There has been discussion from the venture capitalist angle on the failings of mobile consumer companies, including posts by Fred Wilson and Om Malik. I wanted to share my perspective, having been the co-founder of a mobile-first startup . We’ve raised $3.65m to date, and have tried two mobile-first free social products. However, for our next product, we are going web-first and charging out of the gate.
Ads are the Internet’s tax on users who want free apps and websites. Allmost all free apps and services have ads. Ad-supported companies are akin to the government in the sense that they are both really good at finding ways to charge you without it seemingly coming out of your pocket. Many people’s taxes are taken automatically out of their payroll, so they don’t think of that money as being theirs to begin with. Similarly, we feel like everything that we don’t directly pay money for on the Internet is free, but that is simply not true.
Unlike taxes, however, ad-based services target lower-income and lower-education audiences because that’s where they make all of their money. To take the largest example, Google makes $30.00 ARPU (Average Revenue Per User) per year and charges about $1/click on average to advertisers. That’s 30 ads clicked per user per year. I’m certainly not clicking that many Google ads per year and I don’t know if most technically-inclined users do. We know where content stops and ads begin.
What’s the cost to the user? The cost is the loss of privacy, and future opportunities for the user that they’ve lost as a result. Those opportunities can cost tens or hundreds of thousands of dollars as well as future happiness. Advertising-based companies need lots of data to win advertiser dollars away from television and newspapers. That being said, your data is given mostly in aggregate, so none of your personal information is revealed or sold directly to advertisers (in most cases). Usually the argument goes that your data is being sold, but that’s not mine (unless I’m trying to sell privacy to a lay person). If that were true, consumers would revolt the same way they would if they had to go into their bank account once a year and hand 20-50% of it to the government to spend on programs like the TSA. My argument is different; that because of the way ad-supported companies must operate and grow, your data is compromised.
To gather enough data to be statistically significant to advertisers, as well as to achieve the scale necessary to have a large enough lower-income and lower-education audience to click on ads, all ad-based companies must grow very large user bases. They also have to grow their user base fast in the early days of the company, because nobody will suck up the cost of running a slow-growing and high-cost tech company for a long-enough period. To raise venture capital post-seed round, you need fast growth. You will not find many or any large advertising-based tech companies that have not raised money from VCs.
So advertising-based companies have to grow very large, very fast in order to support their free product. Let’s talk some numbers on user acquisition. If you work at a startup and have access to your funnel data, you can confirm that what I am saying is true. User acquisition is ultimately about retaining the user through all stages of the user lifecycle. If you don’t focus on that, at each step of your website or app’s onboarding and main user activity flows, you will lose a percentage of users. I believe this is the primary reason that mobile is failing.
Let me share with you some rough numbers from our mobile-first startup. Out of 300,000+ downloads and 250,000 unique website visitors, 200,000 people have signed up. So right away, chop off 60% of your audience whom are just window-shopping. As an aside, I have heard privately from an app maker with a 100m+ downloads that 50% of people don’t even open their app after downloading. And that’s not counting people who can’t find your app in the store or decide not to download it after seeing your app rating (4.5 stars, in our case).
We used to have a screen where users could input their phone numbers and emails to help other users find them better. Out of 200,000, chop off 25% who don’t have the patience for that or are scared that we will sell their phone number. We also used to have a social network sign-in screen to automatically create groups for our users. Another 25% don’t want to sign-in to a social network, don’t see the skip button, or get bored by this time. We have since removed those two steps, but it took us a while to get there because we had to re-engineer how onboarding worked.
So that takes our original 550,000 eyeballs + people to 100,000 users. Now that the user is in our app and has an account, we want them to create a group and add their friends or family to the group. 25% of users won’t create a group and another 25% won’t add anybody to the group they created. Now we need them to share something to those people. Then the people they share with need to see the value, understand what is going on, and go through most of the steps above.
At best, we retain 5% of users through the entire onboarding process. Attempts to fix it have raised it only nominally. We are not alone on that count even amongst apps with much better onboarding and many more app versions than our own.
