Using Adsense to test your business model

There has been a lot written how entrepreneurs can use Google Adwords to verify whether customer demand exists for their products. Even before you have a product built, you can write a text ad and pay to have it displayed next to search results. If people click on your ad at a solid clip, you have a good sense whether customers are interested in what you are offering.

Another interesting tool is to use Adsense to test your business model. You can use Adsense to answer a simple but important questions - is there money to be made in what I am doing? All too often, entrepreneurs start a social network, blog, or site where there is literally no way to make money. This is a little diagnostic to help avoiding that. Here goes:

Put Adsense on your site. Observe the eCPM. If the CPM is high (say greater than 5 CPM) this is a good sign. If you have low CPM (say less than .5 CPM) this is a bad sign.

The eCPM of your site tells you two important things. First, are you in an industry where there is money to be made. You might not understand yet how to make that money, but someone out there is willing pay for traffic and therefore they know how to make money.

Second, the eCPM tells you whether your vistors have "purchase intent" for something. If they are coming to your site to read an article, message their friends, or write a post, they probably don't have purchase intent for anything and will exhibit a low eCPM. If they are looking for real estate, browsing car prices, or looking at electronics reviews, they will tend to have an higher eCPM.

If you are getting a very low eCPM, I'd encourage you to think very critically about the industry you are getting into and your prospects for making money. Your site could become massively popular, but your business could still be a failure. Your business model will feel like you are squeezing blood from a stone.

In short, you can use Adsense to determine industry profitability and whether you are attracting visitors that might want open their wallets. This does not mean you should use Adsense as your primary business model. Making decent money from 3rd party advertising (even at a high CPMs) requires a level of traffic that most sites will never achieve. However, if you are achieving a strong eCPM, there is a good chance eventually you'll figure out how to make money.

Scarcity Brings Clarity - a good startup quote

A great quote from Sergey Brin about conducting business in an economic downturn in Google's 2008 Founders Letter:

"Nonetheless, I am optimistic about the future, because I believe scarcity breeds clarity: it focuses minds, forcing people to think creatively and rise to the challenge."

It's the same reason why Toyota tries to carry zero inventory - when you're operating without a safety net, you better operate correctly.

Official Google Blog: The 2008 Founders' Letter

Google Checkout raises prices

When we first started using Google checkout, it was free. Then they raised the price to 2.2% + $0.20.

Now Google is announcing a massive price increase. A tiered structure that penalizes the vast majority of merchants. See below.

---------------

Hello,

We're writing to let you know that on May 5, 2009, Google
Checkout's transaction processing fees will be changing. We'll be
transitioning from our 2.0% + $0.20 per transaction rate to a new
tiered fee structure, where the rates will vary depending on the
dollar amount of your monthly sales processed through Checkout.
The rate you'll be charged beginning on May 5, 2009 will be based
on your sales processed through Checkout during the month of April
2009. Each month thereafter, we'll continue to use the prior
month's sales volume to determine your transaction processing
rate. For more details about the new rates, please visit
http://checkout.google.com/seller/fees.html

We'll also be discontinuing the AdWords free transaction
processing promotion on May 5, 2009. Any AdWords transaction
processing credits accrued during April 2009 will be applied
towards transactions that occur on May 1-4, 2009.

Fees are the same for all payment types (Visa, MasterCard,
American Express, and Discover) and there are still no monthly,
setup, or gateway fees. For cross-border transactions, there will
be an additional 1% fee assessed per transaction. To learn more
about Google Checkout fees, please visit
http://checkout.google.com/seller/fees.html

Google is committed to the continued growth and development of
Checkout and to helping merchants increase sales by driving more
leads and higher conversions. Advertisers who use Checkout have
the opportunity to display the Checkout badge on their ads, which
has proven to be an effective way to differentiate ads and attract
user interest. Checkout users click on ads 10% more when the ad
displays the Checkout badge and convert 40% more than shoppers who
have not used Checkout in the past.

For more information about this change and how it affects the
product, please read our post on The Official Google Checkout
Blog: http://googlecheckout.blogspot.com/2009/03/google-checkout-fees-in-2009.html

If you have any questions, please visit our Help Center at
http://checkout.google.com/support/sell/bin/answer.py?answer=134473
Thank you for using Google Checkout.

