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Why Some Startups Stumble And Others Succeed: User Generated Quid Pro Quo

The harsh truth that tech and “Web 2.0” industry pundits don’t like to talk about is that the vast majority of these new “Web 2.0” companies are failing. New companies are starting, mashing up, trying to innovate, but none are close to approaching the success of MySpace, Digg and YouTube and there’s a very good reason for that:

They don’t “pay” their users enough.

Now “pay” is a relative term since no users of MySpace, YouTube or Digg (more on this) are being paid cold, hard cash to publish their content on these sites. MySpace is a social networking site, YouTube is a video site, and Digg is a cool news site, but they’re all based on user-generated content and without this they would not exist; that’s what binds them together. Their popularity would never have came if it hadn’t been for the first few users to take time out of their days and write/publish/upload content to MySpace, YouTube, or Digg. User-generated content is their lifeblood.

So what could possibly interest random Internet folk so much that they would stop what they’re doing and drop content onto these three sites? Well it’s the quid pro quo my friend, it’s what these sites give back to the user. If you take a look at the most successful “Web 2.0” companies and websites out right now, you can basically pick the ones out that will be successful and which ones will not by looking at the quid pro quo ratio, that is, how much bang do these sites give back to the end user as a Thank You for publishing content to the sites. If you spend X units of time/creativity/effort do you get 3X units of pleasure/entertainment/utility in return, or do you only get 1.2X or .6X? That multiplier is the quantifiable way to figure out if your user-generated content site will succeed or fail.

The Economics Of Quid Pro Quo

Before we can equate the multiplier, we must first understand what we are multiplying. The basis of this theory is grounded in utilitarianism which is “a theory of ethics that prescribes the quantitative maximization of good consequences for a population”, or, the counting of pleasure or pain as individual units someone can possess. Essentially if you consider watching TV is good but going to the movies is better, the pleasure found in going to the movies is not a different type of pleasure from TV watching, but rather more units of that pleasure. If X is a pleasure unit, then TV watching could be 10X whereas seeing a movie could be 20X. Eating a hot dog could be 3X and watching your team win the World Series could be 5,000X. The X unit is unchanging, but the quantity of pleasure units varies depending on the activity.

Now it could be said that one’s goal in life would be to pursue activities which maximized the X multiplier, that is, generated the most pleasure or utility. If you have your choice of driving a free Honda Civic vs. driving a free Ferrari 612 Scaglietti, most people would choose the Ferrari. If you think of that decision in terms of its utility, then you would be choosing the Ferrari because it is maximizing the amount of pleasure units, as that would be your ultimate goal.

Utility Theory As Applied To User Generated Content Sites

Now back to the article. Previously I said that the most successful sites (based on user generated content) were the ones that gave the most bang for the buck, or, the most pleasure/utility back to the user. If I put in X units of effort and a site gives me back 2X units of entertainment, that’s good. If I put in X units of effort and get back 20X units of entertainment, that’s much better. On the flip side, if I put in X units of effort and get back 1/8th X units of entertainment, that means the X units of effort I initially put in were a complete waste of time, or, the site took my content and gave me squat in return.

I truly believe that the success of a site based on user generated content revolves around this pleasure multiplier, and sites that are successful have the highest multipliers. Let’s analyze MySpace, YouTube, and Digg in terms of the effort outlaid vs. the pleasure received:

  • MySpace
    You create a profile and have to give only minimal information about yourself to start. In return you have the chance to browse millions of random people’s profiles, find friends you haven’t talked to in years, view funny pictures and stories from complete strangers, and possibly meet someone you might spend the rest of your life with. 1X units of effort with a 50X+ unit return.
  • YouTube
    You don’t need to create an account or do anything special to view movies, but if you want you can record a video of yourself and upload it. In return you can spend hours watching people lip sync to the Backstreet Boys or see puppies play with kittens. If you do create an account and upload a video, then in return you could feel like a minor celebrity when thousands subscribe or watch your videos. No account: 0X units of effort with 20X+ unit return. With uploaded video: 5X units of effort with 40X+ unit return.
  • Digg
    You don’t need to create an account to just find cool stories, but if you do create an account you can actively vote on those stories as well as post new ones. The return is that you are provided with the top tech stories of the day, or if you write a great article and post it to Digg, your site could get tens of thousands of users in just a few hours. No account: 0X units of effort with 10X+ unit return. With account and uploaded story Dugg to frontpage: 5-10X units of effort (took effort to write the story) with 50X+ unit return.

Obviously these multipliers aren’t set in stone, but you can easily see that these three sites ask very little of the user, but in return give them a lot of entertainment or utility back. A ton of bang for the buck = people who tell all their friends and return every day.

Now let’s go a site that isn’t on the level of these three and try to determine the utility it is providing users. Is it asking too much of users? Are they not giving back enough in return? Both?

