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Musings on a Business Plan

Musings on a Business Plan

July 4, 2007
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" A further source of downward pressure on retention rates is the escalating sophistication of the surfer "

I received an email recently seeking specific information for use in developing a client's business plan, of which the seeker was currently in the start-up phase of executing.

While I cautioned him that online adult is a closely held industry populated by privately held companies where accurate reporting and true numbers are hard to nail down, there are some metrics that can be roughly estimated, providing "best guess" guidance that can serve as a base point for projections. Other items may be better understood with a little bit of thoughtful analysis. Here are the items the client was interested in:

1) In the adult industry and various niches, what is their average cost to acquire a new subscriber?

New subscriber acquisition costs vary widely and are based upon the source of the traffic, the advertising methods employed to reach that traffic, and how well your exiting traffic can be monetized.

For example, common pay-per-sale affiliate payouts can range from $25-$45, with cross-sales at $10-$15 and some promotional payouts that run $100 or more per-signup. That's a wide range of "costs" for the same new subscriber; but all can be profitable depending on operational refinements. Overhead, conversion and retention ratios, plus the resale value of the traffic, will impact the actual subscriber acquisition costs.

2) What is the average lifetime of a subscriber of adult websites? In what cases are the lifetime's highest, what niches? What do they do better?

Subscriber lifespan is another hugely variable factor, and complicated by hidden drivers.

It might come as a surprise to some, but the biggest factor influencing retention rate has little or nothing to do with the website's niche, content, presentation, design or any other factors within the control of the site's owners: it's all about customer procrastination.

To understand this better, let's look at the typical transaction chain: A surfer finds a site so compelling that he's willing to join. He glances through the membership options, selects a low-priced trial offer, and checks off the "I accept your terms" box, without ever bothering to read all of that legal mumbo-jumbo.

All he sees is a "$3.95" price point, and then he puts the money out of his mind, quickly moving on to other things.

A few days later, long after he "took care of business" and his visit to your site is a fading memory, that $3.95 trial membership will renew for $29.95 monthly.

Despite the fact that this is something he agreed to when he checked that little box, he is probably not expecting it. Suddenly, what seemed like a good idea for $3.95 is a bad idea at $33.90.

Of course, since he's already forgotten about your site and has likely never even returned, he won't remember any of this until he sees the charge on his credit card statement, at which point, he'll "mean" to call and cancel, but procrastination being what it is, or even embarrassment over having to talk to someone about it, he'll put it off.

And then bam, you've got him again for another $29.95 rebill. Fast-forward to his next credit card bill and the realization that he's now spent $63.85, and his level of pain will likely overcome his procrastination, causing a cancellation.

This equates to a trial period of anywhere up to 10 days, plus two full monthly rebills; expressed as "two-and-a-half months," the most commonly cited membership period.

The correlation between cancellation and procrastination is purely anecdotal and simply based on my own personal discussions with members of a medium-sized niche-program offering high-quality websites; who when calling the cancellation number, occasionally found me on the other end of the phone line, picking their brains as to "Why."

As a side note: insert the member's wife into this scenario, where she is the one who sees the credit card bill, notices the charge and confronts him over it. His denial (understandable in the face of an enraged spouse) will not only lead to a speedy cancellation, but is a leading chargeback trigger; euphemistically called "friendly fraud."

A further source of downward pressure on retention rates is the escalating sophistication of the surfer, coupled with an increase in computing power and broadband access speeds.

This member typically signs up for a trial membership, and then often through the use of automated download managers and a high-speed connection, will literally slurp up all of your available content, and then cancel his membership, well within the trial period.

Since profitability usually depends on your ability to rebill members month after month, these members skew your averages.

This can become even more troublesome if you offer quality content that attracts repeat attention, since if this member likes your offerings, he's likely to return every few months to acquire your latest updates — all on another trial.

If this is a concern for your operation, barring the use of automated download managers and limiting the frequency of trial memberships are steps that can easily be addressed.

Tightly focused niche sites, such as single-model amateur sites and other personality-driven properties, tend to retain members much longer, and in line with the quantity and exclusivity of the content, as well as the interactivity of the principals.

