What’s more important, revenue or users?

QUESTION:

My startup has a site, and we need to get funding. What’s more important, revenue or users? Should we make our site free, and thereby gain more users, or should we start charging for the service and focus on revenue?

ANSWER:

Steve Hoffman

Captain Hoff

by Steve Hoffman, Cofounder of Founders Space

Ultimately, revenue is always more important. That said, you need to look at your business and determine whether sacrificing revenue for accelerated user growth is a smart strategy.

Take Facebook and Twitter, for example, they’ve focused on growth over revenue. This is because the value of their services depends on having a large, active user base. Once Facebook obtained a critical mass of users, it began monetizing them successfully. I expect Twitter will follow a similar path.

Now if your business doesn’t require a large user base to become valuable, then focusing on revenue from the start may be a wise choice. It’s easier to bootstrap a company if you have revenue. And in today’s financial climate, it’s much easier to get funded if you have revenue.

One other consideration is marketing. Most companies today seem to give away a portion of their services or products for free, in exchange for attracting users at a lower cost. Then they up-sell them on added features or services. This freemium model seems to work well, and it tends to be the sweet spot for most Internet startups.

I hope this helps!

Comments & Advice:
  1. David Spark says:

    Great answer Steve. I get the sense that many companies’ revenue model is to get bought out. But since that is such an obvious model these days, you can’t get away with it. You need to show a plan in either direction and then the ability to get the other you didn’t grasp. So if you started building revenue without users, how are you going to get more users? And if you built users with no revenue, how are you going to get revenue?

    If you at least show you have a plan in place, then you’ll be a more attractive commodity.

  2. Kathleen Kathleen says:

    Revenue is critical, and customers bring it. In order to get funded, you need to show that you can attract customers, and that they will pay for the services or goods that you provide. As Steve says, you can make some short term tradeoffs of revenue for customers, but in the end your investors are going to want to know that the business is one that will bring in revenue and return their investment.

  3. Keith says:

    Not all models fit with the revenue/user approach. In fact, much is said about Revenue, User Traction and also Scale, and so investors and critics impose these check offs to all models as if they apply universally. We also look at users as individuals only and not something bigger, and thus apply that to all models as well. This is why I look for value added potential that can scale, and I look for this first in all models and less at revenue and user traction. If the user traction is in a very narrow vertical, that is not good in my view, and if the revenue is coming from consumers only, that too is typically a 14% return verses an 84% in a B2B model. So, be careful with generalizes applications to all ideas. Look at the idea first and know the space your business is in, for this will tell you what you need, and it just may be funding without current revenue and without much traction. The space, the strategy, and the value add ideas that can scale tell it all.

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