How To Build A Business In The Digital Economy

-Money Computer-

You read about the numerous companies receiving funding or getting acquired and you’re determined to build a business that will make you your first million (and hopefully more), right? I’ve spent the past decade trying to build businesses on the web and over the past three I have studied internet startups obsessively. Finally after a decade, I have a business which is profitable, and while it’s not to the level I’d like it to be, I’ve learned tons of lessons that I thought I would share.

If you’re wondering why I’m writing this guide on here, it’s because I’ve met with many CEOs of startups which aren’t generating millions of dollars despite their multi-million dollar valuations. There are also plenty of companies that are making money and there is really only one thing that differentiates the two companies: a business model.

Personally, I’ve been trying to determine the most effective business model for blogs. After much thought and plenty of tinkering I’ve come up with what I believe is a great model and it’s one that’s built for long-term success, not temporary arbitrage opportunities (which are great opportunities but they’re not sustainable).

Build Toll Roads Instead Of Highways

You can spend years trying to develop that catchy product which attracts millions of users to your site. For a select few, this business model makes a lot of sense: get millions of users and then sell ads. It was the average train of thought throughout the web 2.0 boom but it’s pretty clear that this model is dying quickly. If you aren’t building a revolutionary technology or a company with a business model from the beginning, you are doing nothing more than playing black jack.

Rather than going the highway route, I’ve recognized the power of toll roads: digital mini-highways that collect money as users pass across them. While the metaphor isn’t perfect since not all users deposit money in the tolls, your job as the owner of a business in the digital economy is to drive as many users as possible through the tolls and on to larger “towns and cities” (other businesses) that you own as well.

For larger “digital toll roads”, money can be generated by charging others to set up their own cities that you divert traffic to. This can also be referred to as “partnerships”. The key point is this: turning a highway into a toll road is much more difficult than starting off with a toll road. Why spend your time hoping to generate enough buzz to end up with a highway which may eventually have lucrative tolls when you can start building the toll road today?

Create Killer Content, And Optimize For Conversion

Create crappy content and you’ll get a crappy response. I learned this lesson from a social network that I built from scratch 7 years ago. I wanted a platform for independent musicians to sell their music but unfortunately the majority of the musicians coming to the site simply weren’t good. If you want users to stick around, you need to provide them with a reason to. There are number of different types of content that help keep users engaged:

  • Friends – If you give a user access to all their friends (as sites like Facebook does), you end up with extremely high levels of engagement. You don’t need to create content for the site because the users create the content themselves. This model makes a ton of sense but it is also a “highway-like” model which can be extremely risky. Executed properly you can end up with a lot of users, and a lot of traffic. I’ve covered countless companies over the past few years that use this model. It works but a select few have really mastered it.
  • Valuable Contributors – If you aren’t sticking with the friends model, you can create a platform for content producers. The only issue here is that you need to attract a dedicated set of users that create truly valuable content. There are numerous companies that go this route and simply expect users to contribute valuable information. Unfortunately it’s not as simple as that. This model works if you can create a community of evangelists around your brand. However I can’t tell you how many people fail miserably in attempting to build a niche community of highly active contributors.
  • In House Content Producers – In this model, you reduce the majority of the risk by having complete quality control. However the volume of content you have is directly correlated to how much you can afford to pay for. This is the model that most large blogs leverage, and while bringing writers in house and having editorial oversight will help you to maintain quality, it’s a costly proposition for most companies.

So I bet you are thinking to yourself at this point all three content models suck. If that’s what you are thinking: you are partially right in that it’s extremely difficult to make any of these models work. However if I have to choose one model over the other, I tend to lean toward in house content producers which is a much more conservative route but one that can be equally if not more lucrative than the “friends” platform model.

The Whole Optimization Game

No matter which content production model you decide to go with, you’re going to need to make money off the content. Right now it’s debatable how valuable user-generated content really is. Wikipedia has done a great job of getting valuable user-generated content, but the wiki model is a hard one to replicate. Content on the web can be used to drive instant conversions (e.g. sales).

Targeted content = targeted users = greater likelihood of purchasing a targeted product. There are a million and one ways to optimize your content. The most popular is search engine optimization but there are many more. Content can be used to create communities and however that content is being created, if broken into distinct verticals (as all media companies do), the monetization opportunities are increased substantially.

