Prepared for Purdue Entrepreneurship
Certificate Program
Team Analysis & Discussion
Spring
2007 © Hank Feeser
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HOTorNOT.com
Case Study: Mixing free and premium services
written
by Nisan Gabbay on November 12th, 2006
When HOTorNOT first swept onto the scene a few years ago, not many people
thought it would amount to anything more than a short-term fad. Even today, not
many people recognize that HOTorNOT has a very profitable casual dating service
consisting of 500,000 – 600,000 active users. HOTorNOT is making somewhere
between $5M - $10M per year in revenue with very little cost since they don’t
spend any money on marketing.
I felt HOTorNOT would make for an
interesting case study because of how they blend a free, viral service with a
premium pay service. This is typically a difficult transition to pull off and
HOTorNOT offers some great lessons learned.
Interviews conducted: James Hong,
co-founder and CEO
Key
success factors
Low cost of customer acquisition by
tapping into basic human psychological need
HOTorNOT was probably one of the
most viral product launches in Internet history. It seemed to catch everyone’s
attention during October 2000. I personally remember hearing about it through
friends and via e-mail exchanges. You might call ranking people’s photos on a
one to ten “hotness” scale a gimmick, but I don’t think HOTorNOT would have
lasted as long as it has if it wasn’t serving some basic human psychological
needs around social validation, ego, and voyeurism.
For people who post their photo for
ranking on Hotonot, they get to find out how they are viewed by the opposite
sex and possibly gain validation and ego stroking. There are some girls on
HOTorNOT who clearly knew they were attractive before posting to HOTorNOT, but
getting 2,000 votes that say you are a 9.5 is a tremendous ego boost. I have to
say that I felt pretty good about myself after pulling in an 8.8 ranking.
(Note: conspiracy theorists might want to question the validity of the voting
algorithms.) HOTorNOT.com was originally launched as “Am I Hot or Not” – a
fundamental question that every young person asks themselves at some point.
This desire to know how people of the opposite sex view you is what drove
people to post their photo. With many photos up on the site available for
rating, people can enjoy the voyeuristic aspect of checking people out.
Thus HOTorNOT was able to fill some
pretty basic human needs in a way that no other online service had before. This
would later translate into financial success once HOTorNOT offered its premium
dating service because their cost of customer acquisition was so low - zero.
The largest cost associated with operating a traditional online dating site is
the cost of customer acquisition, which even for successful sites can be 50%
(or more) of revenue. Because HOTorNOT attracted users with its free rating
service, it could offer its dating service for the low price point of $6 per
month. This is a price that traditional dating sites can’t compete with because
it generally takes $15-$30 to acquire a subscriber for a traditional dating
service.
Generated mainstream PR to build
brand
HOTorNOT was a dream PR story: two
young grad school students wanting to settle an argument, site spreads like
wild fire by word of mouth, edgy service with fun and audacious branding, etc.
Immediately following its launch and subsequent viral spread, HOTorNOT was
featured in a number of mainstream media pieces as a human interest story. The
HOTorNOT founders were very cognizant that PR would be very important to their
ultimate success and made it a top priority to respond to all PR requests.
Given how easy the service would be to imitate by competitors, HOTorNOT needed
to establish its brand quickly and PR would play a vital role. HOTorNOT’s
extensive PR coverage helped to establish its brand in the mind of consumers
and drove even more traffic to the site.
Created a product that perfectly fit
the need of its target audience (casual dater)
HOTorNOT found a way to monetize its
enormous amount of unintended traffic by brokering the introduction of two
strangers who found each other hot (called a “double-match”). HOTorNOT built a
service that caters to the user unwilling to invest a lot of time or money into
a dating site. Pay $30 a month to troll through profiles? Hell no! Pay $6 to
contact a hot girl who already said she thinks I’m hot too? Probably. Here are
some of the product decisions that make HOTorNOT a great service for its target
audience:
• No lengthy profiles to fill-out or
read. All that a user needs to do to get started is upload a picture – and
that’s what other users primarily see. No detailed questionnaire that forces
you to be witty or introspective. Everyone is on equal footing – your best
picture.
