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Stumbling Towards Revenue: The Case of 3 Hot Web Companies

Foursquare, Pinterest, and Tumblr have plenty of users; now they need to make money. Here's how they plan to do it--and why it may be a challenge.

One of the common paths high-profile tech entrepreneurs have taken in the last seven or eight years goes like this: build up the user base for your Internet service, and eventually you'll find a way to monetize the traffic and build a sustainable business.

Hey, if the likes of Facebook and Box did it, so everyone can, right?

Not necessarily. It's become painfully obvious at this point that moving from obtaining users to making money has not become any easier than in the dot bomb days of swearing that business was all about "attracting eyeballs."

Today, such start-ups as Foursquare, Pinterest, and Tumblr are pushing to make money and prove that they're worth their VCs' investments. However, there can be large structural impediments between those efforts and blank ink.

Diminishing Returns

The problem is that many of the freemium start-ups have painted themselves into a corner. Unless they were established with some sort of tiered payment plan--the way Box or YouSendIt charge for premium services--making money quickly turns into an advertising play. Just look at Tumblr's and Pinterest's latest moves

Tumblr will introduce mobile advertising just a few months after it began to allow advertisers to buy more desirable placement for their posts. In the first half of this year, Tumblr will expand this to the mobile version.

Pinterest is offering new analytic tools for marketers to better understand how the service's users engage with corporate content:

If you have a verified website, you'll get information about how many people have pinned from your site, how many people have seen these pins, and how many people visited your site from Pinterest. We'll also show you a selection of your most repinned, most clicked, and most recent pins so you have a better idea of what's popular. For example, if you have a travel blog, you'll be able to see whether people are pinning your ski vacation posts or beach vacation posts more.

Like Facebook and many other tech companies, the focus assumes that interaction on Pinterest automatically has value for the marketers. And, from one view, that is reasonable. An advertising or marketing medium can at best show how well consumers interact with it.

However, that assumes companies can tie the marketing services they use to a tangible financial or business advantage and not the more nebulous "people are engaged with your content." Ultimately, the marketers want to see activity provide a return on their investment. As many Web-based publishing ventures have discovered, there is a virtually endless potential inventory of marketing opportunities, which drives down the cost. The result is a relentless downward pressure on the price companies are willing to pay for opportunities--and how much the tech companies providing the opportunities can make.

Differentiating With Data

Foursquare has taken a different approach from Pinterest and Tumblr. Instead of hawking direct marketing opportunities, the company has focused on providing location data to other companies. Internet businesses such as Evernote, Vine, Path, and Instagram (which, after all, means Facebook), and any location-based features are powered by Foursquare.

This may be a critical differentiation between Foursquare and both Tumblr and Pinterest. Instead of slugging it out on the potentially diminishing returns as a direct marketing and advertising medium, Foursquare has turned itself into more of a B2B play, establishing it as a premier source of services and data that other companies want.

But even there, it's worth asking how long a data play can work. Facebook has been working on getting location data itself, so it might eventually replace Foursquare as a source for Instagram. That shows the continued danger of large, influential companies continuing to acquire the capabilities of small firms, shrinking existing markets for services.

Furthermore, if too many tech companies decide that data will be their key to monetization, competition will drive down the revenue they can obtain, just as it has done in online advertising. By the time the industry as a whole has realized that a given monetization system has the possibility of working, entrepreneurs should probably already be moving on to something new.

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Last updated: Mar 18, 2013

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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