The business model of internet companies is only one, on one hand, to acquire users, on the other hand, to monetize users. The difference in market value per user among different internet companies is actually due to the difference in the difficulty of acquiring and retaining users, the different ceiling of user scale, and the different monetization capabilities when monetizing users.
◼ In user acquisition, according to the stratification of user demand on the Internet, the ways to acquire users are divided into: communication, social, and content.
The user demand for communication is homogeneous, with the widest user base and the strongest network effect, resulting in the lowest customer acquisition and retention costs; social is a differentiated user demand, resulting in a limited user base, but also having a certain network effect, so the customer acquisition and retention costs are generally higher than communication, but usually lower than content; content demand is the most diverse, generally shared by scale, with the weakest network effect, and generally higher customer acquisition and retention costs. However, mature internet companies show different characteristics that need attention.
In user monetization, the key variables that determine the monetization capability are the user's effective duration, the frequency of interaction, the length of the user's lifecycle, the distance of the business model from the transaction end, and the level of service. iQiyi shows relatively poor financial characteristics because of its short effective usage duration and limited monetization space, as well as high customer acquisition costs. Long-lifecycle games and short-lifecycle games are different businesses, with long-lifecycle games having excellent business attributes and competitive barriers, making them the best business in internet monetization models. The internet demand closest to the transaction end is payment, which leads to annual revenue per user for payment far exceeding that of e-commerce and games, resulting in greater performance elasticity. Tencent's monetization ability change has been obscured by non-operating factors in the past, but will gradually become apparent in the future.
Finally, the unique development history of the US retail industry has led us to discover that consumer upgrades and brand upgrades are only products of specific historical stages, and the return to rational consumption is a more certain trend in the context of slowing economic growth. Low-cost commodity retailers have longer development logic, and Pinduoduo's GMV growth has strong certainty.
Judge the company's business development and reasonable valuation based on the changes in user acquisition and monetization capabilities.
When researching traditional industry companies, investors usually analyze them from the perspective of the balance sheet, such as judging performance changes through capacity expansion, judging competitive advantages through asset attributes, and judging industry cycles through inventory situations, and so on.
◼ However, the tangible assets of internet companies, such as office buildings and servers, are homogeneous. Analyzing these assets cannot determine the differences between companies or explore where a company's competitive advantages lie. In fact, the valuation of internet companies contains a large number of intangible assets, which are not reflected on the balance sheet. This makes it difficult for traditional analysis methods to be applicable to internet companies.
◼ Our analysis framework starts with the following question: why, as internet companies with homogeneous tangible assets, do the market values per user of different internet companies vary so much?
Customer acquisition and retention capabilities hierarchy
Communication: necessary, high frequency, extensive
Social: sense of identity, not extensive
Content
➢ The higher up, the weaker the network effect and the lower the monopoly, theoretically, the higher the customer acquisition and retention costs
➢ It is easier to expand from the bottom up, but difficult to expand from the top down
➢ Changes in user demand are nightmares for internet companies
Hierarchy of monetization capabilities of internet companies: What factors determine monetization capabilities
Revenue = Number of users × ARPU
◼ What factors determine monetization capabilities: the longer the user's effective duration, the stronger the monetization capability; the higher the frequency of interaction, the stronger the monetization capability; the longer the user's lifecycle, the stronger the monetization capability; the closer the business model is to the transaction end, the stronger the monetization capability; the more levels of service, the stronger the monetization capability
User's effective usage duration
◼ The longer the user is exposed to an app, the more monetization opportunities the app can achieve, such as exposing more advertising inventory, purchasing more game props, and providing more opportunities for value-added services, and so on.
The monetization capability of subscription and reward is related to user duration and interaction frequency. Bilibili is considered to have strong user stickiness in the market, but from the perspective of interaction frequency, it is like the two sides of the same coin.
◼ Rewarding and subscribing are the same monetization model, and the difficulty of content production determines the conversion of the two monetization methods:
◼ The higher the difficulty of content production, the higher the payment rate, and vice versa
Why is gaming a good business: Business characteristics of internet companies
Long-lifecycle games and short-lifecycle games are two different businesses
• Long cycle: less R&D investment, deep IP penetration, high user stickiness, low operational failure rate, biased towards consumer goods, and can increase prices, strong cash flow, the best business in the internet field → ARPU value continues to increase
• Short cycle: continuous R&D investment and marketing expenses → the success rate of new games is difficult to guarantee → reskinning and washing users → the lifecycle cannot be extended → project-based → vicious cycle
E-commerce is the real high-frequency application
How to value unprofitable internet companies?
It depends on the business itself. First, find out why it is not profitable, mainly due to high-speed user growth and high customer acquisition costs;
Second, analyze whether the customer acquisition costs can be reduced (reducing the proportion of revenue), the current user growth has slowed down, and customer acquisition costs will not increase rapidly, but the company's revenue will increase rapidly due to the increase in per user spending, and the customer acquisition cost ratio will be rapidly diluted. Once it starts to make a profit, it will show huge profit elasticity, so the short-term PE ratio is meaningless;
Then, study the profit-making ability of the community business itself. E-commerce and offline retail companies generally obtain a net profit margin of 2-3% based on GMV.
We can use this as a starting point for valuation, and in the early stages, we can roughly judge based on P/GMV;
Although periodic losses in financial reports do not affect long-term business strategic planning, under the guidance of the monetization methods of community culture, they can work more closely together to create an effective and positive community environment.
The following are some key influences of the community on team dynamics:
Building trust: The cornerstone of trust. By understanding and respecting the feelings of members, a stronger trust relationship can be established among members. Trust is a prerequisite for collaboration and teamwork, laying the foundation for it.
Promoting communication: Improving the effectiveness of communication between team members. When team members feel that their feelings are understood and respected, they are more willing to share information, opinions, and feedback. This open communication atmosphere promotes deeper understanding and collaboration.
Enhancing cohesion: Encouraging team members to better understand each other and work together when facing challenges. This cohesion is not only based on tasks but also includes emotional connections established within the team. Empathy makes team members more willing to collaborate for common goals.
Reducing conflicts: Helping to alleviate potential conflicts and tense atmospheres. By understanding different viewpoints and feelings, team members are more likely to coordinate their needs and expectations, reducing the possibility of conflicts.
Improving creativity and innovation: The environment stimulates members' creativity. When people feel understood and encouraged, they are more likely to share unique ideas and propose innovative solutions. This is crucial for innovation when facing complex problems.
Supportive leadership: Leaders can better understand the needs of members and provide appropriate support. This leadership style inspires employees' enthusiasm and increases their trust in leaders.
Building a positive culture: Helping to shape a positive culture where care, support, and understanding are core values. Such a culture helps attract and retain excellent team members and improve the performance of the entire team.
Good conflict is essential in the community. From enhancing communication to promoting innovation and resolving conflicts, it becomes a catalyst for creating resilient and successful communities. By recognizing and accepting as fundamental elements, its full potential can be unleashed, and cultural success can be achieved.
User growth below expectations
• User assets are the core assets of internet companies, determining the potential market value space and monetization height of internet companies. Currently, the user scale of most internet companies has reached a growth bottleneck, and the user volume of some companies is still in the growth stage. The user growth rate is an important valuation reference for internet companies, and if the growth is below expectations, it will have a dual impact on performance and valuation.