To say that Apple’s App Store is thriving would be an understatement.  There have been 800 million downloads across Apple’s 30 million iPhones and iPod Touches — meaning on average each device has downloaded 27 apps.  The App Store now has over 25,000 apps and 250+ are added every day.

In such a crowded marketplace, how can an app possibly get noticed?

As developers know all too well, the key to being noticed is getting the app into the top-selling lists. Pinch Media’s data shows that “appearing on a top 100 list increases daily new users by an average of 2.3x” and appearing in the top 10 or top 25 list can mean an order of magnitude gain.

App developers have told me they’d do anything short of cutting their toes off to get into the top 10, top 50, whatever. That often includes lowering the price of their app.
-Dan Frommer, Silicon Alley Insider

So let’s say you have an app that’s selling for $1.99.  Sales are ok, but you want to make more money.  So you cut your price to 99c in an attempt to get on the best-selling list.  It’s perfectly logical after all:  the variable cost per unit is zero.  If you can increase sales 2.3x but earn half as much on each sale, you’ll come out a winner.

So obviously there’s a strong incentive for developers to cut their prices and concentrate on doing whatever it takes to get into that top 100 list.  And therein lies developers’ biggest complaint: the app store calculates popularity by unit downloads — without taking price into consideration. This structure has created immense competition and downward pricing pressure.  In February, the average top-50 app sold for $2.39 which is down 34% from $3.63 only two months prior.

Many have called on Apple to sort the list by total revenue rather than unit downloads. For example consider one purchase of a $10 app equivalent to ten purchases of a $1 app for ranking purposes.  This would highlight the apps creating the most value rather than the most downloads and it would help app developers sustain higher pricing.

But let’s talk about Apple’s dirty little secret: they want apps to be cheap.  The cheaper the apps, the more downloads — and the more value the user gets from the device.  This helps sell more devices, and although lower app prices does mean less app store revenue (Apple takes a 30% cut of app sales), that money is peanuts compared to Apple’s $425 profit/phone. In fact, Apple has said publicly that the app store is being run as a break-even service:

We’re thinking about the App Store in the same way that we think about the iTunes store. While it will generate some revenues, it will be a small profit generator, and just as with the iTunes store making iPods more attractive, we think the App Store will make the iPhone and iPod Touch more attractive to customers. We’ll hopefully see an indirect return by selling more iPhones and iPod Touches.
-Peter Oppenheimer, Apple’s CFO and SVP

The download pricing pressure caused by the per-unit ranking method is seriously hurting developers.  Is this a sustainable model?  No.  Developers will get fed up and leave eventually.  But right now it’s a one horse race: no other mobile platform has achieved much traction.  The most money for developers still lies in writing software for the iPhone.  And until Apple’s hand is forced by competition making significant inroads, a la Amazon forcing Apple to make iTunes DRM free, Apple won’t change a thing.  Everything is perfectly aligned in their favor.

One last point:  The upcoming iPhone 3.0 software supports a subscription pricing model for apps.  To be 100% clear, the new software will support in-app purchasing which asks the user to pay each month to continue using the application (rather than an automatic recurring subscription payment system like many people envisioned — the difference is subtle but important).  Some have reacted negatively to the subscription pricing announcement, fearing that apps will suddenly turn into crippleware and try to charge for every feature that was previously free.  This may be true at first, but ultimately it’s a free market and the problems will sort themselves out.  The simple truth is that the lack of a subscription pricing model was leaving money on the table.  It’s nice to see that being remedied.

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These are just a few of the many companies in the crowded field of web apps for personal finance management (PFM).  These consumer sites all perform the same basic service: aggregating data from disparate financial accounts (savings, checking, credit cards, loans etc), helping users monitor their financial status, and making suggestions for improvement.  Although the services have different focuses and specialties, they generally share the same business model.

Business Model

Unlike the typical consumer app attempting to sell banner ads for penny CPMs, these finance sites have a tried and true business model: lead generation.  The PFMs suggest financial improvements such as signing up for a higher yield savings account, a credit card with a lower APR, or a cheaper phone service.

When users take the site’s suggestions and sign up for an offer, PFMs have generated a lead for that financial company and a referral fee is paid in return.  Referral fees in the finance space are especially high, typically upwards of $50/referral.

Conversion Rates

How many people sign up for these offers?  Previously I assumed maybe 1%, and I thought I was being generous.  After all, does anyone really need ANOTHER credit card?!