The most natural way to combat this is to try and ratchet up the total number of downloads and that costs money. If you paid Google’s $1 CPC for people to enter your funnel, you’re really paying $20 per user and you will never recoup that cost. Simply redesigning or reengineering mobile signup/onboarding is not enough because on mobile, you can’t deploy or react to user behavior fast enough to test a lot of things. Non-active users tend to only download big updates and those updates take a ton of development time. You can’t ship bugs because your rating will hurt. You also have already lost a potential user because there is no great way to tell a user that got lost in your funnel to come back and try your new funnel. The press is not going to write another article championing your new funnel. Company emails have tiny conversion rates to mobile no matter how sophisticated your emailing marketing tricks are. The user has already calculated in their mind how long it takes to go to the app store, find your app, download it, enter their password, open the app, and go through onboarding, and because it will take so long they simply won’t do it.
All in all, mobile service apps turn out to be a horrible place to close viral loops and win at the retention game. Only a handful of apps have succeeded mobile-first: Instagram, Tango, Shazam, maybe 2 or 3 others (Games drive short-term revenue but don’t get me started on that topic – sell a billion $0.99 games with 30% taken off the top by Apple/Google and you now have the equivalent revenue of a Call Of Duty opening weekend).
You have an entirely different onboarding story on the web. You can test easily, cheaply, and fast enough to make a difference on the web. You can fix a critical bug that crashes your app on load 15 minutes after discovery (See Circa). You can show 10 different landing pages and decide in real-time which one is working the best for a particular user. You can also close a viral loop: A user can click an email and immediately be using your app with you. You can’t put parameters on a download link and people don’t download apps from their computer to their phone. Without the barrier of a download + opening the app to try your product, you can prove value to the user immediately upon their first impression, as is with Google. In addition, the experience of signing up for a service is superior in every way. Typing is easier. Sign-up with OAuth is faster. Tab to the next field. Provide marketing alongside sign-up as encouragement. Auto-fill information is a feature in every browser. The open eco-system of the web and 20 years of innovation has solved many of the most difficult parts of onboarding. With mobile, that kind of innovation is lagging significantly behind because we create apps at the leisure of two companies, neither of which have a great incentive to help free app makers succeed.
As I said before, ad-supported companies need to grow very large, very fast, and I said that that is at the cost of your privacy. I made my case for why web companies can retain and acquire users easier, and the way to do that is through testing and the web’s ability to provide quick and perceivable value to a user. What follows is my theory: All advertising-based companies will innovate and iterate to approach zero set-up time, zero friction user actions, and a maximum viral factor, because that increases their growth and revenue.
In order to get to zero set-up time, in the best-case scenario a user will be shown a highly targeted list of suggested friends, auto-follow people, or not have to sign-up at all. In any case, they will not be provided customization options. Also, the user will be shown interesting and relevant content immediately, which requires a vast amount of viewable and public content. In order to achieve zero-friction user action flows, like searching or sharing, it will provide few or zero advanced sharing options and in some cases even share automatically on your behalf. Lastly, to increase the viral factor of the app, invitations will be sent seamlessly or automatically and results and content will be available for any user preference or search.
Unfortunately, your privacy is an advanced option and would in most cases damage one or all of those company goals. Nobody wants to share without an audience, consume a news feed without any content, or search and receive no results. So I make the obvious point: Google and Facebook need your data, information, and content to be public so that they have something to show other people.
The cost to the user is monumental. Unfortunately, you don’t experience that cost until it’s much too late to do anything about it. A blog post could cost you your job, a cached tweet could cost you a relationship, and an inerasable search result can cost you the opportunity for both.
So what can you do if you’re an entrepreneur or have a mobile-first startup not getting the traction you deserve? I’m not really sure yet, we are still figuring that out at our company. I don’t want to peddle our wares, but I’ll tell you what we are thinking and working on at Origami Labs and it’s just something for you to consider for your own business.
We want to place our chips where we believe we have the best chance of succeeding based on our theories and data. For us, mobile is not that place, which is why our new product is going to be launching web-first in the next couple months, with mobile as a companion app. We are taking a big bet on the web and the Internet in general, as you’ll see by how it functions. We are also going revenue-first because we believe in privacy and we’re willing to trade a smaller, slower-growing audience for it. Our new product will cost you money, so you can be assured that it doesn’t cost you something else.
In conclusion, I want to say that I don’t think mobile is going to stop growing. We are not going web-first because people use the web more than mobile. I use my phone more than anything else. I just don’t think that an entrepreneur who wants a real shot at success should start their business there. The Android and iOS platform set us up to fail by attracting us with the veneer of users, but in reality you are going to fight harder for them than is worthwhile to your business. You certainly need a mobile app to serve your customers and compete, but it should only be part of your strategy and not the whole thing.