7 ms·

The depressing math behind consumer-facing apps

135 points by revorad 14y ago

rexreed 14y ago
If you think getting past the first million users is tough, try reaching the first $1M in revenue and growing to $10M... many of these consumer-facing apps have no idea how to get to that first million, let alone the tenth. When I work with other startups, that's usually my first question: "How are you going to get to your first million dollars in revenue?" Even for those that have an answer as to WHAT they'll do, they haven't thought through HOW they'll do it. In many cases, for these consumer-facing apps, it will cost $2M in customer acquisition to get to $1M in revenue... if they can get there at all. Many are building to flip - hoping that the music doesn't run out before the money does.
- hayksaakian 14y ago
  I don't think that getting 1 million users is something to scoff at. It demonstrates that 1M people think that the service is valuable. Deciding how to extract money from them is a first world problem.
  - rexreed 14y ago
    I agree with you -- who's scoffing? What I'm saying is that without the revenue model, the million users gets you something that's impressive, but not quite yet a business. And without it being a business, it's hard to see how to sustain that million user base. Isn't that the whole idea of the Underpants Gnomes? Yes, you can get the users, and yes you can get profit... but exactly how? Many times you can make it work if you can figure out Step 2, but if you don't have enough capital, you can't.
    - lifeisstillgood 14y ago
      Underpants Gnomes ?!
      - lanstein 14y ago
        http://en.wikipedia.org/wiki/Gnomes_(South_Park) http://en.wikipedia.org/wiki/Gnomes_(South_Park)
        lifeisstillgood 14y ago
        Thank you, I think this is one of those times you need to see the episode to understand. I'll live :-)
        rexreed 14y ago
        check out the video on this page: http://onstartups.com/tabid/3339/bid/8608/Startup-Lessons-From-The-Underpants-Gnomes-PROFIT.aspx http://onstartups.com/tabid/3339/bid/8608/Startup-Lessons-Fr...
  - pifflesnort 14y ago
    I could give our free hamburgers and get 1M users tomorrow. Deciding how to extract money from them is not a "first world problem". It's the entire problem.
ChuckMcM 14y ago
Awesome post Gabe, and so so true. It doesn't help that a million different people and organizations are trying to get through to you, the end user. My wife expressed it pretty clearly to me when she said "I feel like I'm being attacked by a million marketing mosquitoes trying to grab their bite of blood." There are advertisements everywhere, they become the digital snow of the electronic generation. Getting through that organically takes a long time, years. You can blast through it with a big chunk of cash (temporarily light up the sky) but you risk resentment from the folks who don't care. Leanness and frugality are the traits to cultivate when you're in it for the long haul.
AznHisoka 14y ago
I find the math behind any consumer apps that depend on online advertising very depressing... Let's say you get a million visitors a month. With a CPM of $5 (very optimistic), and each visitor = 5 pageviews, that's just $25,000/month. Great if it's just a lifestyle business. Depressing if you're trying to build a company around it.
- Agustus 14y ago
  The concept is to not get depressed about $25,000/month, but excited. If you are able to come up with a number of simple products that have a quick development and production time, then with five hits, you are at the $125,000/month. Look at the <insert name of the company that makes that ridiculously simple conversion program that posts here to Hacker News alot whose name currently escapes me>, they have three hits on their hands, and would assumedly be at $75,000/month.
  - AznHisoka 14y ago
    It is easier said than done - you'll be lucky to develop 5 products that total $25,000/month. It takes a lot of manpower to make 1 hit, let alone 5.
- tmarthal 14y ago
  Here is a study that shows that the median (not mean) value of internet sites (note that these are not applications, but blogs or forum sites!) is around $500, with a monthly revenue of $133. http://www.slideshare.net/Flippadotcom/how-do-websites-make-money-16613130 http://www.slideshare.net/Flippadotcom/how-do-websites-make-... It's basically that most niche sites have a hard time scaling up to 100,000 users, let alone 1M. Not sure how well those numbers scale to consumer applications however, but you can probably interpolate from those online advertising/affiliate marketing numbers.
- doctorfoo 14y ago
  I get a little over a million uniques a month (~4mil pageviews) and earn about $2500 / month from ads. Think I'm missing an order of magnitude somewhere.
reinhardt 14y ago
So sick of this vile greedy a-million-X-isn't-cool mentality. This Disqus comment sums it up for me: "OR you can skip the VC bullshit and build a sustainable business that makes you boatloads of money and generates hundreds of great jobs with a <1 million user base."
- mikeash 14y ago
  Seriously. From the title, I figured it would be something like, "There are sixteen godzillion apps in the various App Stores to compete with, and umpty million app-buying users, so you're likely to only sell X thousand copies, which won't pay for your time, unless you can somehow get ahead of the pack." Instead, I'm supposed to be depressed that it's hard to go from 1 million users to 10 million? Holy moly. If you're not doing well with a million users, maybe you screwed up.
  - ori_b 14y ago