Sincerely,
The Google Checkout Team

13 point checklist for startups

Paul Graham at Ycombinator recently published a great essay entitled Startups in 13 Sentences. The essay stands out for its elegant simplicity - clearly a lot of experience and data are neatly reduced to these thirteen tips about starting a company. Like all aphorisms, the tips don't apply to all companies and all situations, but they are surprisingly robust in my opionion.

The tips are great advice for someone thinking about starting a startup. I think it's quite useful as a diagnostic tool for all startup founders as well. Go through each of the 13 points and rate yourself on a A-F scale. Based on the the results, what would you do differently? What are you you doing well and where can you improve?

I went through the excercise for Personforce and found it illuminating. I'll spare you the results, but it definitely highlighted areas where we can improve.

Here's an abbreviated version of Paul's startup tips that you can use are a scoring sheet:

1. Pick good cofounders: ___

2. Launch fast: ___

3. Let your idea evolve: ___

4. Understand your users: ___

5. Better to make a few users love you than a lot ambivalent: ___

6. Offer surprisingly good customer service: ___

7. You make what you measure: ___

8. Spend little: ___

9. Get ramen profitable: ___

10. Avoid distractions: ___

11. Don't get demoralized: ___

12. Don't give up: ___

13. Deals fall through: ___

Definitely read the full version with Paul's explanations here before taking the test.

Email fax by RingCentral is amazing

When we started Personforce, I was amazed at how much faxing went on in the industry. Before this experience, I had used a fax machine maybe once or twice in my entire life. After we launched though, I was paying usurious rates to the Stanford GSB practically every day to send and receive faxes to and from clients.

When I graduated from school and started Personforce fulltime, one of our first purchases was our own fax machine. For a while I was pretty happy about it. Whenever the fax machine starting ringing my ears perked up - it was generally the sound of a new order coming in, which was very exciting. Actually, lots of times it was spam telemarketers which was quite disappointing.

When we changed offices we had to change telephone lines so I revisited our fax service. We decided to try out an email fax service (efax) because it just seemed like the modern thing to do. RingCentral seemed reasonably priced and full featured so we choose them.

It turned out switching to RingCentral has been an incredible experience. The software is well designed and easy to use. You can very easily replicate all the core features of sending and receiving faxes.

The best part of RingCentral is that it puts your fax "in the clouds". That means I can access it from my laptop, anyone else's computer, from my phone, or from any device that can connect to the internet. Now when I get a fax I can check it out on my iPhone whereever I am. I'd contrast this to having to physically go to the Stanford GSB fax terminal after class and see if anything came in.

The other great benefit of email fax services is that they cut down on paperwork. All your documents come to you digitized so there is no need to phyically file documents. I almost never need to file paper documents anymore now.

Anyhow, I highly recommend putting your fax in the cloud. I don't know much about other services but we're quite happy with RingCentral. I particularly like the nice "ding" sound when a new order comes in.

Reflections on Entrepreneurship from Stanford GSB

Going through an old notebook of mine, I found a page of things I had learned about startups and entrepreneurship from my time in the MBA program at Stanford GSB. I wrote it on 6/12/07, about a week before i graduated. I culled these from things I learned from various classes, lectures, meetings, books, and during the early days of starting Personforce.

• Entrepreneurship is about building something with little to zero resources
• Do rather than analyze. Err on the side of speed than precision
• Building a company is an iterative process. Test and learn.
• There is a mental inflection point when the startup moves from idea to actual business
• The micro-details of the product, the sales pitch, the contract matter.
• There is a way to solve any problem. There is a way to sell anything. It might just be harder than you are prepared to work.
• Differentiated businesses require lots of hard work
• Do the dogs want to eat the dog food?
• Your sheer force of will is a competitive advantage
• Work with people who have different skills but similar values to you
• You have to give equity away to make the pie larger
• You have to strike and scale while the iron is hot
• Successful entrepreneurs are just normal people
• You need to commit to something to succeed. Good things start happening and it provides focus. "Throw your cap over the fence"
• Little is gained by secrecy, good things happen when talking to smart people
• Act weak when you are strong. Act still when you are about to move.
• Little companies can crush competitors
• Achieving public success has an irrevocable price
• Don't add costs to the business
• To succeed, you need to be contrarian and right
• Selling into existing markets can be easier to sell to. Creating new markets can be powerful.
• Great businesses create an impact far in excess of the capital invested in them.
• Every early decision has strategic and ethical implications
• Before every fork in the road, ask your self exactly what it is that you are trying to accomplish
  

Perhaps at a later date I'll write about which of these points I found to be true, especially true, or not sure true in starting a business.