For example, a good amateur site, with an "involved" model, may retain many members for more than a year; based on their perceived "relationship," the member's desire to interact with the model, and her unavailability elsewhere.

A recent XBIZ poll suggested that 66 percent of operators make more money with live content than they do with prerecorded content, once again illustrating the value of having exclusive, interactive material.

3) For this type of business what is a common conversion rate going to be for online advertisements? Where can we get the best conversions with regards to our content?

Conversion rates are tightly tied to the quality (source, freshness and implicitness) of the traffic it represents. For example, paid-placement on Google will result in highly-targeted visitors: these are people with a specific interest, actively searching for something to fill their needs and directly clicking on a link that they hope will give them what they desire.

This traffic can consistently convert at better than one in 10 and easily at better than one in 100, if you execute a proper campaign.

Contrast this with general TGP traffic, which can easily deliver conversions worse than one in 10,000, especially if purchased as a bulk quantity. Consider that much of the traffic that is funneled through TGPs consists of freeloaders sitting on a mountain of free porn, being traded from portal to portal, often forcibly via blind links and via "skimming" — a practice commonly employed by TGP operators trading unproductive traffic amongst themselves.

While representing some of the worst-quality traffic, its sheer volume makes it impossible to ignore, and specialists have emerged who can help maximize sales.

Historically, the figure of 1:750 has been used to define an "average" conversion ratio, when all sources of traffic are averaged in together. Like the "two-and-a-half months" average retention ratio, it's purely anecdotal, but useful as a starting point from which your own results can be evaluated.

4) How much will different types of advertising cost us? What are our advertising options? Which options will be most effective and cost efficient for our company?

Different venues have different costs; you can open an AdWords account at Google for next to nothing, while targeted text links on a decent volume TGP can run $1,500 to start; both can be a bargain if handled correctly.

Ideally, websites are finely tuned money machines — pour in a given amount of capital for traffic acquisition and receive a predictable revenue stream in return; but the Devil is in the details and this predictability is elusive and an increasingly specialized endeavor.

Different budget levels offer different opportunities, but money doesn't necessarily mean success, so a specialist such as Scott Rabinowitz from TrafficDude.com could be retained to facilitate the most advantageous traffic buys to meet your specific goals.

Beyond direct ad buys, creating a staff position for an in-house traffic specialist can be a wise investment.

Submitting galleries to TGPs, even using automated solutions, is a full-time job, the results of which could easily justify the overhead, and is an example of how developing internal, self-sustaining traffic sources is key to long-term profitability.

A logical step and one which most paysite operators take, is the establishment of an affiliate program. An arena with very stiff competition, many operations rely on such programs for the bulk of their traffic and advertising efforts, so this should be explored, but should not be taken as a sole solution to traffic acquisition.

Once again, this can be done for free using tools available from the billing companies and a little bit of time; or, millions of dollars can be invested in a high-end program that launches with a splash — and one can grow (or shrink) into the other, depending on how well it's all handled…

5) Do you have suggestions on the pricing strategy that would be most profitable?

There's no such thing as having too many membership options; that includes pricing, payment mechanism, terms and methods.

While subscription-based membership options tend to be the most common, they're not necessarily the most profitable means for monetizing content. Pay-per-view offerings can provide cumulative sales far in excess of the subscription value of that same material, but it should be an "either or" choice for the consumer, as to how he wants to pay — don't just offer one option.

One strategy is to offer a higher-priced, longer-term trial; say, $9.95 for a week of access, with a higher priced monthly membership, partially offset with a "loyalty" discount, along with a la carte offerings of individual videos/scenes/galleries, etc.

You could charge, for example, $29.95 per month for the first month and $24.95 thereafter to encourage retention, and the higher price point (than for example a $14.95- $19.95 site) will foster a perception of a better quality offering. If the prospect doesn't want to make a membership commitment, then sell him a dozen video downloads for $5 each.

