Why social networking sites need a business model first
Yelp.com Scam:
I have written previously about monetizing online communities. To sum it up, my point was that communities do not convert into paying customers unless the expectation is set at the very beginning. The recent Yelp.com extortion scam further strengthens my point. Yelp.com is not yet a profitable company – its primary source of revenue is advertising. As the primary user-review site, I did trust yelp.com implicitly with its customer recommendations. However, having learned today that yelp.com actually tampers with the reviews (pays employees to write reviews, gives a negative review to business who decline to advertise with yelp.com and gives positive reviews to companies that advertise with them) – I will never again trust the veracity of the reviews on that site.
It is a mockery of consumer trust and the implicit rules of social networking and social technologies. Like the Creative Commons Act – this may not yet be written in stone, but dude – tampering with user reviews is dishonest, faulty and plain despicable.
Social networking/ social media companies – I beg you. Please have a business model in place first. Then go attract your users.
Don’t get me wrong – I do think that as a community of thinkers and entrepreneurs, we will only learn by taking risks and making such mistakes. But personally, I’m becoming less and less enchanted by social networks that essentially offer variations of the same service – but do not do the right due-diligence and research to have a sound plan behind it.Ultimately, this is what happens then. Oh yes, we’ve generated a terrific user base- NOW- lets go to investors and get the money. And THEN lets figure out how to make money off this. How can you do business like that?!
We talk so much about old business models dying and how social technologies is re-defining how we do business. Agreed- but I still think there’s a lesson or two to be learned from the old-school folks. For Yelp.com -what’s the point of bringing in thousands of users, establishing trust with your users and then fooling them like this? The sad thing is, unless this story reaches critical mass – users will continue to flock to yelp.com, trusting its recommendations.
I wish brands would understand that a social network is not a solution to their problem. Heck, most brands don’t even do a good job of properly identifying the problem first. As I see it, they find a new media solution first (whether it is a facebook fan page, a social network or even twitter) and then they frame the problem around it.
Facebook – the savior
Yes. I sincerely believe this. At work, I have two windows constantly open other than my work email: my personal email and Facebook. With their new “Like and Share” features, it is diminishing my need to go to a digg.com or a reddit.com – and instead derive satisfaction from sharing items with MY friends. There has been a lot of debate abou their TOCs lately – Give those guys a break. They are doing their best too – to figure out how to make money while staying true to the community. What I love most about Facebook is that while they experiment with different business and revenue models, they are quick to react, communicate and apologize to their community as and when need be.
Anyways, these were totally unfiltered thoughts brimming around in my head after reading that Yelp.com scam news today. Feel free to agree/disagree.
19/02/2009 at 3:16 pm Permalink
I finally decided to write a comment on your blog. I just wanted to say good job. I really enjoy reading your posts.
19/02/2009 at 4:04 pm Permalink
Hi Dan – Thank you for your kind words. Really appreciate it. I checked out your blog as well – I’m actually working on a presentation titled Customer Service 2.0. So your blog is very helpful
19/02/2009 at 5:39 pm Permalink
Interesting thoughts.
Yelp had a business model in place well before the site was created. They were able to secure venture funding and angel investors appropriately. Whether they were able to fulfill on their model is questionable.
But the fact that they are allegedly changing reviews is a different story, one that has nothing to do with the profitability of social networks and social media.
20/02/2009 at 11:07 am Permalink
I’m not sure what their business model was but in the light of things, I can venture a guess that the business model was based primarily on advertising. Esp. advertising from local businesses. I think that the fact that they are changing reviews does have to do with profitability of social networks because they were obviously driven to a point where their original business model in place (local ads) wasn’t working.
They figured that using a scare tactic like that would force more small businesses to advertise with them and it worked for a bit. Until, the small business owners realized it was not worth it.
To their defense however, we did not know as much about community based business models when they launched as we do now. You should read my previous post about monetizing communities – I’d love to hear your thoughts about that.
I am sure they went to seek funding with a sound business model in place – but they have been around for a while and have obviously been paying attention to where communities, social media and social netowrks are going in general. Changing reviews – was not an efficient strategy. An efficient strategy would have been to figure out how to adapt their business model.
I’m not saying I have the answer but from my perspective, it looks like this turn of events was unnecessary and they could have easily avoided it by changing their strategy.
20/02/2009 at 3:31 pm Permalink
Considering that the founders of Yelp were former employees of PayPal, their connection with Max Levchin, Peter Thiel, and other venture capitalists probably has facilitated the acquisition of venture funding.
I don’t want to imply that their personal ties have somehow overridden the lack of viable business model in securing the venture funding – I am sure that the business model was sound enough to convince the investors. However, looking at the allegations thrust upon them, it looks like Yelp’s business model may not be too sound after all.
Given the current state of the economy, venture capitalists are becoming more discriminating with their funding. We’ll see whether Yelp will improve their strategy for generating revenues or falter and see the funding evaporate.
21/02/2009 at 1:39 am Permalink
Magazines and publications have been doing what Yelp was trying to do for ages. Shouldn’t be so surprised.