A key ingredient of many Web 2.0 projects is their ability to collect information from users and then share it in a form that people are willing to pay for. The users themselves, in the course of doing what they want for their own projects, contribute value to the larger system. Creating systems where users want to do this can be difficult, requiring a different kind of analysis then when creating systems that present information to purely consumer users.

Even if you’re in the middle of a project or business that’s been running for years, it may help to start from a blank slate, a tabula rasa, much like zero-based accounting. Take a fresh look at your project, program, or business from the viewpoint of an individual customer. Getting to a user’s perspective and then carefully tracking that single user’s cash inflows and outflows—as well as the value created, captured, or wasted by an individual user’s actions and interactions—is a focusing lens that helps you better appreciate your most valuable, active, and creative contributors. You may want to change your cost structure and model so that you can spot ways to reward your top contributors, incentivize and support collective user value, and monetize this value to make it beneficial for you and your users as quickly as possible.

First, take a look at the cash inflows and outflows of your business from the perspective of a single user. It’s important to evaluate your costs and opportunities when working with new users because there may be a few different kinds to consider and multiple sources of revenue—and costs. (If you haven’t yet started your business, of course, you have an opportunity to plan how you’d like these flows to work.) It’s important to understand the basic value and cost of your users.

Flickr had six key areas in which collective user value was important. You’ll need to evaluate your own project to find the areas where collective user value can help you. Are there ways to maximize the creation of value by changing the relationships or interactions between your online users or even your offline partners? How could the creation of a community or ecosystem affect your business, revenue streams, revenue-sharing, or cost structure? Could collaboration; sharing; and shifts in frequency, loyalty, or multiple revenue streams be a sustainable competitive edge, measurable in individual customer profitability and lifetime value, and aggregated into a customer-facing total enterprise value?

Flickr gave its users instant gratification with easy-access digital photo storage and management, using its huge library of public photos to build a new kind of community. Depending on the nature of your project and business, centering your work on that kind of customer data may not work, but there may still be many ways for you to expand the information that users share with each other. Experiment with making small changes immediately, and, if they work, see whether you can make them a default condition so that your system and business model are continuously and automatically increasing your system and user value.

Network effects are the heart of Web 2.0, underlying all of the strategies presented here. Network effects come in a variety of flavors, however, and applying them well means seeking out and enabling their power.

The first step is to figure out what your offline and online network effects are and how you can measure their value. Where are all the likely and unlikely places and groups that could generate positive network effects—direct, indirect, demand-side, cross-network, and social? Can you identify and track the ones you leverage and capture more effectively than your competitors? (Can you identify possible effects that you haven’t started to capture?)

Once you’ve inventoried the possibilities, it’s time to examine how to combine them. How can you multiply and compound your online network effects, creating increasing returns, using powerful dynamic pricing demand-side effects, and developing n-sided cross-network effects? Free or highly subsidized services are often a key for such multiplication.

The more systematically you examine the influence of network effects on your project or business, the more opportunities you will find for creating and capturing both online and offline network effects. Because positive network effects grow exponentially, combining more than one type leads to multiplicative outcomes, not just simple incremental value-added.

Google’s search-engine story demonstrated the hair-raising twists and turns in a highly fluid, complex, and time-sensitive competitive race. In the early race between Google and Overture/GoTo and Excite, having the right combination of network-effects strategies and monetization meant that Google could overcome its competitors’ early lead.

However, in the Google advertising platform, the network effects helped many more players than Google. There have been a multitude of unexpected winners—all the small- and medium-size businesses, first-time advertisers, and online storefronts as well as bloggers—that became part of the fast-growing online advertising business because of its stellar returns with pay-per-click direct advertising. It isn’t a zero-sum game: positive network effects can grow the entire pie and even proliferate thousands of little pies and tartlets. This makes it possible to redistribute the exponentially increasing value more broadly throughout the Google ecosystem, resulting in a win-win-win-win....

You also need to consider how important network effects are in your efforts to grow your market share and the returns on that expansion. Are you in a close competitive race with a tippy market? Are there early- or late-mover advantages? How much should you be willing to pay for the dominant bandwagon and market share position in a tippy market? Who owns the swing votes in your industry?

Markets with strong network effects also tend to be “winner-take-all” or “winner-take-most.” Even leading companies can be vulnerable to a swing vote of six or seven market-share points. It may seem like the tail wagging the dog, but AOL played a decisive role in the early race between Google and Overture, as well as in the tippy race between Google, Yahoo!, and Microsoft. It’s important to accurately track, assess, and influence the impact and potential role of all players and complementors in close competitive races.