• No up-front subscription fee. HOTorNOT has an almost pay for performance
business model. It’s free to post and browse the site. However, if you’d like
to contact someone when a “double-match” has been achieved (a lead if you will)
then you are required to pay a reasonable price ($6) for that introduction.
• No e-mail exchange before a connection has been established. Given that
casual daters don’t want to get bogged down in writing and responding to
e-mails, HOTorNOT does not allow e-mail communication between users unless both
parties have agreed to begin communication through the double match feature.
Built user trust and community -
generating positive word of mouth
The HOTorNOT founders (James and
Jim) have always treated HOTorNOT as a community and have made many decisions
that have traded off financial value for building community and trust with
users. James and Jim wanted to build a service that offered good value for
users and have made product decisions accordingly. Given that HOTorNOT is so
reliant on word of mouth for customer acquisition, they need happy customers
more so than traditional dating sites. This focus on customer satisfaction has
yielded user satisfaction ratings of 9 out of 10 on internally conducted
surveys.
Some specific examples for how
HOTorNOT has built user trust and community:
• They have not raised the price
above the $6 per month subscription fee since the service launched 5 years ago.
HOTorNOT has done price elasticity studies that indicate they could charge
more, but have chosen not to.
• HOTorNOT sends its customers a warning e-mail that their subscription will be
renewed for another month before the customer’s credit card is charged – making
it easy for customers to cancel. It is probably one of the only dating
subscription services to do so.
• HOTorNOT’s double match system ensures that users don’t waste time or money
contacting someone unless minimal physical attraction has at least been
confirmed between the two parties.
• HOTorNOT has created a community of 2,000+ volunteer moderators to review
pictures and profiles before they are posted to the site. This engages the
power users in monitoring and participating in the well being of the community.
Launch
strategy
When HOTorNOT was started in October
2000, the founders never intended to create a business, thus there was no
planned launch strategy. They started by e-mailing their friends, 40 friends to
be exact, and it just grew from there. HOTorNOT integrated the MeetMe service
into the site about 3 months after launch and started charging the $6
subscription fee 2 months later. Thus, HOTorNOT achieved viral customer
adoption and proved its business model in 6 months from launch. James credits
HOTorNOT’s initial traction to the fact it was something new and edgy. It
caught people’s attention as either a joke or something fun to play with and
kill time – sort of like people watching in the real world. The game-type
element of quickly rating people’s photos and seeing how your scoring matched
popular opinion was addicting for users. All in all, it was a site that everyone
could understand and gain some amusement from upon initial glance. This was
enough motivation for people to want tell friends about it.
Once HOTorNOT generated its initial
buzz, mainstream press coverage contributed greatly to driving more traffic to
the site. As mentioned above, James placed great emphasis on responding to PR
inquiries to create competitive advantage. At no time did HOTorNOT spend any
money on marketing.
Exit
analysis
One month after James and Jim
launched HOTorNOT they had an acquisition offer to be bought for $3-5M. Not a
bad result for a couple months of work. However, they rejected the offer for
several reasons. For one, they thought they could launch the premium dating
service and make more money that way. Since the dating service had yet to be
launched, this was a big gamble. Luckily, it paid off and Jim and James have
been paid the $5M several times over. They were also fearful that the acquirer
would not run the service the way they intended – as a community.
Jim and James also did not take
venture capital money, but for a different reason than most founders. Given the
timing of the Internet bust in early 2001, they were skeptical of the
intentions of any VC trying to invest in the Internet at that time. Given the
nosedive taken by the online advertising market and the lack of exits in the
space, they didn’t think that HOTorNOT made for a good VC investment. Given
market conditions, they felt any VC that would want to invest in HOTorNOT at
that point in time was crazy, and they wouldn’t want someone like that on their
board. As it turned out, HOTorNOT became so successful on its own, that it did
not need any outside investment as it became cash flow positive in under one
year.
So what is HOTorNOT worth today? By generating
$5M worth of profit per year and applying a low 5X EBITDA valuation multiple,
HOTorNOT would be valued at $25M. This seems like a fair number to me.
