#LeanStartups: What I Learned from Eric Ries in 10 Minutes of #CustDev2

Last night was the excellent event organized by Sim Simeonov called Customer Development: The Second Decade .  At the event, some of the best in customer development spoke about what it means today and what startups need to be doing.  There were many great takeaways in the event, so I encourage you to check out the video.

At the end of the event, I specifically asked (skip to 2:09:11 if you'd like to see it) about how the consumer web should approach building a viable lean business, where free, freemium and often uncertain business models reign supreme.  Eric Ries gave me a great, detailed answer when I caught up with him after the panel ended which I'd like to share now.

What I Learned from Eric Ries in 10 Minutes of #CustDev2

Monetizing (a word Eric doesn't like) is hard in the real time web for consumer facing products, because of the consumer expectations of products being free, and the assumption that if you charge, that there is something similar that is free.

The panelists even admitted that they have difficulty themselves as Eric admitted he finds he has trouble paying for even the most inexpensive applications on his iPhone after paying $500 for the phone itself. Fellow panelist Bob Dorf also admitted he almost didn't pay for Pandora, an app he admittedly loves, simply because his wallet wasn't in the same room at the time they asked for payment (note: he did end up buying it). Eric went on to explain how to "value the exchange you are getting from customers."

There are many value propositions on the web, so the first step is to understand that there's more than just consumer payments and advertising as modes of generating revenue. The key thing I heard from Eric off camera was the concept of the transactions that occur on the web: Time, Skill, Money, and Passion. Below are some of my thoughts on what that can mean for a startup.

Time, Skill, Money and Passion: 

First, as Eric mentioned while on the panel, the customer is the person paying; the product is what is being sold.  In many cases, this can be the consumer using a product for free on your site or application; your attention is the value the business can extract.  Expanding on this is the concept of understanding how to derive time, skill, money and passion from the participants in your startup's economy.

Note: the explanations for what each of these represents is my own interpretation of Eric's concepts he shared; feel free to make your own interpretations and share in the comments if you like

Time

This is the most straight forward of the pieces in the consumer web economy: the longer you spend on my site or using my application, the more valuable you are to a customer who may want to reach you.  

Example in the real world: Facebook ads running as you browse the site.

Skill

Here is where you can put someone's talents to work to the benefit of your site/app. This may be people maintaining open source code which your business then consults on, people sharing their expertise in the form of answering questions on stack overflow or any other skill that you can derive value from.

Example in the real world: Clothing designers on Threadless.

Passion

This is where Lean Startups comes in most. Regardless of who your customer really is (i.e.- the person paying you money), you need to find your earlyvangelists who can promote your product and would be very disappointed if it no longer existed. These users are the ones who will rave about your product and help recruit others by sharing with them either through the viral elements you've built into your product or their own channels.  In addition, your passionate users are the ones you should listen to most to build a product that will best satisfy their needs (aka- customer development).

Example in the Real World: Our earlyvangelists on oneforty who tweet about our apps and like us on Facebook.

Money

Ok, this is the important one. At some point you have to find someone that will pay you money in exchange for something of value that you produce.  Sometimes it's straight forward like paying Dropbox $9.99 per month to upgrade to 50GB of storage.  Other times, it's advertisers paying to reach relevant searchers like in Google Adwords.  

The key here is that you need to have the other 3 elements working in conjunction to generate the maximum amount of value which you can then profit off of in a transaction to those that are most interested in it.  This is why some are discussing the power of Facebook's better context to advertisers than Google's current model.

The Bottom Line:

If you're building a consumer facing web app and grinding your teeth on how you're going to make money, think about how you can best enable all these elements to create the maximum value.  I don't have all the answers, but I know that hearing these concepts from Eric helped me a lot.

If you have other thoughts to share, or would like to correct anything I said, please add them in the comments below.

You can sign up for future events like this in Boston at Sim's new site: FastStartup

Here's also the video of the entire event last night: (again, my question was at 2:09:11)