    There's the second half of the question: How much money are you making from your users? If you're able to effectively monetize a million users, that sounds great. If you're making millicents per user a year, a million users is only a few thousand dollars. And if you haven't figured out monetization, and are just hoping to make an exit, you probably need a larger number of users to catch the attention of BigCorp(r) if you want them to buy you out for a reasonable amount. The numbers of users that you need to be doing well depends on the product, the market, your goals, and umpteen other factors. If a million users is enough to keep you afloat sustainably, congrats!
    - ahoyhere 14y ago
      > If a million users is enough to keep you afloat sustainably, congrats! If it's not, perhaps you need to ask yourself why you chose that business model (or lack of business model) to begin with. Startups don't happen to you. You design your startup from day 1. Take this kind of thing as a warning not to design one you'll certainly fail at.
  - endlessvoid94 14y ago
shawnreilly 14y ago
Great article. I totally agree; User growth is an uphill battle that requires a well thought strategy to 'cross the chasm' and beyond. However, I did not see any mention of Value, which I find to be inherently important. When it comes to User Acquisition (or I guess what we now call Growth Hacking), I believe that Value is one of the most important (and sometimes overlooked) aspects of any project. Solving real world pain points creates inherent Value, which in many cases facilitates organic growth. If your App or Service is Valuable, then people will naturally want to use it, no promotion necessary. I've found that the Value of a project is usually tied to the Vision of the Founders, what types of problems they want to solve, and how painful those problems are. I try to make all my Projects High Value, but many are still in the beginning stages, and how successful (or unsuccessful) they will be has yet to be seen.
nhashem 14y ago
This post should be renamed the depressing math behind consumer-facing apps without a business model that operate by setting money on fire. I think Gabe is generally right with the metrics he quotes. It's going to be a long slog to go from 1 million users to 10 million users. But it is completely mind-boggling to me how he discusses 1 million users as an emergency condition that needs to be rectified as soon as possible. If you're a startup with a consumer-facing app with some sort of business model (ie. some way of making money besides chucking up ads) and operating relatively leanly (ie. not having a huge sales force) then 1 million users should provide plenty of revenue/profit to let you reinvest into the marketing channels he describes and optimize accordingly. Let's take our theoretical site with 1 million unique visitors a month. If you figure out some way to get 1% of them to pay you $10 a month, then you are now clearing $100,000 a month. Depending on the product, there are lots of different ways to do this. Just because "freemium" is cliched doesn't mean it's not effective. Just ask Dropbox. And that revenue is on top of any sort of ads you'll serve! The only reason to be depressed if you have a million users is if you have no business model, and your operating costs are so high that making over $1 million in revenue a year is not enough to pay the bills. Sure, there are some companies where there was an early conversation at some point where someone said, "we're going to hire a huge sales force, and get a ton of users, and not figure out any way to make money on them besides ads" and everyone else replied "brilliant!" and they all toasted their Guinness and got so drunk that they never realized how absurd that was. They should be depressed. Everyone else with 1 million users though, I'd say, is doing just fine.
- nhebb 14y ago
  I read it the other way. I read it as meaning that you have to achieve a large user base for the app to be beyond ramen successful. You say a million users that that's a piece of cake. I took it to mean that was the depressing part of the equation.
  - lifeisstillgood 14y ago
    Yes, 1 million users is an Everest - and collapsing at the top you find it is merely the foothills, above you lies Mons Olympus, and there's not even oxygen up there.
sixQuarks 14y ago
As soon as I saw dark background with white font, I closed the tab. Sorry, but it hurts my eyes to read like that. Why the hell do people still do this?
- lazugod 14y ago
  Because the opposite hurts their own eyes.
droithomme 14y ago
Very good comments here. If you can't make a sustainable business with a million customers, then you have a lot of problems, and getting even more 'customers' isn't one of them.
jacques_chester 14y ago
Most of the money in the world isn't in the hand of consumers. It's in the hands of business. "I've heard of them" is not a useful metric for success. It gives you sample bias towards thinking consumer-facing businesses are good, because the only thing mass media journalists have in common is that they're mass market consumers. http://chester.id.au/2013/01/05/on-selling-to-consumers/ http://chester.id.au/2013/01/05/on-selling-to-consumers/
- Alexx 14y ago
  In the USA consumer expenditures represent 70 percent of gross domestic product, in pure 'output'. Though Economically business investment is a stronger driver, (business moves more money around), it's not the larger slice of the final pie, or 'in their hand' as such.
  - jacques_chester 14y ago
    The point is that at any instant in time, almost all the current "stuff" is not in the hands of consumers. It is situated in the structure of production. Read the Hayek essay I mentioned, he explains it better than I have.
    - Alexx 14y ago
      Maybe I communicated my point poorly - I agree. Supply is the driver, not demand. I was just annotating the use of the phrase 'most of the money' comparing the difference in final output (as GDP), and throughput. In the context of this discussion, internally the mechanics of the economy are driven by business spending (which is most likely more than double GDP alone). But if you take final output, consumers do hold the larger portion.