Your company may not resemble Google, but there are lots of tippy markets out there, and you want your business prepared to seize the day—and the market.

While you may think of social networking as a particular kind of Web 2.0 application, social networks permeate and enrich Web 2.0 projects even when they aren’t the central focus. Social networks are a natural conduit for network effects and a key field for community-building that can strengthen your project’s appeal. In addition to being a business of their own, social networks can help you reach a much larger audience and build stronger ties within your project’s user community.

Have you mapped out the online social network structure of your target market? How do you currently identify, help activate, and reward the online connectors, mavens, and salesmen in your system? How about the most active 1 to 3% of uploaders?

Can you systematically identify ways to increase the viral, interactive, or social influence/referral factors of your business, especially during the critical-mass stage of the marketing bell curve? How can you trigger socially influenced viral distribution as well as classic viral marketing and buzz?

Note that answering these questions doesn’t mean you need to build social networking software. You don’t need to know the details of a social network’s structure to make use of it. One extra line at the end of each Hotmail—“Get your private, free email at http://www.hotmail.com“—was the source of its phenomenal success through viral marketing. Infections and innovations with a higher spreading rate reach a larger population more quickly. Hotmail reminds us that free services have a high spreading rate because they reduce the perceived financial and social risks of adoption and the distribution costs to zero.

Social networking software can certainly highlight key issues for your projects. LinkedIn demonstrates how online social networks follow the principles predicated by network power laws and social-marketing bell curves, as they relate to critical mass and the 1 to 3% of users who are active contributors. Unlike the well-established 80/20 Pareto Principle where 80% of results comes from 20% of people, networks like the Web follow an even more extreme power law where 1 to 3% of users can form a critical mass triggering exponential growth.

We see this when a small number of web sites like Yahoo!, MySpace, YouTube, Wikipedia, and Digg generate significant traffic and viral buzz. Only about 1% of the 7.4 million users of Wikipedia add new content or make changes, with 1.8% of that 1% writing about 72% of the articles. According to Bradley Horowitz, Yahoo! vice president and blogger, 1% of the users start a group or thread; 10% interact with the content, remixing and synthesizing it; and 9.2 million Yahoo! group visitors benefit from these creators and synthesizers.

You might have been surprised to learn that 90% of LinkedIn members are first-degree relationship builders and 5% are networkers, with the final 5% being infrequent but highly intense-use contactors—salespeople, recruiters, and one-time hiring managers. But that is why it’s smart to map and analyze your underlying online social network structure in as much detail as LinkedIn did. You too can act on this social network knowledge to develop the social networking aspects of your Web 2.0 business model and better customize your free, basic, and premium features, and incentive pricing to the right target groups in your n-sided market space. Like LinkedIn, you should also ask whether it would be in your interest to vary the services, products, and features you offer to different sides of the two-sided market.

You should also contemplate Facebook’s twist on viral marketing: socially influenced viral distribution. It opened up hypergrowth in the college-age population to a whole new ecosystem of active users, contributors, and developers—not only from startups but from other Web 2.0-savvy marketers, such as Amazon, eBay, and Apple. No doubt, several of your current businesses or services could benefit from this kind of accelerated growth, traffic, and visibility.

Firms build their businesses on competences. Success depends on a business doing better than its competition. Can it produce something unique, something faster, something better, something cheaper? Web 2.0 may change the way you look at these competences, helping you find new ones (offered by other businesses) and letting you share your existing ones.

First, evaluate your strengths and weaknesses. Do you have shareable competences that are strong enough to sell? Do you have or can you build the organizational capability to dynamically mix and match internally and externally sourced competences and resources? Does your firm value dynamic capabilities—flexibly creating, connecting, and discarding competences as needed?

Web 2.0 competence syndication is a new kind of digital open remixing. Mashups and viral distribution of previously hoarded company secret recipes can turn competitors, ecosystem partners, and a broad range of small- and medium-size enterprises into your loyal, revenue-generating, revenue-sharing users, while increasing your economies of scale and global scope. Are you flexible enough to play the competence syndication game—adjusting to different competence syndication roles while figuring out the rules you need to optimize value creation and capture?

Online content syndication is a viral engine for the blogosphere. RSS feeds, hyperlinks, and ubiquitous news aggregators—such as MyYahoo! and Google—enable web syndication to accelerate the transfer of previously inaccessible personal and tacit knowledge and competences into publicly shared, extensively archived, and searchable web documents, images, podcasts, and video.

IBM, Amazon, and Google moved beyond content feeds to more sophisticated techniques for building dynamic capabilities and capturing value from syndicating competences and services. Each demonstrates a different path, one or more of which might fit your needs.

