Digitalwall: From Idea to Business (1) How to Estimate Your User Number?

What's important is the process of estimation. You will get a clear picture about whether the business is worth your money, whether its outlook is as promising as you have thought and what's the right pace.

[+] Estimation is for real war

Amid the tide of Web 2.0-driven online businesses, many young players can no longer sit tight. Weird ideas and comments on cliches of traditional online companies and new tricks of startups in the cyber space are emerging on Blogs across the Internet.

Making a comment is always the easiest thing to do. We can marvel the brilliant interface design of a website, or their understanding to the behavior of a user. Yet we have no way to understand the real thinking of an website operator, not to mention the compromise that he has to make.

It's easy to "have an idea", or even to set up a team to start your business right now. However, to turn your idea into real business, you need to make the right estimate. Particularly, in the Internet industry, where there's still not a definite answer to whether user number is a reflection of revenue or of cost, such an estimate could be not so easy to make.

Lately, a friend of mine, who's a member of a leading Internet company in the United States posed to enter the China market, asked me over MSN: "how should I estimate my user number right from zero?" Indeed, this is the right question for anyone planning to start a business on the Internet.

He showed me the user number growth curve of a few listed U.S. Internet company and said that he wanted to follow suit in China. What he failed to mention was that, none of those companies were more than 10 years, and they had particular backgrounds that could never recur. In fact, he was not able to find a company with a background similar enough for him to copy its business mode.

He used all his knowledge about statistics, including Bezier Curves and regression, which puzzled me even more. Finally, I had to let him know that such a purely academic approach might be good for the calculation of an accurate figure in theory, but would never work in field practice. For people engaged in field work - like me - there's another way.

[+] No marketing ads, no user

To prepare a budget for an Internet business, one has to have in mind a few key points. First of all, it need not and cannot be clock accurate. Then you need to know what's important is the process of estimation. You will get a clear picture about whether the business is worth your money or not, whether its outlook is as promising as you have thought and what's the right pace.

For the estimation of your user number, there are a few key aspects: 1) you cannot expect to have your first customers without an investment; 2) you might get your first customers without spending a cent, but you will be much slower than your rivals; 3) if you have an advertising budget, you should spend it in the first 3, instead of 12 months.

I was personally involved in the building of many websites. A terrible experience I got was that you got practically zero page view without advertising. Unlike the situation 10 years ago, in today's Internet world, users have numerous options. It is unpractical to expect them to just bump into your site.

With advertising, the cost of acquiring a user is much easier to estimate. For the simplest cases of some Internet ad network or Google Adwords, you can easily get the normal ad click-through rate, or conversion rate, or even the average cost of acquiring a user. Therefore, you would have a clear picture of how many users you would have - just look at your initial budget.

If you don't want to spend the money, you can attract a user group quickly through a PR event, too. In additions, there're cases in the market to attract visitors to a website through PR press coverage, or a TV report or a headline in Sina News, or the recommendation of a popular Blogger.

Therefore, the number of new users each month you get depends on your marketing activities in the month. Isn't this a burning of your money or merely a hype show? Fortunately, there's one unique feature about Internet businesses that could provide you a touch of comfort: Network Effect.

[+] Identities of Network Effect

Existing users of yours might strongly recommend your site to their friends, or bring them there by casually clicking the "send to a friend" button. They can also be mere victims of the trap you have prepared and promote your site without knowing it, the way they are caught in the transmission chain of a "viral marketing".

I define the factor that helps you to attract new users without advertising "Network Effect Coefficient (NEC)". For example, with an NEC of 1.1 and 100,000 users at the end of this month, you can expect to increase 10,000 new users by the end of next month without advertising.

Therefore, by the end of next month, you will have 110,000 users plus the new users you have secured with marketing/advertising efforts. Multiplying the sum by the NEC, you could estimate the number of new users by the end of the month after next.

See? The more users you have, and the earlier you have them, the stronger the momentum of your business development would be - thanks to the exponential growth enabled by the NEC each month. This is just like the way your money grows in the bank: you deposit 100,000 and you get 10,000 in interest; you put 20,000, and you get only 2,000.

Now you understand why I say if you have an advertising budget, try to spend it in 3 months! The faster you get your users, the better. In fact, for two similar websites, the one with more users has higher NEC. In other words, the more money you have, the more you earn.

Generally, the NECs of content sites, e.g., news portals, and tool sites, e.g., search engines are estimated to range between 1.0 to 1.1, while those of online communities (as most Web2.0 sites are) could be anywhere from 1.2 to 1.4, depending on the ability of viral marketing of your site.

[+] Estimation, the gap between ideas and businesses

When you have only a few users, your NEC is practically 1. For most sites, an explosive growth (steep rise in user number curve) comes only after their user numbers break a critical point, which is also the start point for the sharp rise of their NECs.

For a saturated market or a reverend Internet company, the change in NEC could be stable and minor, which, however, is beyond the scope of this article, as its focus is how to estimate the increase of user numbers for Internet startups.

If you, having read all above, can't help opening your Excel spreadsheet to see how much you need to spend to secure one million users in the next 12 months, believe me, you will faint at the result. The reality is to start a business on the Internet, you need some extraordinary means.

Is securing users something to be happy for? As a matter of fact, user number is an underlying factor of both revenue and cost. I am not writing this series to scare you. In fact, anyone preparing a budget for a new business would become more realistic. (
2007/07/15 - By Digitalwall.com - Way to
China Internet/Telecom )