Are You A Market Trader? [Business]

A couple of days ago I came across a post from a software developer named ShiftyJelly titled Amazon App Store: Rotten to the Core.

ShiftyJelly were on the Amazon App Store, which runs free promotions. Amazon approached them about featuring their app as a free download, and ShiftyJelly either misunderstood or felt deceived by the conditions of sale. They thought that they would get get paid by Amazon regardless of whether the price was free, but it turns out not so much. So they get a lot of downloads, but no cash, and felt burned. Many developers chimed in in agreement.

So I tweeted this:

Developer acquires 100k new customers via Amazon App Store for free. And complains about it.

What I'm highlighting is that small developers (games or software) are often focused on the wrong thing and have oriented their whole business in the wrong direction. They're thinking and acting like market traders, and it’s the reason that they are struggling.

 

Birds in Hands

Turnover is vanity, profit is sanity, but cash is king.

If you’re in the business of selling goods in a market, this is eminently sensible advice. It means you need to stay focused on what matters and treat everything else as secondary. The market stall business model is essentially about finding footfall, having the right stock (don’t sell produce in an antiques market, or vice versa) and keeping careful track on what’s going out versus what’s going in.

Smaller developers often think the same way. They develop a piece of software, try and find digital footfall, and keep careful track of what they’re spending versus what they’re earning. Like the trader, they are less interested in repeat custom and more interested in getting the sales to pay their staff and make some profit. It seems sensible.

However, it’s just about the worst business model that you can adopt in software, particularly online software, for one reason. Unlike the market trader, the business of software is all about repeat custom. 

 

Traction is King

One reason that developers get to thinking like market traders is that many of them believe that darling startups that become big businesses without revenue (Twitter, Facebook, etc) will eventually fail. They believe that the lack of a revenue plan is just another way of saying ‘dotcom bubble’ and that it will all ultimately come crashing down. So do small investors. So they think they're being smart in the long term.

They're not, because this belief is based on naive understanding. Whether that’s a game, a messaging app, a blog, whatever, in the online world the rule is this:

Turnover is vanity, profit is sanity, but ARPU is inanity because traction is king.

Ar-who? Average revenue per user. For the market trader the most important thing is cash, and how much can be made from each customer. His relationship with the customer is a one-time thing, so profit and cash is all about ARPU. Stock unsold represents a loss and you only have so many units to sell, so it’s really important to get the ARPU right. So the trader tends to care a lot about what price he can charge, and he tends to value his entire business around price points.

In the online world it's different. Software essentially has no stock costs, you can manufacture unlimited units to meet market demand, and your running costs per user are cheap. So there's a lot of upside, but there are also two downsides.

The first is the effect of masses of global competition. A trader in a market only has a few competitors looking for the same footfall, so his competition is easy to understand and account for. A software developer on the App Store, on the other hand, has thousands of competitors on all in the same space. 

The second is the tendency of the audience to settle for a default option. For single player games this used to be less of a problem, but in the age of games-as-a-service (or software-as-a-service if you're not a game developer) the amount of time that players spend with each kind of software is longer, and it's more of a long term affair. It also means that friends try to pull other friends into the same game, so it becomes the go-to game. This is why World of Warcraft remains king.

So ARPU doesn’t matter nearly as much as traction as a result. While not every software business needs to be big, they all need attention. They need a product that’s taking off, that people are using and talking about, and that will breed further users. Particularly for a growing startup. Every sale of software is a chance to build a relationship and turn and user into something much more valuable than a transient customer: A subscription. A freemium relationship. A series of upgrades.

A fan.

But the user has to be convinced of the value of your product before they will buy from you. The market trader has a tangible product that the customer can examine before purchase. Online, all the user has is an icon in an App Store and a blurb of text that anyone could write.

So your product has to earn attention all the more than the thousands surrounding it. So what should you do? Give it away? Probably. Get people talking about it? Definitely. Find a way to communicate to your users to encourage them into a relationship.

