I am often approached by young tech entrepreneurs with hopes of becoming the next big dotcom giant. After sitting through hundreds of these presentations, it struck me that many weren’t really “dotcoms” at all, but “dot orgs” in disguise. Let me explain.
Time and time again, these ambitious tech visionaries mentioned that their promising ideas would be “free to start with” or that they would “eventually add advertising to make it work.” Folks, “free” is not a business model!
This is no longer 1998, when you were rewarded for “getting big fast” and then going public or selling off your collected eyeballs to a larger strategic buyer. Granted, we saw a flash of this again in ’06 and ’07 when services like Del.icio.us, StumbleUpon, and others went for high valuations without meaningful revenue streams -- but that moment has passed, and we are back to having to generate real revenues to survive the economic downturn.
So if a successful online business can’t be free and survive over the long term, what else is there? How is there money to be made?
Of course the old standby has been to turn to advertising, but most entrepreneurs don’t understand just how hard it is to make it a viable revenue stream. The ad business is one of scale, and without a massive audience, it is difficult to bring in meaningful levels of revenue. Not to mention that the costs of doing this successfully are huge, as a company has to either bring in a sales force (expensive and time consuming) or work with go-between services like Google Adsense or vertical ad networks (lower eCPMs and squeezed margins).
So what does that leave? At Paltalk, for example, we have successfully turned to a “freemium” model to generate most of our top line. We give away a vast majority of our features to our more than four million active group chat users, but hold back some of the best bells and whistles to upsell to our power users. This has proven to be very successful for us and has driven tens of millions of dollars in subscriptions, enabling us to be profitable for the past four years.
It only takes a small conversion rate of a few percent of the free base to work, but the trick is determining which features can be tariffed. If you don’t offer enough free content, your site won’t provide enough utility to garner an audience. If you don’t select the right feature(s) to charge for, nobody will subscribe. So what’s the answer?
There really is no magic bullet other than trying to find a balance -- working with your users and optimizing on what is most valuable to them, discovering what they will pay for and what pricing is reasonable. Premium services can be as simple and as useful as Plaxo's Outlook contacts de-duping tool or as esoteric as hyper-localized wind and wave forecasts for surfers and kiteboarders (all of which I personally value and pay for).
Other than working hard to successfully optimize and deploy a “freemium” model, the biggest challenge to entrepreneurs will be overcoming the consumer’s current expectation that everything on the net should be free. I think this mentality will slowly change over time as the free sites hit the end of their funding runways, and companies have no other choice but to charge users for some level of content.
So for all you tech entrepreneurs, I advise you: It’s better to get started now and reap the benefits -- and leave the dot orgs to the charities. Remember, free is not a business model!
Paul/Murugan- Chris's article in Wired hits the nail on the head, but I think that the message he is trying to get across isn't that everything should be free, it is that you can make enough features/content free and valuable enough to attract an audience that you can then monetize in some way. At Paltalk, we give away 90% of the features in our group chat service and only hold back the ability to view the other users' webcam streams in a chat room. Apparently, we have found the right thing to charge for, at the right price, for we have hundred of thousands of paying subscribers that enjoy their premium service every day. The challenge for us start-ups is to figure out how much to give away for free to attract and keep users, but have something else significant enough that the power users will pay for, without holding back too much. Once you get the formula right, it scales as a monetization engine much much easier than trying to sell ads/sponsorships every day (very very hard, just ask AOL). Hope that clarifies my position a bit better, -Joel
Leo- I agree that the easy collection of micropayments could make charging for content/services much more palatable for users if they would only be charged $.99 for something of interest. I know several firms that tried this but haven't heard about them in a while (peppercoin, hello???). Collecting payments on the net is tough, since fraud can be rampant and credit card penetration might not be high for certain demos and geos. -Joel
Hounhosp- you bring up a good point in that some companies have found a way to give away valuable free content/services and then attract a large enough audience to hopefully monetize (see last.fm). I am just suggesting that this is a very risky way to go, unless you are highly capitalized, and also gives pause to those looking to fund you if you "will just figure it out later". My point was that a lot of entrepreneurs I am have seen recently have that attitude that the biz model will just come to them or they will sell ads, without realizing just how hard that is to do. My wish is that this debate will at least cause entrepreneurs to think about this from the start and not just somewhere down the road. -Joel
You made a very good argument and your business model "freemium" looks appropiate but very delicate. I also find the heading a little bit misleading since the business model you operate involve a 'free" aspect. It will be extremely difficult to take "free' from the internet and it will take real ingenuity by site owners to know how and when to make the transition from free to pay in order to be successful.