135 points by revorad 14y ago

If you think getting past the first million users is tough, try reaching the first $1M in revenue and growing to $10M... many of these consumer-facing apps have no idea how to get to that first million, let alone the tenth. When I work with other startups, that's usually my first question: "How are you going to get to your first million dollars in revenue?" Even for those that have an answer as to WHAT they'll do, they haven't thought through HOW they'll do it. In many cases, for these consumer-facing apps, it will cost $2M in customer acquisition to get to $1M in revenue... if they can get there at all. Many are building to flip - hoping that the music doesn't run out before the money does.

hayksaakian 14y ago
I don't think that getting 1 million users is something to scoff at. It demonstrates that 1M people think that the service is valuable. Deciding how to extract money from them is a first world problem.
- rexreed 14y ago
  I agree with you -- who's scoffing? What I'm saying is that without the revenue model, the million users gets you something that's impressive, but not quite yet a business. And without it being a business, it's hard to see how to sustain that million user base. Isn't that the whole idea of the Underpants Gnomes? Yes, you can get the users, and yes you can get profit... but exactly how? Many times you can make it work if you can figure out Step 2, but if you don't have enough capital, you can't.
  - lifeisstillgood 14y ago
    Underpants Gnomes ?!
    - lanstein 14y ago
      http://en.wikipedia.org/wiki/Gnomes_(South_Park) http://en.wikipedia.org/wiki/Gnomes_(South_Park)
      - lifeisstillgood 14y ago
        Thank you, I think this is one of those times you need to see the episode to understand. I'll live :-)
        rexreed 14y ago
        check out the video on this page: http://onstartups.com/tabid/3339/bid/8608/Startup-Lessons-From-The-Underpants-Gnomes-PROFIT.aspx http://onstartups.com/tabid/3339/bid/8608/Startup-Lessons-Fr...
- pifflesnort 14y ago
  I could give our free hamburgers and get 1M users tomorrow. Deciding how to extract money from them is not a "first world problem". It's the entire problem.

