The social web revenue inflection point

Metcalfe’s Law says the value of a network equals the square of the number of its users. Larger networks create network externalities, leading to competitive advantage. Users post on YouTube because there are more visitors. And visitors come to YouTube because there are more videos to watch.

Therefore, network size is key to a successful social web venture. More users and content than your competitors means more consumer value, which in turn creates a snowball growth effect.

But when should you start monetizing your traffic? Critics suggest that many startups wait too long to start monetizing. However, until we find revenue models that do not reduce consumer value, the wisest strategy is to hold off monetizing your traffic at least until you reach an inflection point (e.g., second derivative hits zero).

Most revenue models, such as advertising, reduce consumer value. Metacafe, which has long had relatively intrusive ads, launched nearly two years before YouTube, but continues to trail far behind the market leaders.

When a site starts monetizing its traffic, it reduces consumer value, which can give your competition an advantage. Therefore, sites should delay monetizing until they reach the point of diminishing growth… as they come closer to their long-term stable size. This suggests that the larger the potential market for a site, the longer you should wait to monetize.

Once you get big enough (like YouTube), you may have the breathing room to capture some of the user value without reducing your net value proposition below that of the competition.

Heavy.com has done a great job of monetizing traffic without hurting consumer value too much. Of course, the best solution would be to monetize while increasing consumer value. Brickfish.com is doing a fantastic job of that by melding user generated content and revenue generation into one unit [disclaimer - I have performed consulting services for BrickFish in the past].

Do you have any comments, or ideas are for monetizing while enhancing consumer value?

Note: This article derives from a paper I co-authored in 2007, “Understanding Key Success Factors for Social Web Ventures”.