One option might be going global with your successful local business. IBM has applied Web 2.0 strategies of open systems, community-generated software development, and virtual mentoring to catalyze local network effects in software applications and web services that can be marketed and proliferated worldwide.

Alternately, you could syndicate your back-office skills like Amazon did and become a master at multiple service syndication roles. Syndicate and digitize multiple services and competences—not only customer-facing applications but a range of back-office, logistics, and supply-chain capabilities that were previously out of reach for small- and medium-size businesses.

Google’s open APIs have spawned a wide range of consumer and company competence mashups. You’ll probably want to evaluate the pros and cons of opening up your own APIs to third-party developers, as well as outsourced development services for nontech and primarily offline partners in the mashup ecosystem.

Web 2.0 promises great change, but not necessarily the kind of creative destruction that the prophets of the original dot-com boom had expected. Web 2.0 changes the rules of business, but it isn’t a simple disintermediation play aimed at replacing earlier businesses with web-based businesses. New-style click-and-mortar, online-offline network partnerships focus on bridging and building new networks rather than replacing or disrupting the infrastructures of offline companies. There’s plenty of opportunity for connecting innovations in both the online and the offline business worlds, and potential competitors are also potential partners.

There are many opportunities for Web 2.0-style online-offline cooperation besides competition in your relationships with customers, suppliers, competitors, and complementors. Who stands to gain if you bridge rather than disrupt the current cast of players in the industry? Who stands to lose? How can Web 2.0 redefine and transform the scope of business model innovation and collaboration in your industry, and across industries and geographies?

Recombinant innovation is a key component of emerging Web 2.0 businesses. Jajah’s VoIP alliances with major global telecom carriers like Deutsche Telekom (the owner of T-Mobile) take a revenue-sharing approach to create an online-offline, win-win alliance and ecosystem. Apple’s turnaround of the online music industry with the iPod and iTunes is very different from—and more successful than—the Napster and Kazaa approach. And Apple’s latest major push, the iPhone, builds on its success with the music industry to partner with yet another industry, cellular phone service.

You may not be selling a product like the iPhone, but you should consider ways to integrate partners in your business. Web 2.0 technology makes building these connections easier, and you and your partners can benefit mutually from the network effects you create.

Market analysis is all about opportunity—or as Steve Jurvetson, a well-known venture capitalist, once put it, “How high is up?” Choosing a large market space that was growing and structurally attractive to new entrants used to be a given. Of course, online marketing and the rapidly growing penetration of broadband, mobile, and digital devices have made consumer niches and long-tail markets more reachable.

The key questions still remain, though:

It’s usually difficult to guess the market response—how much people will pay for something, and how quickly word will spread about a great product or service. But Web 2.0 business models shine at coming up with that information. You can often replace market analysis with real-time experimentation, do-it-yourself trials, and detailed web analytics. Just as Flickr or Craigslist or Digg did, you can throw something out there to see what works at a relatively low cost while you keep fine-tuning the parts that don’t work. Real market data and performance metrics beat overly optimistic and wildly imaginative predictions any day.

On the key revenue and pricing question of how much people are willing to pay, Web 2.0 business models again offer a significant and somewhat hidden advantage over other approaches. For most offline products, especially consumer goods, there are well-recognized price points, and it is difficult to offer different prices to different customers. For a while, there was the $100 consumer electronics price point and the belief that consumer demand would explode only when you could get your DVD player, color printer, or new and improved technology gadget under that price point.

In Google’s case, it was able to support dynamic pricing and what economists call “perfect price discrimination.” In simpler terms, advertisers are charged almost exactly what they are willing to pay, and every keyword and keyword phrase has its price connected to its pay-per-click. Talk about the fundamentals of differential pricing—personalized pricing, versioning, and group pricing are all available instantaneously, dynamically, and on a one-to-one customer and per-click basis. Even in the relatively more static online subscription Web 2.0 businesses, personalized and individualized pricing, different versions of the service or product offering, as well as group and n-sided market pricing are a snap to implement and even to adjust on the fly.

In some cases, the very low cost of entry and capital investment in getting started with a Web 2.0 business might make pricing a decision to be reviewed and analyzed only after building up a critical mass of 1 to 3% active participants, viral growth, and a sustainable social network structure that has ongoing network effects value. Particularly in cases where there are strong network effects, a competitive race, and a two-sided market, building a critical mass of free customers might be valuable. Doing so will multiply cross-network and indirect effects, and trigger widespread social influence and bandwagon effects, as well as active and passive clickstream contributions to the collective user value of the business.