  • Squidoo
    You signup for an account and create a lens where you write content on a specific topic, you can create multiple lenses. In return, if your content is good enough you could earn about $30 but the vast majority of lens creators make less than few bucks per month. 5-10X units of effort (writing content for your lens) with a 8-15X unit return (a couple bucks). Verdict? Not worth the effort.

As you can see, Squidoo asks a lot from its users, but in return doesn’t give back enough to make it worthwhile. The delta isn’t large enough to make the initial effort worth the returned pleasure, so fewer people use the site, fewer people recommend it to friends, and so on. I don’t believe Squidoo will be a success based on many factors, but the most telling factor is the low returned value after the high initial effort put in by end users.

The Web 2.0 Factor

This theory is about sites that thrive on user generated content, but it can be applied other places as well. Think about a site you went to once and didn’t come back to, what was your reasoning? It was probably because there wasn’t enough “to the site” to make you want to come back. It didn’t solve a particular need or problem that you were having, or maybe it was just boring. The key to having a high comeback rate is to provide some sort of value to the user that they previously did not have, and that’s the true way of building a successful company.

About Mike Rundle


  1. matthijs says:

    Agree. It’s all about return of investment. And getting people over the initial effort is another thing. Your final example: visiting the squidoo site I spend 30 seconds wondering what a lense is. Or where to find info about lenses. Never heard of it before. Finally I clicked the FAQ, something I usually do only when everything else fails. Then I found out lenses are just articles. Why not call it that. Why confuse me? Making me feel stupid irritates me and most visitors I guess. Not a good way to start.

  2. Devin says:

    Good thoughts but it’s all very relative.. who’s to say my Squidoo units are 50X return and digg only gives 15X? I don’t think you can systematically assign a quantity to any of these sites..

  3. Mike Rundle says:

    Well these multipliers are personal to me, so I have to ask, is your Squidoo multiplier higher? Just because we’re talking about Squidoo here, the problem is that Seth Godin himself said the highest ranked Squidoo lenses only made $30 per month, and that’s with hours and hours of work and updating, linking, etc. So is 5-10 hours of work on a Squidoo lens worth $30, or should it be worth, say, $100 or $200? That’s what I’m getting at… for the Squidoo multiplier to be higher, the person would be making more money for all the hard work they put into their lens.

    Now say you’re young and just started your blog a month ago, and you get on Digg’s frontpage. Who’s to say your excitement is so high that your new Digg multiplier isn’t 100x? Digg provides the opportunity for the multiplier to get much larger, but Squidoo is currently capped because they’re not paying people much at all.

  4. Josh Kenzer says:

    I think we shouldn’t under estimate the amount of effort required. I have submitted many stories to digg and watched painfully as they didn’t get dugg. This has a negative multiplier because I’m disappointed when others don’t agree with me on the story. However, I keep submitting because its basically one or two steps.

    As for my lens page, it drives almost no traffic to my main site. I have to choose between doing regular blog postings or maintenance on the defunct lens. Since both are about equal in terms of effort, I choose to do the blog post.

    Mike, excellent job looking at these social sites from a different angle…have you submitted it to digg?

  5. MBH says:

    Very very insightful interesting article. The multipliers and units of return were a very fresh approach and pushed me back into Economics 101.

    Indeed when Squidooing I also found myself trying to figure out just what “lenses” were for a little longer than I’d like. Maybe it means something in greek that just didn’t quite jump out right away.

    On the flip side… (maybe I’m just getting old) I’m always a little amazed at all of this web 2.0 and socializing stuff. It kinda blows me away that people come forth utilizing the “dump my life out on the web approach” as much as they do. Course I’d be seen as a more private / security minded individual as well though.

    When my colleagues tell me yeah my daughter has a MySpace site and my sons are chatting this that and the other………. I’m like good for you but my kids will be limited on all that stuff.

    Again great article and I’ll have to drop back by and read more.

  6. TagMan says:

    I think you’re comparing apples and oranges. Why are you using cash to measure the utility of Squidoo but other factors for the other sites? Why is Squidoo the only example you chose? Do you have a beef with them? Do you have some other sites you can use as examples where you’re not looking at monetary compensation as the means to “pay” users?

  7. Mike Rundle says:

    TagMan, my analysis is based on the primary incentive for using the service — with Digg it’s traffic, MySpace is meeting people, and Squidoo it’s to earn some money from publishing a lens. I’m comparing what the companies push as the main benefit for the service.

    If you look at my examples, only one uses monetary compension as the form of “payment”, so I’m not sure why you’re so ruffled. My argument is that the benefits of using YouTube and Digg (or other services that have a larger “ROI”) outweigh the benefits of some less popular web services that don’t “pay out” enough.

  8. giorgio says:

    I think your analysis is flawed.

    You state in the beginning that new web 2 startups are failing…


    Then later bring the example of Myspace and such, but please don’t forger that these guys should not be considered startups any longer.

    the real issue would be is I think, WHY have people started using these sites, when there were hardly anyone there? When the utilitarian factor was superlow, because nobody looked at your profile?

    This is the real question IMHO

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