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!
— Joel Smernoff, President of Paltalk