ChuckMcM 14y ago

Awesome post Gabe, and so so true. It doesn't help that a million different people and organizations are trying to get through to you, the end user. My wife expressed it pretty clearly to me when she said "I feel like I'm being attacked by a million marketing mosquitoes trying to grab their bite of blood." There are advertisements everywhere, they become the digital snow of the electronic generation. Getting through that organically takes a long time, years. You can blast through it with a big chunk of cash (temporarily light up the sky) but you risk resentment from the folks who don't care. Leanness and frugality are the traits to cultivate when you're in it for the long haul.

AznHisoka 14y ago

I find the math behind any consumer apps that depend on online advertising very depressing... Let's say you get a million visitors a month. With a CPM of $5 (very optimistic), and each visitor = 5 pageviews, that's just $25,000/month. Great if it's just a lifestyle business. Depressing if you're trying to build a company around it.

Agustus 14y ago
The concept is to not get depressed about $25,000/month, but excited. If you are able to come up with a number of simple products that have a quick development and production time, then with five hits, you are at the $125,000/month. Look at the <insert name of the company that makes that ridiculously simple conversion program that posts here to Hacker News alot whose name currently escapes me>, they have three hits on their hands, and would assumedly be at $75,000/month.
- AznHisoka 14y ago
  It is easier said than done - you'll be lucky to develop 5 products that total $25,000/month. It takes a lot of manpower to make 1 hit, let alone 5.
tmarthal 14y ago
Here is a study that shows that the median (not mean) value of internet sites (note that these are not applications, but blogs or forum sites!) is around $500, with a monthly revenue of $133. http://www.slideshare.net/Flippadotcom/how-do-websites-make-money-16613130 http://www.slideshare.net/Flippadotcom/how-do-websites-make-... It's basically that most niche sites have a hard time scaling up to 100,000 users, let alone 1M. Not sure how well those numbers scale to consumer applications however, but you can probably interpolate from those online advertising/affiliate marketing numbers.
doctorfoo 14y ago
I get a little over a million uniques a month (~4mil pageviews) and earn about $2500 / month from ads. Think I'm missing an order of magnitude somewhere.

reinhardt 14y ago

So sick of this vile greedy a-million-X-isn't-cool mentality. This Disqus comment sums it up for me: "OR you can skip the VC bullshit and build a sustainable business that makes you boatloads of money and generates hundreds of great jobs with a <1 million user base."

mikeash 14y ago
Seriously. From the title, I figured it would be something like, "There are sixteen godzillion apps in the various App Stores to compete with, and umpty million app-buying users, so you're likely to only sell X thousand copies, which won't pay for your time, unless you can somehow get ahead of the pack." Instead, I'm supposed to be depressed that it's hard to go from 1 million users to 10 million? Holy moly. If you're not doing well with a million users, maybe you screwed up.
- ori_b 14y ago
  There's the second half of the question: How much money are you making from your users? If you're able to effectively monetize a million users, that sounds great. If you're making millicents per user a year, a million users is only a few thousand dollars. And if you haven't figured out monetization, and are just hoping to make an exit, you probably need a larger number of users to catch the attention of BigCorp(r) if you want them to buy you out for a reasonable amount. The numbers of users that you need to be doing well depends on the product, the market, your goals, and umpteen other factors. If a million users is enough to keep you afloat sustainably, congrats!
  - ahoyhere 14y ago
    > If a million users is enough to keep you afloat sustainably, congrats! If it's not, perhaps you need to ask yourself why you chose that business model (or lack of business model) to begin with. Startups don't happen to you. You design your startup from day 1. Take this kind of thing as a warning not to design one you'll certainly fail at.
- endlessvoid94 14y ago

shawnreilly 14y ago

Great article. I totally agree; User growth is an uphill battle that requires a well thought strategy to 'cross the chasm' and beyond. However, I did not see any mention of Value, which I find to be inherently important. When it comes to User Acquisition (or I guess what we now call Growth Hacking), I believe that Value is one of the most important (and sometimes overlooked) aspects of any project. Solving real world pain points creates inherent Value, which in many cases facilitates organic growth. If your App or Service is Valuable, then people will naturally want to use it, no promotion necessary. I've found that the Value of a project is usually tied to the Vision of the Founders, what types of problems they want to solve, and how painful those problems are. I try to make all my Projects High Value, but many are still in the beginning stages, and how successful (or unsuccessful) they will be has yet to be seen.