Pay-per-minute telephone access, especially popular in developing countries, doesn't often command the same per-visitor dollar value as does membership sales for example, but it is "found money" that might otherwise be left on the table.

Working as many different payment mechanisms, currencies and methods into your operation as possible is the means, making it as easy as possible for the member to join, is the goal. Part of this process is offering your content at a variety of price points, each tailored to the market and application. With fixed-expense, digital-direct downloads, not everyone has to pay the same price for you to be profitable.

6) If we offer links to other sites on our site, how much income could we generate from this? What's typical for this type of advertising? What is the average number of clicks this type of advertising receives?

This is one of those "how high is up?" questions, impacted by the type of site, its traffic, and the means by which you monetize and feed these links.

If you're running a paysite and seeking to monetize unproductive (non-joining) surfers who are leaving your site, then sending those surfers to your competitors can be the most profitable approach; you then become an affiliate, and receive commissions on any sales that another operator makes.

Some programs may realize higher profits on this exit traffic than they do from membership sales, and well-handled, these departing visitors can often add an additional 30 percent (or more) to your bottom line. Non-exiting traffic, either members within or outside of the member's area, as well as guests, can be targeted with upsell offers for everything from adult novelties and DVDs to pay-per-view theaters and beyond. This business is all about the upsell.

Sites that are designed to be "traffic pumps" and intended to be monetized as sources of traffic for resale, can more aggressively funnel visitors to selected links, "forcing" any desired percentage of visitors to a destination website; and some degree of "help" in this regard is commonplace, so this skews "average" click counts — it can be 100 percent if you like.

This is a huge topic with many nuances, the upshot being that it shouldn't be a question of "if we should offer links to other sites" but one of "how best can we monetize our links to other sites?"

7) Is there an "interactive" niche in the current adult industry? Is there demand for it? Will people pay a premium for this type of content? Could this niche be profitable based on current market trends?

Interactivity is everything. One of the reasons that decent single-model sites retain so well is because there's often a high degree of interactivity between the model/site owner and member, which results in a "relationship" that lasts as long as the credit card rebills.

This transcends "porn" and is as much psychology as anything else; where a huge market of lonely people that just want someone to talk to, are seeking "to touch" another person, and in ways that often include sex.

The profitability also is impressive. Consider the glut of free porn currently available on the Internet: a savvy surfer knows that he doesn't really need to pay for a membership, when all the photos and videos he could ever watch are available now, at his fingertips. Live shows, however, are not free — not if you want to control the action and be in charge of the interactivity.

8) Current market trends, what's selling, what isn't, where is the market going.

Sex sells — it just doesn't sell like it used to. There's good news and bad news; the low barrier to entry in online adult has resulted in a saturated landscape populated by a few major players, dozens of midsize operations, as well as countless smaller and individual operators; many only marginally if at all profitable.

Poor business acumen tends to be the norm and a huge population of "problem elements" (what I like to call the 15-year-old Ukrainian kid living in his momma's basement, well beyond the reach of U.S. authorities) complicate the realities of poorly publicly perceived marketing approaches, resulting in legislative initiatives that are problematic to deal with.

There are a lot of headaches in this business, but a lot of opportunities as well. Increasing broadband speed and penetration, more powerful home computers, and an increasingly savvy and growing user base — all of these will point the way for forward-thinking businesses.

Live, high-quality, interactive content offerings, especially those crafted with a three-year lead to mobile deployment, and available with easy, flexible payment options, will offer tremendous upsides. But print-based adult B2C publications are well past their prime.

Adding to the pile of free photos and videos is counterproductive, even when necessary, but focusing on live, interactive, micro-niche content and enhancing the user-experience will drive sales. Users want to be involved, and adult users are no different.

Consolidation is an ongoing trend, so start-ups should at least consider their attractiveness as acquisition targets and plan their back ends accordingly. As you can see, there are an awful lot of factors to consider, many of which are quite specialized endeavors, but necessary pieces of the puzzle.

It's a lot of material to digest, and perhaps not what you expected but these are all valuable considerations on the road to online adult success. It's just the tip of the iceberg, but the best that time allows...


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