in Business Design

Web 2.0 Strategy: Customers Create Value

Note: Over the next few weeks I’m blogging my notes on Amy Shuen’s book Web 2.0: A Strategy Guide: Business thinking and strategies behind successful Web 2.0 implementations. (O’Reilly Media). The book is both a good introduction and a synthesis of diverse theories that should offer something to even experienced strategists.

Background: What is Web 2.0?
Wikipedia entry
What is Web 2.0?, the seminal article by Tim O’Reilly

Chapter 1: Users Create Value / Flickr

  • Alvin Toffler predicted the “prosumer” in his 1980 book The Third Wave, and with recent technical advances in web and digital technology his vision is being realized.
  • Like so many startups, Flickr started out doing one thing (a game) and by listening to customers transitioned to another offering, online photos. The small team including technically-smart founders could turn customer feedback into rapid release cycles. A key to Flickr’s growth was making photos public by default.
  • The freemium business model was first described on Fred Wilson’s blog: “Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.
  • Flickr’s platform was timely in compounding the positive network effects of broadband, digital cameras, blogging, social networking, and online syndication.
  • Flickr’s core business message: Don’t build applications. Build contexts for interaction.
  • Stages in the open systems movement: Linux; APIs; user-generated content. Flickr combines the last two to compound their use.
  • Flickr’s interestingness algorithm factors in popularity, interaction, identity, and time.
  • Flickr uses the first three of the six kinds of revenue models: Subscription/membership; advertising; transaction fee; volume/unit-based; licensing and syndication; and sponsorship/co-marketing/revenue-sharing.
  • They managed to avoid the four major cost drivers (inventory, payroll, IT, and marketing/advertising/CRM) compared to retail photo printing and online stock photo companies.
  • In March 2005 Yahoo! brought Flickr for an estimated $40 million, a value that can be calculated using a customer-based formula in which revenues are directly tied to customer fees, not unit prices. Tracking customer behavior and metrics on an ad-supported site can result in an average revenue expectation per customer; in 2006 it was $13 for Google. Flickr had advertising, premium services, and partner revenue, making the average revenue per customer about $20. Multiplied by Flickr’s 2 million customers, we arrive at the $40 million valuation. More sophisticated formulas might give different weights to customers based on how actively they use the platform.