nhashem 14y ago

This post should be renamed the depressing math behind consumer-facing apps without a business model that operate by setting money on fire. I think Gabe is generally right with the metrics he quotes. It's going to be a long slog to go from 1 million users to 10 million users. But it is completely mind-boggling to me how he discusses 1 million users as an emergency condition that needs to be rectified as soon as possible. If you're a startup with a consumer-facing app with some sort of business model (ie. some way of making money besides chucking up ads) and operating relatively leanly (ie. not having a huge sales force) then 1 million users should provide plenty of revenue/profit to let you reinvest into the marketing channels he describes and optimize accordingly. Let's take our theoretical site with 1 million unique visitors a month. If you figure out some way to get 1% of them to pay you $10 a month, then you are now clearing $100,000 a month. Depending on the product, there are lots of different ways to do this. Just because "freemium" is cliched doesn't mean it's not effective. Just ask Dropbox. And that revenue is on top of any sort of ads you'll serve! The only reason to be depressed if you have a million users is if you have no business model, and your operating costs are so high that making over $1 million in revenue a year is not enough to pay the bills. Sure, there are some companies where there was an early conversation at some point where someone said, "we're going to hire a huge sales force, and get a ton of users, and not figure out any way to make money on them besides ads" and everyone else replied "brilliant!" and they all toasted their Guinness and got so drunk that they never realized how absurd that was. They should be depressed. Everyone else with 1 million users though, I'd say, is doing just fine.

nhebb 14y ago
I read it the other way. I read it as meaning that you have to achieve a large user base for the app to be beyond ramen successful. You say a million users that that's a piece of cake. I took it to mean that was the depressing part of the equation.
- lifeisstillgood 14y ago
  Yes, 1 million users is an Everest - and collapsing at the top you find it is merely the foothills, above you lies Mons Olympus, and there's not even oxygen up there.

sixQuarks 14y ago

As soon as I saw dark background with white font, I closed the tab. Sorry, but it hurts my eyes to read like that. Why the hell do people still do this?

lazugod 14y ago
Because the opposite hurts their own eyes.

droithomme 14y ago

Very good comments here. If you can't make a sustainable business with a million customers, then you have a lot of problems, and getting even more 'customers' isn't one of them.

jacques_chester 14y ago

Most of the money in the world isn't in the hand of consumers. It's in the hands of business. "I've heard of them" is not a useful metric for success. It gives you sample bias towards thinking consumer-facing businesses are good, because the only thing mass media journalists have in common is that they're mass market consumers. http://chester.id.au/2013/01/05/on-selling-to-consumers/ http://chester.id.au/2013/01/05/on-selling-to-consumers/

Alexx 14y ago
In the USA consumer expenditures represent 70 percent of gross domestic product, in pure 'output'. Though Economically business investment is a stronger driver, (business moves more money around), it's not the larger slice of the final pie, or 'in their hand' as such.
- jacques_chester 14y ago
  The point is that at any instant in time, almost all the current "stuff" is not in the hands of consumers. It is situated in the structure of production. Read the Hayek essay I mentioned, he explains it better than I have.
  - Alexx 14y ago
    Maybe I communicated my point poorly - I agree. Supply is the driver, not demand. I was just annotating the use of the phrase 'most of the money' comparing the difference in final output (as GDP), and throughput. In the context of this discussion, internally the mechanics of the economy are driven by business spending (which is most likely more than double GDP alone). But if you take final output, consumers do hold the larger portion.