According to Comscore, the HOTorNOT Meet Me service has close to 1M UVs per
month in the US and James claims it has approximately 500,000 active users. An
active, engaged community of this size has potential to be leveraged for
launching other Internet services as well. However, given the relative lack of
potential acquirers in the US online dating market, its hard to see HOTorNOT
being acquired for the
15-20X EBITDA or 5-10X revenue being paid for other online communities and
content sites.
Food
for thought
My big lesson learned from HOTorNOT
was the clever way in which they created a pay service while still maintaining
the viral nature of the free service. One of the toughest transitions for an
Internet business is to transition from a free service to a pay service. Adding
a pay component to a service will often kill the viral nature of the free service,
because users no longer receive value without paying. Compromising the free
service is a slippery slope because you may lose the ability to acquire users
at low cost.
The key to mixing the free and
premium services is to be sure that they are two separate, self-contained
processes such that the user receives differentiated benefit from each. In the
case of HOTorNOT, they never changed the initial free service of rating photos.
Anyone who comes to the site can easily post a photo to be rated or rate photos
themselves. A user can benefit from this service without ever being asked for
payment. The casual dating service is placed on top of this service, but does
not interfere with the original value proposition of the free service. The
premium service has a completely different value proposition from the free
service, one based on the promise of communicating with someone, as opposed to
the entertainment or ego gratification value prop of the free service. Users
are willing to pay for the premium service because it is clear that they are
getting a different benefit from the free service. Furthermore, by never
tampering with the free service, HOTorNOT enjoys the continued benefit of zero
marketing cost for its pay dating service. While other dating sites have high
customer acquisition costs, HOTorNOT has none, allowing them to charge a much
lower price. Up until recently, this created a sustainable competitive
advantage as being the low price leader in the casual dating market.
Another lesson learned is how a cash
cow business can be a double-edged sword. James pointed out to me that given
how successful the business had become in generating cash flow, the founders
became more conservative in terms of changing the product or experimenting with
new ideas. This is somewhat counter intuitive given that the founders now had
the money to invest in the business. However, any product change had the
potential to negatively impact the significant cash flow being generated, so it
was hard to justify adjustments. Could HOTorNOT have grown much larger or
changed directions if it had not been run as a cash cow business? After all, it
was one of the most successful user generated content sites with a demographic
proven to demonstrate viral behavior. Might it have successfully expanded the
scope of its services with a more aggressive growth strategy? Possibly, but
it’s hard to say whether they would have been successful. Relying on ad revenue
was a hard business model from 2000 – 2004. In any case, it’s hard to argue
with maintaining a strategy that earns millions in profits with minimal
management overhead. HOTorNOT is currently exploring new services and a change
to its business model – expect to see some innovation in the future.
Reference
Articles / Further Reading
“’Am I Hot or Not?’ Is Red Hot”, Wired News, November 27, 2000
This article from Wired has some good stats on HOTorNOT’s initial traffic (3M
page views per day after 6 weeks, 7M per day on weekends). The author claims
the success of the site is due to a simple interface and appeals to people’s
vanity.
“Facing the World With Egos
Exposed,” New York Times, June 2004
This article discusses the psychological reasons why people use rating sites
like HOTorNOT.
Hot or Not
From Wikipedia, the free encyclopedia
Hot or Not is a website that
allows users to rate the attractiveness of photos
submitted voluntarily by others. Photos are approved by volunteer moderators,
who strive to keep the site "fun, clean, and real."
Founded in October 2000 by two Silicon Valley-based
engineers, James Hong and Jim Young, the site was originally called Am I Hot
or Not, and quickly became very popular. The site allowed people to submit
their pictures, and visitors would rate them on a scale of one (not) to ten
(hot).
Within a week of launching, the site had reached the level of
serving almost two million page views per day. Within a few months, the site
had penetrated the NetNielsen Rating's Top 25 advertising domains, placed
immediately behind CNET and NBCi.
In order to keep up with rising costs, Hong and Young added a matchmaking
component to their website called "Meet Me at Hot or Not", i.e. a
system of range
voting.