The marketers that advertise through your content (including yourself) will want to know how targeted the visitors are. As you improve your content and structure of that content, you can increase conversions of sales, and that’s how money is made on the web.

Create Multiple Products As Toll Booths

As I mentioned earlier, it’s important to build toll roads instead of highways. While the most ambitious individuals may not follow this advice, many smart entrepreneurs will leverage this model as it presents the quickest path to revenue. While all businesses require some sort of initial investment (time or money), toll roads produce revenue as soon as a functional version of your business is built.

As you build your primary source of traffic, you can use it to create new “toll booths” which serve as new businesses. Whether it’s selling tickets to events, creating digital goods that can be purchased on a case by case basis, or selling subscriptions, there are numerous types of products that you can create. Create quality products as toll booths on your virtual toll road and you will begin to see the immediate benefit of this model over the highway model.

Create Targeted Email Lists

Email marketing is still an extremely effective technique for increasing sales and expanding your pool of sales leads. Any successful digital entrepreneur should have a thorough understanding of e-mail marketing if they are going to succeed. There are a number of things to research around email marketing including “landing page optimization”, effective advertising copy, and more.

Study other businesses that appear to miraculously generate millions overnight (trust me that it’s not overnight) from the use of email marketing and other digital sales funnel techniques. I recommend reading Copyblogger and Problogger as a starting point. As you begin to offer free e-books and then paid products, and eventually subscription services, you will begin to understand how e-mail marketing serves as a critical component of any successful online business.

Network Your Ass Off

This is honestly the single most important rule. You can set up a homepage and print up some business cards for free and be just as successful as the person who invested millions of dollars but didn’t know the right people. Spend your time networking with thought leaders and super-connectors in order to dramatically increase the likelihood of your business succeeding.

Networking can be used to help get you free promotion, build new partnerships, get new ideas on how to improve your business, and build lasting friendships. Aside from executing, networking is the single most important thing you’ll ever do to maximize your odds of success. There’s a saying that essentially states that your network is your net worth. It’s true … live by this rule!

Social capital is one of the few things you can never have enough of. As you build your personal brand and build valuable relationships, you exponentially increase the likelihood of your business succeeding.

Keep Looking For Ideas

A successful entrepreneur never stops looking for ideas, yet also knows not to jump into anything too quickly. Education is one of the most important techniques to master and this means studying how others are also building successful online businesses. As you look at other business opportunities you will generate new ways of integrating some of the techniques leveraged by other successful entrepreneurs.

Entrepreneurs have a commitment to a lifetime of education and they are passionate about absorbing new information. Information can help your business grow and while too much education can hinder your ability to execute on the necessary tasks, increasing your knowledge can help you to quickly squeeze out additional revenue that wouldn’t have previously been available.

More important than the education though is simply the passion for what you are doing. The passion is what drives you to continuously evolve and improve upon the original idea. Whether you are building a highway or a toll road, you have to be extremely passionate. This passion will drive you to learn more.

Learn How To Program

Programmers have much greater odds of success in the digital economy. It’s a simple fact of live. If you can cutup any page design, quickly customize a wordpress installation, or build software that crawls the web for relevant data, you will have a greater chance of creating a sustainable business. While it’s not critical that you program everything for your business, having a basic understanding of programming techniques will get you set up faster.

I’ve actually found that knowing too much about programming can cause you to spend too much time programming when other activities will have a much greater return. While there’s know perfect balance of programming knowledge, a basic understanding of how things are developed will help get you get further, quicker.

Focus On Your Strengths

An entrepreneur is either a jack of all trades or a master of one. Whether you are a master software engineer, or really good at doing just about anything, you must focus on what you are best at. If your strength is connecting with individuals, get out and network to build a team that will help you to build your vision. If you are a master software engineer, focus on building new technology.

If you have the personality of someone like Gary Vaynerchuk, create a video show which highlights your individuality. The jack of all trades actually has it harder in that it makes it much more difficult to focus. Focusing on a single vision will help guide you along each step of the way. By determining what your strengths are at the beginning, you will be able to instantly recruit those individuals that help fill your weaknesses.

What Do You Think Is Most Important?

While I’ve listed some of the most important rules/techniques to building a successful business in the digital economy, no single article can cover all of the best strategies. What things have you found to be the most to build a successful business in the digital economy?