Mostly: Build software that can thrive within that kind of environment. Something that has a long tail. Don't build what is essentially a retail product with no plan for the long term. That way, any opportunity that you get to have 100,000 people for free really is a gift horse. 

 

Giving Scales

As Steve Blank often says, a startup is not a miniature version of a bigger business. Startups that behave that way are often concerned with ARPU rather than growth, and that is why they never take off. When it comes time to find an investor or build another product, they have not built the traction that they need to act as a marketing channel.

So they are always starting back at square one and eventually will encounter that one bad project that sinks them – and that’s why nobody invests in them.

Building traction requires the mentality of the giver, not the trader. In The Social Network we see a very young Mark Zuckerberg quarrelling endlessly with Eduardo Saverin. Saverin wants advertising content but Zuckerberg isn’t interested. He wants servers and developers to keep building out this amazing product. In reality this drama was not quite so clean, but the point of it is to highlight who has the right beliefs.

By focusing on the product and the service to the point of obsession, Zuckerberg manages to build a social network that blows everyone else away. It’s a gift that he gives that attracts fans, and the fans are the ones who spread the word to the rest of the world. The same thinking applies to 37Signals, Google, Rovio, Blizzard around the year 2000, Valve and more.

Giving is not necessarily free. It is over-delivery with hooks designed to bring users back over and over and turn them into fans. It scales because people talk about how awesome the product is. 

To the trader there is no value in giving stuff away except when he has stock to shift at the end of the day if it’s perishable. This is why very few of them manage to make the leap from running one small operation to running a retail operation. Their core belief about what's important holds them back.  

The equivalent developer is one who thinks that a Twitter which people pay for is sensible, or a social network whose app costs money is wise. He thinks that an iPhone game that packages its updates as sequels rather than free updates is viable, and that charging customers for levels is a sound business model. He can’t help it. Like the trader, he can only see what these things cost to make (and therefore ask what the return is) and this leads him to make mean choices.

Users are not interested in meanness. Who wants to be the fan of the guy who always has his cap out and is demanding to be paid for his time after all. That’s like going to a free festival only to see the musician refuse to play until his hat is filled.

 

Benevolent Meanness

Even benevolent meanness is still mean. I write thousands of words every week that I give away for free with no expectation of reward. I could write much shorter articles, or parts of articles, with links to buy the full versions. I could explain to you that I have to because I need the money, please understand.

I would get your sympathy, sure, however I would also only get maybe 2% of the readership that I have today and probably zero sales. I would conclude that blogging is a tough business and Google steals all my rightful money with their search advertising.

Or I could write like hell, over-deliver, convert thousands of fans and in the process discover some alternative ways to prosper. By getting my product out there as a  gift to everyone and relying on some fans to take the next step, I have created a consulting business, and business is brisk. More importantly, my model is sustainable because it creates fans, not sales.

It's exactly the same for software, whether games, social apps or productivity. The online space offers new opportunities for businesses to find markets, but it’s a fallacy to think that the rules of the market are the same as those of retail. They are not, and all those ‘bubble’ businesses, subscription software companies and million dollar value bloggers conclusively prove it again and again.

As a developer it’s up to you to realise that your core beliefs may just be wrong. Your ARPU obsession is probably the thing standing most in the way of you being a success, and if you get the chance to be front page news on the Amazon App Store, figure out what you can do with 100,000 new users that will help you build something amazing.

Don’t worry about whether the horse has its teeth. It’s free!

Comments

[Walter]

Meanwhile, in other news, Minecraft just passed the 3 millionth paid customer mark. Customers paying for software? Fancy that!
OK. I read this article very carefully to see if there was any nugget of actual useful information behind all the hand-waving. I'm disappointed. Your argument is that game/app developers should think about making money indirectly instead of - you know - directly, from the things we actually do well. Fine.
Unfortunately, for most of us, that just isn't a realistic business model. Mouths to feed, etc etc.
Reading this I was reminded of a Software Architect we used to work with. He had a lot of high-minded notions. When asked about specifics he'd dismiss our enquiries with a wave of the hand and a curt "That's an implementation detail". Infuriating.

