the evil hat (evilhat) wrote in lj_biz,
the evil hat

Analyzing the LiveJournal business model

In light of the discussion that has emerged around posting limits, and free users vs. paid users and so forth, I've gotten to thinking a bit about LiveJournal as a business -- and thus, the LiveJournal business model.

I'm going to share some thoughts. They're long; for that I apologize. I must also note that I don't know anything about LiveJournal from an insider's perspective; thus, these thoughts are simply those of a LiveJournal user looking at the business, hopefully semi-objectively, as it appears to an outsider.

It sometimes appears that people forget that LiveJournal is, ultimately, a business. It is, at least theoretically, run in a for-profit manner. As a friendly and responsible business, LiveJournal's goal should be to maximize value to its users. That means giving users the things they want, at a price that they're willing to pay and that LiveJournal can turn a profit on.

I get the impression -- which may be wrong -- that LiveJournal is run in a mode that very much approximates the early dot-coms. Build a popular service, attract as many users as possible, get enough money to fund operations, frantically try to build enough capacity to serve all of the users that are coming on. A lot of LiveJournal business decisions seem to be reactive, rather than based on careful planning.

In my view, there are four key metrics for the LiveJournal business:

  1. New accounts created. (More useful would be number of unique new users plus new communities, but new accounts is easier to measure.)

  2. Conversions. (Number and percentage of free accounts that have converted to paid accounts.)

  3. Churn. (Number and percentage of paid accounts that have reverted to being free accounts, or have been deleted.)

  4. Operations cost per paid account, free account, and community, respectively. (Money spent on variable costs such as servers and bandwidth.)

Free users are important to LiveJournal. Though free users aren't paying anything, they possess "social capital". They contribute to the mass of users that make the community functional and attractive, and which distinguishes LiveJournal from many competitor blogging sites. Free users serve as the target for paid-account conversions, and they also lure additional users to the site, who in turn may become paid accounts.

In theory, LiveJournal wants to maximize the number of paid accounts, while minimizing the number of free accounts that must be subsidized in order to serve as an attractor for paid accounts.

Presumably, more free users don't become paid users because they are unable to pay for an account, or because they don't see the value in becoming paid users.

Let's set aside the "unable to pay" users for a moment, and discuss just the latter group. There are three major ways to address that issue: you can either increase the services offered or decrease the price charged for paid users, or you can decrease the services offered to free users.

Clearly, there's a way of doing an analysis on what different accounts cost to operate. Given this, you can create a profile of what types of accounts are profitable, and what types of accounts aren't profitable. You can also measure the fiscal impact of adding a new service, and thus charge a reasonable amount of money for it.

Free accounts, ultimately, add to the value perceived by another LiveJournal user, thus contributing towards the likelihood that the user will convert to a paid account, as well as serving as a "free trial offer". You can think of the operational costs of a free account as being akin to marketing dollars.

Interestingly, however, because paid users benefit from the social capital of free users, paid users can theoretically be induced to pay for things that benefit free users. For instance, if there was a limit on the number of comments that a free user could post each day, a paid user might be induced to pay for a feature that permitted otehr people to post unlimited numbers of comments in his journal.

I have a theory, however, that if one were to graph the friends connections within LiveJournal, that one would rapidly discover that there are large webs of people within LiveJournal where practically no one is paying for an account, because they fall into the category of "unable to pay" -- I'd guess the majority of such users are in high school. While they may contribute to a large and vibrant population within LiveJournal, their social capital contribution is limited. They're probably most valuable to paid/potential paid users in the context of communities, not in terms of individual journal entries.

Where free user social capital is most valuable should determine what free user activities are ultimately most profitable to subsidize. For instance, if implementing a post count limit, posts to communities should probably not accumulate as many "post units" as posts to one's individual journal. Indeed, in the same way that RSS feeds get cheaper as the number of subscribers to that feed grows, posts to communities get cheaper as the number of community members grows, thanks to accumulated social capital. (This also prevents the abuse of making a journal shared just to avoid post limits.) Big communities generate lots of social capital, thereby making LiveJournal more valuable.

What LiveJournal needs to do is to profile resource usage by type of resources consumed (probably per-operation: posting entries, posting comments, and reading other entries), and break that down by paid accounts and free accounts, and then further by demographic. It needs to identify the users who are capable of paying for an account, but aren't, and figuring out how to make paying into something that's worthwhile.

And yes, that means rationalizing what sorts of services free users get, as well as figuring out the business case for paid accounts and any additional special features.

LiveJournal does not, to my recollection, have formal terms of service, but it can be argued that paid account users were implicitly promised things like unlimited posts when they paid for their accounts. This does not mean that the policy for what one gets when a paid account is renewed can't be changed, though. [Edit: Correction thanks to todfox, there's a ToS, and it does indeed allow the account offerings to be changed at any time, so LiveJournal can indeed alter account policies at will.] Furthermore, individual abusers should be dealt with individually; there's "power user" behavior and there's abusive behavior, and a distinction has to be made between the two.

However, some degree of quantitative thought has to be put into what free users get. The limits placed on free accounts need to relate to compelling conversion points -- high enough that free accounts have value when compared to other free services, but low enough that paid accounts have greater value (compared either to free accounts or other paid services). The limits shouldn't be based on "what's convenient" for free users. This is fundamentally something which is a business decision, not an emotional one.

LiveJournal also needs to find ways of maximizing revenue from its existing paid user base. While there are users for whom the $25 a year is a stretch, there are also heavy users who would be willing and able to pay more for additional features -- features around which business cases can be quantitatively crafted.

In order to grow profitably, LiveJournal needs to be willing to give up users who aren't paying enough -- either in dollars or in social capital -- to justify the cost of operating their accounts. I'm not speaking of targeting individuals; I'm speaking of targeting particular usage patterns.

This is not a problem that LiveJournal can simply throw hardware at; unbounded growth without a solid sense of where the company is going is going to cause real problems in the future (and indeed looks like it's causing problems right now).

Just my two cents. (And happy to elaborate on specifics, if anyone wants to ask.)

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