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Contents [hide] |
[edit] Imitators
It has
been suggested that this article or section be merged into Rate-me site. (Discuss)
Hot or Not was originally preceded by the popular RateMyFace.com and RateMyBody.com which
were launched a year earlier in the summer of 1999, although Hot or Not
would eventually become a more popular website. Since then, Hot or Not has
spawned many imitators. Imitators have even taken the concept as far as rating
characters in Massively Multiplayer Online Role-Playing Games or MMORPGs (Sexy Sprite or Fugly
Fright?!), Network Diagrams (RateMyNetworkDiagram.com), the
female breast (GetYourBoobsOut.com), the
male genitalia (www.ratemycock.com), MySpace profiles (MySpaceRater.com),
douchebags (douchebagalert.com), cars (RespectMyRide.com), and
unsigned bands (RateMyBand.co.uk). The concept always remains the
same, but the subject matter varies greatly. One refined idea is (Kiss or Diss (TM),
Kiss or Diss me, why doncha? (TM))which offers a more modern Web
2.0/AJAX experience where users can vote on submitted videos of people dancing,
singing, etc., as opposed to just a photo. The site is currently powered using
YouTube videos.
A new site/idea that seems related to HotOrNot is Favorite Part.com. This
concept is slightly different giving any visitor the ability to select any
pixel of a photo to designate it as their favorite. After visiting or by
viewing the results, the site dynamically creates a heat map of each and every
click. This is something considering as of September 28th, 2006 the Paris
Hilton photo had over 1,500 clicks. Favorite Part also differs slightly by
allowing any user to anonymously comment on any photo.
The latest craze to hot or not style websites is in pet picture
rating sites. A lot of the sites are the same and offer you the choice to post
up pictures of your pets for others to rate. There are however a few more
tailored websites like petsinclothes.com, which is aimed at the pet
fashion category. petsinclothes.com allows the user to upload
pictures of their dressed pets for others to rate in the standard 1 - 10 scale.
There is also 'MeorMyPet.com' which allows the owner to be
compared to their pet. They are then given a percentage rating to find out whom
is the more attractive of the two.
The most recent addition to Internet user ranking is once again Kiss or Diss (TM),
Kiss or Diss me, why doncha? (TM))which offers a more modern Web
2.0/AJAX experience where users can vote on submitted videos of people dancing,
singing, etc., as opposed to just photos. It also allows for voting to be
embedded in blogs, MySpace, etc. Other recent releases are the Vote 4 CamJam
Network; which includes vote4them.com,
vote4girls.com, vote4him.com & vote4boys.com. Five
domain names all pointing to one site for users to upload their pics, chat with
others, email and IM each other, and spend hours looking at others profiles.
Another new site, The Snub Club (SnubClub.com), allows
you to vote on people's images in order to allow access into the member's only
side of the site. It was created to give a place to meet others without having
to sort through members who are old or ugly. Passions.com is a
brand new rating site that is evolving into a fully functional social
networking site. Passsions is different because it utilizes the new AJAX
technology available to web designers. This allows the site to load much
quicker and is much more user friendly. Yet another photo rating website has
sprung up focused around MySpace - dubbed (Scale Me). Scale
Me gives its users code which they can place in their MySpace profile or post
to friends.
[edit] Rating distribution
A comparison of the original hotornot.com and others, such as the
German hotornot.de,
revealed a large difference in average ratings between the sites. The most
likely cause of this difference is that the algorithm used to
keep track of scores on hotornot.com contains a bias term to adjust ratings to a 10 point scale, with
most pictures rated 7 or above. The site FAQ mentions that statistically people
tend to rate from 1 to 5 and the rate algorithm adjusts the results to scale to
10. It appears the other sites do not use such a 'normalization' method on
their ratings and thus most rarely get over 7.
[edit] See also
[edit] External links
Kiss or Diss: Rate and Share people's
amatuer videos with fun voting
How hot are you? Have your photo
rated.
Tribute to hot or not 'Me or My Pet'
Voten.de - German flirt and rating
community