[Tadhg]

Hi Walter,

The "mouths to feed" argument is the same as the market trader one. It is simply another way of saying cash is king. And while I respect that we all have commitments in life etc, it doesn't change anything about the rules of how online works.

The problem with citing Minecraft or Rovio is that not only are they outlier examples, they are also poor fits. In both cases the developers constantly provide updates to the players long after sale. They're both givers rather than traders, and so their audience markets their work for them.

But like I said, it's a belief issue, not a pragmatic one. The details are important, but what you're aiming for is more so.

Thanks for the comment.

[Jeremyspringfield2000]

The GAMBIT MIT event addressed this very issue last night. Where the Moderator from Owlchemy Labs, talked with Ichiro of Dejobaan Games, Eitan of Fire Hose Games, and Scott from the now closed MacGuffin Games. A very similar question was asked by one of the MIT students. She has an app/game, and wants to find the right revenue model and worries about giving it away for free but knows that can get a lot of notice.

I think your point is absolutely correct from the point of view anyone with cash on hand. But anyone with the point of view of a bootstrapping start up will see it differently. Small companies pay very close attention to the money coming in because if they do not, they fail. The go back to work as a receptionist at an M&A company, or in America at the moment go back to unemployment.

Eitan's advice was stay away from any apps store of any brand of mobile gaming. Because a startup can't wait for a fan that got something free to turn into a paying customer.

On the other hand the moderator from Owlchemy labs broke in with a different answer to the same question. He suggested a free game, but with small in app purchases. Let a player love the game first, then allow them to pay for something if they want to.

Another member of the audience who, I don't know and can't remember the name of, suggested making two versions of every app. One free with ad support, and one with a cost to the user but with no adds.

Ultimately the answer is that the creator of said App/Game needs to pick a business strategy that works for them. But newcomers to game design generally aren't aware of those options. They look at chasing fans like going bankrupt. It seems like that may be a the source of some of the angst associated with the issue.

[Tadhg]

Absolutely. Any kind of medium or long term plan can feel very flaky when you have very little in the bank. Money now is very attractive, and yet its eventual failure rate is very high. Most studios that end up going that path either become hand-to-mouth outfits or contractors.

The right approach comes from the software itself. For example if you're making a stand-alone game that has no way to deliver extra content then it's just immediately harder because such a game will naturally max out its interest level and then decline. And yet the bulk of games that appear on mobile platforms are exactly of that type.

Thanks!

[Simon Strange]

@Jeremyspringfield - Mobile Apps are somewhat different from open web-based products, which is Tadhg's main thrust here. "Money Now" is absolutely a viable strategy... sometimes. In the past it was always the primary strategy, and now it's just one of several potential strategies.

The real takeaway is that a business strategy is now something you have to develop from scratch based upon your particular product. For more on that topic, I direct you to my own blog:

http://strangedesign.typepad.com/strange_design/2011/08/strategies-for-monetizing-your-mobile-application.html

[Gavin Zalinger]

Given that Minecraft/Rovio/Super Meat Boy are outliers, where does this leave perfectly decent products/developers who will only ever manage a modest following?

At what point is asking for money not mean? Charging up front isn't mean because that's a model that everyone's familiar with and thus contains no trickery, but it runs counter to fan-chasing. You cite charging for levels as mean, but what about games that come in installments, the first of which is free (e.g. Monkey Island)?

[Tadhg]

Hi Gavin,

It's not the asking-for-money that's mean, it's whether the product itself is miserly (how much am I spending on this???) versus generous (am I doing what it takes to make this awesome?).

Episodic games are an interesting case in point. I think they're a very difficult business model to make work because they're just poor value for users. They feel like metered content.