But at December’s Web2NewYork Meetup, Thrive.com shared some truly remarkable statistics about their conversion rate: about 15% percent of users have taken an offer.  Within their top demographic category, that figure jumps to 25%.

Mint.com reports similar figures: “Users are clicking on presented opportunities 12-15% of the time.” But wait, it gets better!  Thrive said their users often sign up for multiple offers — on average about two.

Wow. I was blown away.

Back of the Envelope Calculations

Financial offers pay $50 per conversion, 15% of users convert, and users sign up for two offers on average. PFMs therefore make $100 from 15% of its users, which means that Mint.com and Thrive.com make $15 per user.

The challenge, then, is clear: rapidly grow the business while keeping the Customer Acquisition Cost (CAC) below $15.  I’m guessing that mainstream press has probably been the most important (and cost-effective) method to gain new users.  I would also wager that customers who find the PFM services via press (and also word-of-mouth referrals) are the most trusting and therefore the best converting users.

The PFMs also use other marketing channels to find customers, such as search engine marketing.  Thrive’s ex-CMO, for example was able to bring “SEM acquisition cost down from eCPA of over $20 to under $3.”  Of course each marketing channel produces users with differing engagement levels and conversion rates, and that needs to be taken into consideration when trying to calculate the ROI of each channel.

A screenshot of Mint.com recommending a new credit card. (credit: crunchbase.com)

Measuring Success

Mint is the runaway leader with 650,000 registered users.  By my estimation, Mint should have collected close to $10 million revenue in the company’s lifetime (using the figure of $15/user).

Impressive, but not enough.  The company received $18 million in VC funding so clearly expectations are set even higher.  I would expect to see some additional monetization strategies in the future: a premium service?

Thrive, which launched in October 2008, has a much smaller user base.  The company was hesitant to share specific numbers during their presentation, but hinted that they have a low double-digit number of users.  If we conservatively assume 10,000 users, the company has earned about $150,000.

Recurring Revenue

A question for my readers: once a user has taken the recommendations (and the PFM has earned their referral fees) is that the end of the opportunity?  Is this a one-time earning event for the PFM?  Or is there a way for the services to make recurring revenue?

Is there enough rotation among financial service offers that the users’ accounts are never completely optimized and users jump from bank account to bank account following the best rates?  How do the PFM companies think about calculating the lifetime value of a customer?

Aaron @ Mint, Avinash @ Thrive, etc — would love to hear feedback on my analysis and also hear what marketing channels are working well for you.

——————————————–

UPDATE: In February 2009, Thrive was acquired by Tree.com for an undisclosed amount.  Congratulations guys!

Tree.com (Nasdaq:TREE) is the company behind LendingTree and RealEstate.com and was formerly owned by IAC.   Having the financial support and web exposure/brand of a large company like Tree.com should help Thrive grow quickly and compete effectively with its larger competitors.

UPDATE #2:  In March, Silicon Alley Insider did an eerily similar analysis on Mint.com and used some updated figures.  Worth a read.

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I was surprised to see an ad for Xobni on Gmail today.   Xobni (‘inbox’ spelled backwards) is an Outlook plug-in that helps organize a flooded inbox and basically makes Microsoft Outlook into a bearable (and semi-useful?) product.  Why is the company advertising an Outlook plug-in on Gmail?  That’s beyond me…perhaps that’s the beauty of PPC (pay-per-click) advertising — where you (or google) place ads doesn’t matter to the advertiser since only clicks are charged.

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Yodle is also interesting because it’s the classic instance of a startup founded by a young person and transitioned over to ‘real’ management.  Founded as NatPal in 2005 by Nathaniel Stevens (then an undergraduate student at Wharton), Yodle took off.  He was replaced as CEO in 2007 by Court Cunningham, an experienced Harvard MBA and former SVP at DoubleClick.

The company is growing fast: 300%, 400%, 500%, or even 700% depending on which press release you decide to believe.  With $15M in funding, the company is in a race against its competitors to expand quickly across the nation.  They’re hiring aggressively and overwhelming Craigslist with job posts. They already have a presence in 18 major US cities and “will grow the team from 180 to 800 in 18 months.”

What Exactly Does Yodle Do?

Yodle helps small local businesses (think hair salons, florists, car mechanics, and optometrists) advertise effectively online.  Online advertising is too complex and time consuming for the average small business owner to deal with..or so goes the thinking.  By combining an expertise of SEO, SEM, and website design, Yodle seeks to generate leads, driving new customers to small business.