I know that all this talk of free not being a business model is due to the plummeting Ad revenue but author of the following article make a real case of why he thinks 'free' is the ideal business model:
Typically you go into business to make money. A business model outlines your methods in which you are going to obtain money. By stating that revenues will be generated by some unknown, incalculable source you have not done your homework and entrepreneurial dreams are flawed.
I'm sorry but how does charging for valued services or info constitute "harm"?
In my experience it tends to be quite the opposite, one gets greater service in all manner of ways if one is a paying customer. The mutually agreeable exchange, using the most exchangable commodity, ie money, is the hallmark of synergy and progress. The idea that one is somehow harming others by exchanging with them went out around the same time the Berlin wall came down.
If you want to talk of exploitation I'd say "web 2.0" stuff where site owners generate an income from other's input and content is arguably more exploitive than simply offering a product or service for sale.
No-one is saying that by charging we somehow prevent people from being all they can be, quite the opposite in fact as related services can spring up and provide greater opportunities for all.
Is it
really a major problem that people tend to expect that online means free and
would it really be a valuable discussion to determine how to overcome this? Linda Stone (Former VP, Microsoft
& Co-Founder & Director, Microsoft's Virtual Worlds Group/Social
Computing Group; member of the advisory board of the RIT Lab for
Social Computing; etc.) once essentially expressed that, increasingly people
will or are using technology effectively to meditate toward a healthier global
community and the most positive future we can create together. Trying to grow
greater optimism is
ideally increasingly seen as a good thing. The easier it is for all to be
lifted to their best, the better. It certainly would be great if no one in the
process was about causing any other harm. Ideally evolution brings continual advances
and eventually sustainable peace and joy for all.
As you stated in your writing, it takes an immense amount of
visitors to see advertisements generate revenue.
How about free being integrated into the business model for
the initial or early phase of a web service?
One is more likely to visit a site if it is free instead of
one that requires payments upon arriving.Then after a sizeable amount of consistent visitors has been achieved
then start generating new value added services that those visitors might be
willing to pay something for.
The free aspect should not be ignored as it has a powerful
role in the marketing a web site.
All this talk of positive energy leaves me cold to be honest, because such energy doesn't warm a cold house or pay any other bills for that matter.
Leo has a great idea regarding micropayments, though it strikes me that the biggest obstacle there is government, not technology. Banks have a huge clout with governments and you'd soon find yourself either in court or applying for some license. A license to be an online bank with no charges? Best of luck with that one...
Paypal has proven that simple small online payments work well but a cheap or free version of Paypal will hit the same obstacle that Paypal hit (read up on it).
Valuable informatin will always be torn between 'guess what I've got!?" and "Buy what I've got". If it is valuable then it's valuable and everyone wants something valuable for free - but will pay for it otherwise.
I agree that a major problem is that today people tend to epect that "online" means "click a link for nothing". Just how to overcome that I'm not sure but it's a valuable discussion in it's own right. Perhaps we should charge for such discussions, if only to keep the "good karma" types away?
Joel, what's your opinion about micropayments, or rather, electronic cash transactions? Assuming that a secure, fee-less and anonymous system would exist, which at the moment there isn't. But I believe that such a system could be devised, which I wrote about in an article on this site some time ago.
Right now, the only way to pay for online services is to sign up for an account (not anonymous), provide credit card details (cumbersome and not risk-free), and lose part of the transaction amount to a third party.
But suppose you would have a virtual coin slot on your web browser, in which you could deposit small amounts of virtual cash, i.e. encrypted tokens that represent a monetary value, that get transferred directly from payer to payee; no third party, anonymous (except for IP address), and risks no different from dealing with 'hard' cash (counterfeit, loss, ...).
Then what would you think of the chances for a web site that charges small amounts per page view or to access certain features or content? I wouldn't mind paying a few cents for a useful piece of information; I just don't want to bother giving up my anonymity and entering a few pages of transaction details for each website.
A lot of stuff that is free right now would actually have a sustainable value to price ratio larger than one with a nonzero price on it. We pay hard cash for phone calls, post stamps, parking meters and gasoline without even thinking about the value we obtain from it.
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