The Trap of the Bad Revenue Model

It always puzzled me why services like Evite and Hotmail that were once considered groundbreaking more or less stopped releasing new features.  You can probably think of your own examples.  I believe the most important reason is the lack of a strong revenue model.  These companies start off with venture capital funding and offer a free service to reach critical mass.  They eventually plan to generate revenue from advertising or similar sources, but overall the revenue per user ends up being quite low.  Once they get past the venture capital stage, they often can’t afford to spend a lot on further product development and be profitable at the same time.  So they get stuck in a bad equilibrium where they can’t afford to build features that could pull in higher revenue and end up trying to optimize a mediocre business at the margins.  These companies are also tempted to start sacrificing the user experience in order to eke out more revenue.  Sites that bug you with pop-ups, excessive ad content, or other annoying tactics are basically admitting that they can’t afford to offer a good experience because the revenue per user is infinitesimal.  They’re perpetually scrambling for pennies. Continue reading The Trap of the Bad Revenue Model