To achieve this, the company first sets up a doppelganger of the client’s existing website.  For example, the TheBodyKlinik’s main website is www.thebodyklinic.com.  Yodle set up a separate mirror site for the business at www.thebodyklinic.net.  Made from a template designed to optimize conversion rates, the page is also extremely SEO-friendly.  This helps the page rank highly on google search results (although some maintain that duplicating a site’s content will cause both to be dinged by google).  This sometimes also results in two similar client webpages: exhibit a and exhibit b.

Second, the company sets up a separate phone number for tracking purposes: notice that the phone number on the .net site is different than the .com site.  This allows Yodle to gather statistics about incoming calls and monitor the ROI.

Third, Yodle purchases online search ads to drive traffic to the mirror site and hopefully drive phone calls too.  Yodle uses predictive modeling to set expectations for how many calls will be generated by a given level of advertising spend.

Additional Services

Yodle isn’t just another SEM/SEO agency.  The company differentiates itself with innovative tools that help optimize a small business’ interactions with prospective customers.  All calls to the tracking phone number are recorded to help the business owner gauge whether staff are dealing with customers appropriately or whether more training is needed.  Yodle also offers consulting services to help plan in-house promotions and address call center staffing issues.

Competition

Yodle’s competition comes in many forms.  First, there are direct competitors like ReachLocal, Webvisible, Weblistic and MerchantCircle.  Reachlocal has $65M in funding versus Yodle’s $15M and both have focused on quickly building out a large and aggressive salesforce. Webvisible has $17M, and Merchant Circle has $14 million in funding.

Companies like Yelp and CitySearch also compete with Yodle.  These business listing/review sites often dominate the search results (SERP) for a business name, and attempt to sell to small businesses ‘premium listings’ designed to drive more customers.

Additionally, each specific vertical seems to have its own set of specialized lead generation companies or directory listings which help small businesses dominate SERPs.  Doctors, for example, can use the service ZocDoc.com to help bring in new patients.

Company Performance

So how is Yodle performing?  Well, if we trust Yodle’s job listings, they currently serve 4,000 customers.  The average spend from each client is pegged around $900 per month but let’s round that to $1,000.  Therefore, Yodle should be doing $4M in monthly revenue and close to $50M in annual revenue.  Much of this spending flows right through Yodle and into Google AdWords.

Googling “Local Internet Marketing by Yodle,” the phrase that appears at the bottom of every site designed by Yodle returns only 200 businesses…let’s hope there’s a flaw to this method of gauging the number of Yodle clients!  Yodle has most recently turned their focus to franchises, which could be a real cash cow for the company.

Potential Acquirers

Yodle’s heavy reliance on search ads immediately rules out yahoo/google/microsoft due to the conflict of interest (remember, when Google bought Doubleclick, Google sold DoubleClick’s SEM division to Publicis due to that conflict of interest).

The big advertising conglomerates (WPP, Omnicom, Publicis, Interpublic) certainly would be interested in Yodle, but Yodle’s focus on local small business advertising doesn’t match the ad conglomerate’s focus on bigger nationwide clients.

Certainly Idearc would be interested.  Idearc is the publisher of the Yellow Pages, White Pages and also Superpages.com, Switchboard.com and LocalSearch.com.  Yodle is eating their lunch.  The problem?  Idearc is currently only worth $52M and couldn’t afford Yodle.

Additional Questions

1) Yodle serves small local businesses by helping them beat their competition to the top of internet search result pages (both organic and paid results).  But Yodle cannot in good faith serve two local competing businesses in the same geographic area.  So what are the competitive limitations on clients?  Can Yodle only serve a single florist across all of NYC?  Or within a specific NYC neighborhood?

2) What is the culture like of a company which grew from a handful of employees to 180 employees in a very short time?  Is there a corporate culture?  Any semblance of stability?

3) Why does the company have no news?  Doesn’t the company have a PR department!?  Shouldn’t they be complimenting their outbound sales team with a marketing/press team to get articles written about how local businesses are embracing new online technologies?  Yodle should help attract customers by getting the Yodle name into every small newspaper across the country!

Interview with the founder: http://www.youtube.com/watch?v=zfJiv7XetDA

Any comments, insights or additional business analysis would be greatly appreciated!

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