like mugs and t-shirts. Plus, since every niche has its inside jokes and sayings, you can poll users to submit their own and vote on their favorites and create related products through a simple service like Cafepress.

Over at Ravelry, Jessica and Casey have tapped into the strong community pride Ravelers feel by offering a range of knitting-themed bags and swag, from t-shirts to pins featuring the founders’ dog (and community mascot) Bob. They even sell shot glasses with knitting phrases on them. That’s harnessing passion! When a new product is launched, sales can often surpass advertising revenue for that month.

Mix and Match to Suit Your Community

Of course, you don’t have to rely on just a single revenue source. Many sites combine two or more effectively, while not taking away from the members’ enjoyment and attachment to the network. In the Online Community Revenue and ROI Techniques survey mentioned above, respondents also shared advice for other social network entrepreneurs — people just like you — to raise revenues, including:

  1. Understand your community and know what they value, and expect from you.
  2. Don’t put hurdles in front of features that are needed for a healthy community. Instead, focus on value-added services that compliment the core community features and focus.
  3. Focus on a few effective revenue streams rather than several moderately effective ones. Better to have a single, well-placed ad on the site than seven poor-performing ones.

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Excerpted from The Hands-on Guide to Starting a Niche Social Network by Ric Mazereeuw. Copyright © 2010 Ric Mazereeuw. All rights reserved. Used with permission.