Web 2.0 business models bring a lot of marketing benefits not only to the entrepreneur team but to the investors. Each of the areas discussed above could either add to or reduce the risk and unpredictability of a new venture. A Web 2.0 business plan marketing section is more likely to be able to show real customers and have a web-analytics data-driven visualization of what works and what doesn’t with a target market. Not surprisingly, this is a quantum leap ahead of the highly creative predictions often seen in business plans.

The market analysis is important, but there’s more going on in the world than just this one plan. Timing is critical in competitive race situations. The plan needs to answer questions such as the following:

These questions lead to a fundamental but nonetheless often difficult question:

This is the meat of the case, the place where it is critical to articulate explicitly that Web 2.0 business models are a different way of thinking about the business and the unit economics. For example, most products and services in the offline world will look at per-unit or per-labor/service hour economics, while most localized or geographically constrained products and services will look at the per-local-market economics. By contrast, the Web 2.0 online business models we looked at all had per-user and usage economics—Netflix had per-individual-subscriber economics; Google had per-unique visitor, per-query, and per-click economics. This kind of user-focused economics is crucial to capturing value in digital and online marketplaces. The increased traffic and the number of users exponentially increases the network value of the system while the costs of digitally available service and distribution remain zero after the fixed, one-time initial upfront cost of development.

If a project can already show hypergrowth comparative numbers and an innovative viral growth and distribution strategy, it probably doesn’t need funding to break even and be profitable, so it’s likely that venture capitalists will be lining up at the door.

Also, if the key drivers of Web 2.0 business models are fundamentally collaborative, you should consider adding a robust section on collaborative analysis to complement the section on competitive analysis. It could include detailed descriptions of how your business model creates, captures, and redistributes value from many of the following sources and linkages:

Understanding the competition is still important, but Web 2.0 adds emphasis on finding win-win collaborations.

Web 2.0 products and services may be digital, but they still need to be carefully defined, and they present challenges for standard analysis. User-generated content is especially difficult to forecast effectively, and first you’ll need to figure out how to integrate it into the fundamentals of your business plan:

There are also some questions you should consider early, rather than leave them to a possible breaking point at which you risk alienating your customers or damaging your business:

These questions may be unfamiliar territory for businesses that are used to creating and directly owning what they sell, but they’re essential for businesses that rely on their users to create content for them. Users need to trust a business before they are willing to donate their energies to it. The need for trust may vary depending on how much users feel they’re giving away, but it’s best to be prepared for these kinds of questions from users and investors.

Thanks to collective user contributions and the importance of open and third-party ecosystems, this section should look quite different from the typical employee and man-hour chart. There are a few key factors that may not be easily estimated:

There will still be a business rollout, but many times Web 2.0 projects don’t even start with a 1.0 release. Companies like Flickr and Google have done very well with open betas, letting thousands or millions of users work with software that’s changing constantly, perhaps even hourly. The iterative nature of Web 2.0 projects gives them incredible flexibility but makes it difficult to create long-term predictions about what the time line and milestones will look like.

Many venture capitalists and experienced investors will say that they “read the résumés first” when deciding whether to look more closely at a business plan or to toss it. Not surprisingly, they pay a lot of attention to what the team knows (relevant experience), who they know (relevant relationships and social networks, from customers to suppliers to partners to talent), and whether they are known (track record for execution and dealing with unexpected challenges).

Arthur Rock, a legendary venture capitalist who funded Apple, Intel, and others, stated, “I invest in people, not ideas.” But what distinguishes a Web 2.0 entrepreneur? Maybe it’s a style or an approach. In Web 2.0 businesses, the winning formula for a founding team seems to be quite different from what it was during the dot-com era. Collaborative skills such as listening, peer interaction, and speedy responsiveness and innovativeness—all dynamic capabilities for orchestrating and catalyzing large online connected and interactive groups—are emerging as higher priorities than the shoot-from-the-hip, take-no-prisoners style that earlier high-tech entrepreneurs were known for.

In the end, it (almost) always comes down to the financials. So, in short, the challenge is to show that the financials, forecast, and time line are driven by some distinctive Web 2.0 economics, including:

One final point is worth remembering: many Web 2.0 projects can be low-investment projects with a large potential upside. Although Google, for example, took a big risk in developing and releasing Google Maps—because it depended on existing (and expensive) map data—many Web 2.0 projects can start with an idea and a site, and grow from there. If your plan shows good reason to spend a lot of money upfront, and if you can get that investment, it may be worthwhile, but don’t start off thinking that your next web venture has to cost a fortune at the outset.