(This is an extended version of an email I wrote to one of the local tech mailing lists here in New York, in response to a developer's question. It seemed generally useful enough that I'm reposting it here.)

A very common design problem in web services project these days is the issue of user search. Most web services now involve pools of data that are far too large to be entirely "browseable", even if we're only talking about finding another user on the service. Very quickly you start to see a specification develop of increasing complexity, involving boolean ("AND/OR") concepts, keywords, and all kinds of other demands targeted at extremely precise results tailored very exactly to the knowledge domain or data set. What's the best way to go about building this user experience?

If you own or manage a small-to-medium-sized business with a somewhat web-savvy customer base, you’ve probably already thought about using Twitter to promote your offerings. I’ve talked with a number of small business owners who started Twitter accounts for their companies but were disappointed with the results. Here’s a few suggestions on how to improve your success with Twitter, and some issues you should consider before putting time into Twittering.

(This is a continuation of my series on understanding and analyzing web service and software businesses. If you'd like to start from the beginning, go to part one, "Core Value Proposition.")

User Acquisition

For a web services business, user acquisition is the "input" to the machine you've built by creating appropriate value proposition for users and monetization for the business. I'm covering acquisition last for a number of reasons:

• Without value for users and monetization, how many users you can acquire is irrelevant
• Acquiring traffic is easy, assuming you can spend money on marketing -- it's converting those leads into revenue that can then drive further traffic acquisition that's difficult

(This is a continuation of my series on understanding and analyzing web service and software businesses. If you'd like to start from the beginning, go to part one, "Core Value Proposition.")

Monetization

If you've created a service that has a compelling value proposition, and delivers on that promise for its end users, you've succeeded at the most difficult part of building a growing online business. Turning it into a profitable online business, however, takes more than simply making users happy. You have to find a way to generate revenues from your users that doesn't unnecessarily compromise that core value proposition.

There are two primary ways of generating revenue from an online service:

• Direct service charges
• Advertising revenue

This is an extension of an earlier post, which covered how one goes about calculating customer lifetime value (CLV). In this series, I'll be examining the key levers you use to maximize your business, seen through the perspective of CLV.

In my previous post around customer value, I reduced the CLV equation down to two key components:

• How much profit you make off each transaction with the customer - i.e. monetization
• How many transactions you get with the average customer - essentially, retention

To transition this a bit more to a customer-centric, rather than monetization-centric, view, your typical business has three key components:

1. The core value proposition to customers - what do they expect to get out of interacting with the company, service or product
2. The monetization of that interaction - how does the company make money off of delivering the core value proposition?
3. Customer acquisition - how does the company find and acquire new customers that find its value proposition compelling?

I'd argue that for most web businesses, it's all about these three components. Everything else is a support function. Any successful business will have to necessarily address all three of these, at least implicitly - you may not have an active acquisition strategy, for example, but that just means you're implicitly depending on word of mouth or another passive method. If you don't have a value proposition, well, that's somewhat more troubling.

I'll cover these each in separate posts. I'm going to start with value proposition, because not only is it the heart of the business, but it's also the one component you can't take a passive approach to, whereas there is at least (some) argument that you can leave the mechanics of acquisition or monetization until after you've solved the central value proposition question.

If IBM opens at zero, it loses 652.95 points. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE and Alcoa combined.

The more I think about this article about the DJIA from The Big Picture, the more it bothers me.

The Dow Jones Industrial Average (DJIA) has always been my least-favorite of the broadly-quoted marked indices, despite being the one that the mainstream media follows most closely. First of all, it's price-weighted -- a relic of the days when the index was calculated by hand rather than computers. If one of the components splits its stock (which should be an entirely inconsequential even from an equity value and market cap perspective), it suddenly has half the weight in the index it did before, simply because it now has half the stock price and twice the shares. Second, the index only has 30 "representative" stocks, and it's not transparent why some companies are included and others are not -- it's not the top 30 largest companies, as some might think.

Now there are number of financial and industrial giants whose stocks have fallen below the $10 minimum that DJIA gives as its guideline for when a component will be replaced. (A $3.50 price for Citigroup means that it has 1/25th the weight of IBM, trading at over $90.) With the financials underweighted in the DJIA but in reality continuing to drag down the markets, the DJIA is now going to increasingly outperform the broad market... and the press will likely continue to report the "Dow" as the gospel for the state of the market until they either focus on this situation, or the index is corrected and fallen angels like Citigroup and GM are kicked out to the curb.

Customer Lifetime Value (CLV) is a key concept for any business, but it's especially important for Internet sites where there is a daily decision to be made about how much to pay for user acquisition and at what point advertising becomes too expensive to be profitable. Seth Godin made the very valid point earlier this month that online, the idea of an "advertising budget" is nonsensical: either an ad campaign produces positive ROI by creating customer value that exceeds the cost of customer acquisitions, and you run that campaign until the cows come home, or it doesn't and you don't run it at all.

Crucial to that concept is coming up with some kind of metric for what a customer is worth to you. The basic concept is that the average acquired customer will make a certain number of purchases (or view a certain number of ad-supported pages) before they leave due to attrition or competition. By figuring out how much profit a user will generate, we can estimate how much we should be paying to acquire them.

As long as the mathematical analysis of the risk of ruin lies beyond the understanding of the CEOs, the money managing organizations can stay competitive by employing their latest version of a return-boosting Martingale, without admitting to themselves or to others that they have been peer-pressured into the financial equivalent of selling their soul to the Devil.

-- Semyon Dukach, The real cause of the financial crisis, and the real solution -- an MIT Blackjack Team perspective

In the bond industry, they have a saying: "YBG, IBG" -- You'll be gone, I'll be gone. Remuneration and favoring of short-term performance will always encourage investors to pursue low-risk, high-cost bets in the market. It reminds me of all the funds out there with side-pocket vehicles for things like earthquake insurance. In 9 out of ten years, they are adding a healthy bit of "alpha" to their perceived returns. But in that 10th year, look out.

Specifically, what if The New York Times goes out of business — like, this May?

The Atlantic has a worthwhile article pondering the (very real) possibility that the NYT print edition might cease to exist by the middle of this year given their current financial situation.

One comment on the article -- it posits the HuffPo as a model for what a new, non-print NYT could be like. I hope that's wrong, given that the HuffPo for all its attention captured less than half a million dollars in revenue last year (and could make half that this year, given the lack of an election and a declining ad market.) Sure, the Times reaches 20 million online per day versus the HuffPo's 8 million or so per month, but even a multiple of say 10x the uniques isn't going to generate enough revenue to support their operation.

The letter above arrived in my mailbox this afternoon from AIG's Private Client Group... sometimes you just can't make this stuff up.