It is quite easy to get a lot of customers by giving everything away for free. The real test is making money.
“Have you ever thought about including an advert with your text answer?”
This is a question we get asked a lot. However, we do not believe that it is good business to include adverts in our text question and answer service.
The idea behind this business model is that an advert would be inserted after the answer we send to our customers and, so the theory goes, we can then generate additional revenue on every text. If we can generate enough advertising revenue on each text it might even be possible to reduce the amount we charge customers, perhaps even giving away answers for free. In this virtuous circle we could then attract even greater advertising revenue because of our larger user base.
It is not an unusual concept. Newspapers have for years sold their papers for a cover price and also generated advertising income on top. However, it is the internet world that has witnessed an explosion of ad-funded models, only a few of which have actually been successful. Websites and whole businesses have been funded on the concept of giving away information for free in the expectation of generating web traffic measured in millions of users. Whilst some companies have achieved spectacular web-traffic, many have also racked up spectacular losses.
So why doesn’t it add up?
Mobile is different to the web
Probably the single most important business feature in the mobile arena is the presence of a micropayment mechanism. i.e. customers have an account with a network operator. In the UK, premium rate services worth close to £1bn a year (appendix C of the PhonePayPlus business plan) have been developed on the back of this payment mechanism. This means, unlike the internet, it is possible to build a business where the consumer pays a small fee every time they use the service.
Despite the emergence of paypal etc, the lack of a credible and simple micropayment mechanism on the internet has hindered the development of such services on the web and has thus encouraged the ad-funded model approach. In contrast, in the mobile arena, it means you can make money on a service without the need to include advertising. An error many companies make has been to assume that the ad-funded models they have seen on the internet can be transferred to the mobile world.
Mobiles are personal
Mobiles are personal devices which customers have with them at most times of the day. We are in a privileged position where the customer asks us a question and allows us to send the answer to their phone. It is important to respect the customer’s personal space. This is why we never spam our customers. However, it goes further than that. When a customer texts us a question they know they are getting the best answer we can find. They know we are not pushing a product and we have not been “bought”. When they ask for a restaurant in their town we give them an independent recommendation rather than pushing a company that has paid us to recommend their chain or one that is paying us for an advertising campaign.
Ultimately, we believe that we provide more than £1 of value in our answers. Texts only allow us around 160 characters to answer any question. We have a policy of using as many of those characters as possible in our replies and supplement many of our answers with extra information. The inclusion of an advert in any SMS text inevitably reduces the quality of that answer.
Despite all the arguments against using adverts, some companies still believe they are acceptable within their text answers. It is therefore worth looking at the whole economics of setting up and running an ad-funded model.
The best way to look at this is to consider the cost base. Any business has to cover its costs and then some extra to make a profit. In the text question and answer business there are two costs that must be covered each and every time a question is answered. The first is the human cost of answering a question. At 63336, we pay our researchers 30p for each question they answer. This allows us to attract highly competent researchers who are based at home and primarily in the UK. We also have to pay a ‘bulk’ charge of around 3p-5p to send the answers back via text. So, to break-even on each and every text we answer we need to generate 35p. This is before marketing costs, central management salaries, IT infrastructure and the cost of supporting this blog.
Therefore, running an ad-funded model where the questions are free whilst achieving bottom line profitability requires in excess of 50p for each and every answer we send out. Is this really possible?
Advertising rates vary depending on the type of advert and how well an explicit consumer group can be targeted. For example, an insurance advert sent in an answer to someone who asked a question about insurance companies will command a high premium and it may be possible to do this through keyword identification. The problem is that we send out of 1,000’s of texts every day and only a fraction will appeal to category specific companies.
Higher advertising rates are also achievable on “click-through” advertising (where someone not only sees the advert but also clicks on it, taking them to a website). However, such high payments are only made when a customer clicks on the advert. The average payment across all the adverts sent works out much lower because in many cases the customer doesn’t click through.
Finally, there is traditional banner type advertising seen by everyone. However, as it is not targeted, it commands very low rates per text sent out.
So what do other companies do ?
Despite the apparent unattractive economics of the ad-funded text question and answer model, there are examples of companies who have tried to adopt it. AskMeNow operated in America and were listed on the US stock market. Their results are available here. The company offered a free text question and answer service, relying on advertising as its primary source of revenue. It even tried to reduce the cost of answering the questions by employing researchers from the lower wage economy of Philippines. In the 12 months to 31 December 2007, its last full year of trading, AskMeNow managed to generate an income of USD60,000 whilst incurring expenses of USD20,980,000.
There are of course a number of reasons why the AskMeNow business model failed. However, it does demonstrate that it is unlikely to be possible to generate enough income from advertising to operate a totally free text question and answer service at a profit. It may be possible to generate some income from advertising but the customer will end up paying for an answer, the value of which is then diminished by the inclusion of an advert.
I recently came across a new service run by an American company Gogii to give away free texts through an iPhone App. It is discussed in this article here. Whilst they have raised VC funding of USD5.2million, the CEO freely admits that “advertising revenue does not come near the cost of running the service”.
It is quite easy to get a lot of customers by giving everything away for free. The real test is making money. At 63336 we were profitable after 18 months and have used those profits to grow the business. Customers can depend on us to keep delivering a good service because they know we are commercially successful.
Would we ever consider advertising?
There are clearly some forms of less intrusive advertising that are suited to mobile business models. A more obvious example is advertising within applications. This would work much like banner advertising on the web. We have developed the 63336 app that makes it easier to ask a question as well as providing insight into the questions our customers are currently asking on a daily basis here as well as our Top 5 Q&A and your question history. If we get sufficient usage of the app there may be an argument to cover some of cost of supporting it through advertising. However, unlike the text question and answer service, the customer hasn’t paid £1 for a specific answer. Rather, they are browsing for news and information, a situation much like newspapers where advertising is less intrusive and more acceptable.
Given the current technology and the space available in a text the economics just don’t stack up to make it viable to run an ad-funded model. With the micropayment mechanisms in place on mobile phones it isn’t necessary either to support a viable business. The extra income we could potentially generate might enable us to perhaps reduce the cost of the text for customers but it is marginal and doesn’t offset the concerns about independent answers and not invading our customers’ personal space with advertising they did not solicit.