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Subject: | Re: UKNM: Putting a value on users |
From: | Ray Taylor |
Date: | Fri, 16 Jul 1999 13:24:37 +0100 |
Nick Gilbert <nicknewsnow [dot] co [dot] uk> asks:
>Does anyone know how Freeserve came up with a value of 1500UKP per
>subscriber? I seem to remember AOL valuing its users at $8000 per
>subscriber and can't see why their valuation would be higher than
>Freeserve's.
The US version of the South Sea Bubble has over-valued internet stock for
several reasons, not least the fact that the existence and wide use of
online stock trading in the US means that lots of people who use the
internet, use it to invest, are naturally inclined to invest in internet
stock.
Stock market valuations are based on market interest. If lots of people want
to buy, the price goes up. Because US investors are crazy about internet
stock at the moment, the valuations have gone sky high in comparison with
any objective measure of the value of the stock's assets.
Because UK investors are not as crazy as US investors, it is likely that the
valuation of any UK listed stock will be lower.
The value per users is an interesting development and should be developed
further. If a regional department store has a customer who comes back to the
store time and again for clothing, household goods, Christmas gifts, etc,
the lifetime value of that customer is huge. I made the point about value
and customer loyalty a while back.
But the point is, we are talking loyal customer, not passing trade. If
someone comes into the store, buys a �20 gift, and never returns, you can't
really add any value for that customer other than the profit on the single
sale.
This is important because if you are going to advertising in order to
acquire that customer it could cost several times more than �20 to get them
in the store in the first place. This is the Amazon business model where it
costs something like �25-35 on web advertising (reputedly) for every new
customer acquired. But Amazon has real staying power when it comes to
customers so many first-time customers become loyal lifetime customers and
hence are worth many times more than the initial cost of acquisition.
On the other hand, there is a high churn rate for freeserve customers and
they at the moment, perhaps understandably, refuse to disclose their traffic
figures, presumably because they are low. Lots of people check out
freeserve, go away, and never come back. You'll have to ask freeserve how
many, I don't know, but I sure wouldn't commit any investment to them unless
they told me the figure first.
The thing about freeserve is they created their huge number of users without
any substantial cost by coming up with the best surprise gimmick of the
decade - free internet access (if you ignore the telephone bills of course).
But how long will the gimmick last and have they replaced it with anything
solid yet? Ask them, not me, I don't know the answer.
Anyone else wants to create loyal online customers there are two things you
have to do:
1. Provide excellent customer service in every way, and without any gaps
whatsoever, right down the supply chain / customer service chain.
2. Advertise/promote the service very heavily and at high cost. It may cost
�20/50 or even more to acquire a new customer. So if you want 100,000 loyal
customers, you have to spend �2-5 million, possibly more, on advertising and
promotion unless you don't mind waiting several years and allowing
competitors to get there first.
So to create 1,000,000 loyal users, your ad budget could be �20-50 million
or more, but then if each customer is worth several thousand, you ought to
get a listing worth billions.
So when someone like lastminute or any of the other successful startups does
all of this at a much more modest budget than Amazon or any of the other
highly funded operations, you really have to take their hat off to them. The
proposition is so good that it virtually advertises itself (as freeserve did
last year).
But to reproduce the model with any kind of certainty will require serious
upfront investment. As long as the big boys in the city are reluctant to
supply this, it will allow a healthy flourishing startup market. So in fact,
the longer UK (institutional) investors stay out of the game, the better it
is for the real entrepreneurs.
Long may the City remain in ignorance! (though I suspect not much longer).
Ray Taylor
NMC/Adplan
Please note our new number: 0181 249 6313
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Replies
Re: UKNM: Putting a value on users, azeem azhar, lists
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