9 Things You Need to Know about Starting a Profitable Online Community
Know why it works. People have an inherent need to collaborate. Maybe it’s in our genes, but human beings seem to need, in addition to food, clothing and shelter, a fourth factor to sustain us: collaboration. Before the Internet, we commuted to work along with all of our fellow workers, hung our coats up together, shared a coffee break, discussed our families and our weekends, and gossiped about various topics of shared interests. Today, thanks to telecommuting—people working from home or from Wi-Fi spots—the need to collaborate is palpably urgent. “The goal that a person seeks to fulfill in joining an online or mobile community is to collaborate with others who, like him or her, share a common interest,” says Silver. “Through sharing that common interest, the joiner seeks to solve his or her problem: a vital need to collaborate.”
Reputation management is key. Think about it. People are willing to send $600 to perfect strangers for a purchase on eBay because it provides trustworthiness scores for sellers and buyers. Your success will be tied to your trustworthiness and part of that trust will be built based on how you deal with betrayers and defectors within your community. “Publishing the names of betrayers and defectors is the best way to deal with the problem,” says Silver. “If they create new identities, publish those as well, and along with their new identities publish the ISPs who sold the defectors their e-mail addresses. Since their reputations are valuable to them, they will not continue selling an e-mail address to a person who violates the trust that the communities offer to him. Whatever you do, implementing an effective reputation management service will be imperative in order for you to maintain the success of your community.”
Corporations can get involved, too, but you’ll have to be creative. Existing corporations can get involved with online communities, but corporate leaders must understand how their situation differs from that of entrepreneurs. The biggest obstacle corporations have to overcome is distrust: Often people do not completely believe what a corporation says about its own products. That’s why creating communities where users come in order to learn about a corporation’s products and services won’t work. There are several approaches corporations can take. For instance, launch products experientially, making the experience of finding a “hidden” new product one that people will want to share. Place your products in online games. Sponsor experiential events in communities that have no financial or legal relationship with your corporation. Finally, make a venture capital investment in an online community that will benefit your company.
Your online community doesn’t have to be free. People will pay fees to be involved. If you create a community where you provide valuable information to members, the ability to share information amongst themselves, and the assurance that you will keep out defectors, people will pay you for the benefits you offer. If the community is formed on a platform of trust, and if that trust is never broken by purposeless fees or inappropriate ads, then users will pay for experiences, games, the right to tell stories, the opportunity to reinvent themselves and the knowledge that they have a place online where they are welcomed by friends and colleagues each time they click in. “When you add an upscale membership restriction caveat, members will be willing to pay the premium for the ‘privileged’ brand,” says Silver. “Communities that have subscription fees usually have large numbers of mature, intelligent and informed users, who see the experience of collaborating as a duty and something of profound socioeconomic importance.”
Seize the great opportunities for strategic alliances. Collaborative participation is not only the driver that will bring millions of people to your community; it is also one of the linchpins of your business model. You won’t need to spend money to bring in more users because you can form strategic alliances with other communities and old content-owning corporations that will bring new members to you. “For example, if I’m offering music on my mobile-phone-based social network, then I will make a list of every organization with a theme song that might swap its song, which I may offer to my users as a ringtone, in exchange for my logo or web site beamed to their group,” says Silver. “Because there are so many different kinds of players, the opportunities for strategic alliances in the online and mobile communities markets are prodigious.”
Beware of the (ironic) success factor. You can build a community of 20 million happily chatting and paying users, be the strategic partner of choice for the top consumer product and service marketers on the planet, and be deflecting offers of more than $2 billion to sell your company to old media—but appear to be as successful as you are and you could blow it all. The more liquidity you create in the marketplace, the more you should keep your head under the hood. “Why this careful attempt to avoid appearing successful?” asks Silver. “Because the purpose of being in business is to make your product or service a substitute for all other products and services, and to make their products and services no substitute for yours. Corporate America isn’t going to be thrilled about their products and services being rendered inadequate. If you always appear to lack money, they won’t sue you. If you are ever asked about funding or capital, simply say that your online community is ‘member supported.’”
Don’t sell ads. Just don’t. Selling ads is so yesterday. Did the guildhalls and Masonic lodges hang banners for Budweiser, Toyota, or Ford tractors on their walls? No, and they still don’t. “I urge you not to seek revenue by selling ads,” says Silver. “You must gain credibility, and to do so, I recommend that you avoid selling ad space in your community. You can do better than that by offering the members of your community every benefit you can conceive of, and by permitting them the freedom to create and fly in their own direction, you will be creating a community that can make revenue through other methods without cheapening your brand with ads.”
Hone your judgment skills. You’re gonna need ‘em. When you launch your online or mobile community, you will become a manager perhaps for the first time. The most important actions you take—and there will be 25 or more decisions to make each day—will require you to do the right thing. “You’ll often have to make these decisions on the fly or while multitasking,” says Silver. “That is very difficult, and my best advice to you is to put off the decisions until your head is clear and your phones aren’t ringing off their hooks. If you need to call on the advice of a mentor or trusted friend before acting, then do so. Over time your judgment will get better and you will be able to make decisions more quickly to the benefit of your business.”
Using float is a great way to create cash flow out of the gate. Float is one of the entrepreneur’s favorite words. It means using the customers’ payments for a while before delivering the product or service, and it negates the need for venture capital. The best ways for online community entrepreneurs to generate float is by asking subscribers to pay subscription fees in advance of your providing a service and by asking content owners to swap you their content for access to your mobs of users.
Excerpted from “Smart Start-Ups: How Entrepreneurs and Corporations Can Profit by Starting Online Communities” (Wiley, 2007, $24.95) by David Silver, founder of the angel capital firm Santa Fe Capital Group. He has authored 30 books on entrepreneurship and finance. For the past three decades, he has been funding high-tech start-up companies.