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Players, Stayers, and Payers

Last month, Intuit, the leader in personal finance software, announced it would acquire Mint.com for $170m (5.3x paid-in capital two years after first funding).  High fives all around! Mint offers a unique, far-easier way for consumers to organize personal finances and budgets on the web, bringing in information from numerous accounts.  People adopted it and stayed with it.  Then monetization was subtle, so contextual that is almost seemed like a service to the user:  “Would you like to make an extra $345 on that CD for the next 6 months? Click here.”

Mint is a good example of a company that both engages users and monetizes them very well.  In the web properties we know, we’re seeing a strong waterfall effect in user engagement, with three levels:  users who come and play on the site (“Players”), users who return repeatedly and become part of the established audience for the site (“Stayers”), and users who actually take actions that generate revenue (“Payers”).  While this segmentation is pretty obvious, the odds and best means of getting users from one level of the waterfall to the next are much less clear.
We see a lot of businesses that have strong initial success finding players.  We’ve learned that this proves little.  A lot of people will click on something and try it, it seems.  What matters a great deal is engagement:  how often users come back, registration, providing e-mail address and other personal information, open rates on outbound e-mails, and bringing others to the site (“virality”).

And a corollary: if you are buying Player traffic via Google clicks or the like, but not converting Players to Stayers and Payers, you are burning money.  Of course, you have to do some of this for learning, while you work out how to engage your audience.

Creating engagement is a scarce skill set (meaning, a lot of people don’t have it).  Every business is different.  However, entrepreneurs who create engagement and Stayers are all good at three things:

• They create a value proposition that is truly important to the user.  Often they tap into a powerful motivational force: eg, Facebook meets our social need by helping us keep in touch with friends and reconnect with old friends in a richer and more frequent way.  Or they provide credible information that we care about.  There are only a few services that people use regularly (10-20?).  To engage Stayers, you need to become one of those for a lot of people, knocking something else off their list.  Finding a new value prop that makes the short list for a lot of people makes a deal hot.
• They make sure users are really receiving value.  This sounds like motherhood, but too often vision trumps reality here.  User feedback, usability studies, and good engineering are key.
• They are very good at studying and optimizing the “flow” of users on their sites with two goals:  to make the site intuitive, easy to use, and compelling; and channeling users to desired, high-value behaviors.  Consider the evolution of first-class sites like Amazon and NetFlix in recent years: improvement of usability and added features that are relevant and engaging, while maintaining a familiar core structure and value proposition.
  

Turning Stayers into Payers is a different dynamic.  Most web sites that develop a large, strongly engaged audience eventually succeed in monetizing that audience to some degree.  That’s why Twitter raised money on a $1 billion valuation, despite zero visibility to monetization.
But, monetizing better and faster can make a big difference to exit value and return on investment. As investors, we like to see:

• Customers who have money to spend and value to marketers:  as I like to say, you can’t make much money selling cheese to church mice.  One of the attractions of Massive, Inc., an ads-in-videogames business we funded and Microsoft acquired, is: advertisers can use Massive to reach a valuable demo (males age 16-30) that is so hard to reach by normal means that advertisers refer to them as the “lost boys”.
• Monetization strategies that are closer to action:  sale of a product, or taking a commission when a product is sold are close to action.  Selling qualified leads is the next best thing.  Then come contextual ads. Display ads are the worst: web display ad space is like ski condos in Colorado – they can always make more of them. Marketing dollars are flowing to marketing tools that are close to action, especially in a recession.
• Products or leads that represent inherently high-value transactions.  A qualified web lead for a home mortgage seeker, or a mesothelioma (asbestos-related lung cancer) patient seeking a tort lawyer, is worth hundreds of dollars. 
  

Good engagement leads directly to monetization (Stayers naturally become Payers).  Once a customer is convinced of the value of your service, they will often agree to pay a subscription fee for more features or fewer ads:  the famous “freemium” strategy.  You can make more, better-targeted transaction offers as they spend more time on the site and you learn more about them.  There are additional skills needed for monetization, too:  eg, bus dev skills to get deals with partners leading to commission and lead gen revenue, or advertising sales capability to sell ad space at favorable rates.

The main points are: Players are plentiful and not worth much.  Don’t base your business strategy or funding pitch on creating lots of Player traffic. Turning Players into Stayers is a big challenge and a scarce skill.  Once you have Stayers, odds of monetization are good, but doing it well and quickly adds a lot of value.