Every time an economic bubble develops, many will tell you how “this time it’s different,” how “this time the rules have changed.” The lie of the Web 2.0 bubble is that free is the way to succeed in the new economy. That’s not true. The rules […]

no_free.gifEvery time an economic bubble develops, many will tell you how “this time it’s different,” how “this time the rules have changed.” The lie of the Web 2.0 bubble is that free is the way to succeed in the new economy. That’s not true. The rules of economics have not changed. The best way to make money in the new economy, in the Web 2.0 economy, comes down to the same fundamental business model that has always existed: create something of value for people who will pay for it.

Josh Kopelman of Redeye VC notes the penny gap:

scaling from $5 to $50 million is not the toughest part of a new venture – it’s getting your users to pay you anything at all. The biggest gap in any venture is that between a service that is free and one that costs a penny.

Then he suggests that the existence of this hard-to-cross chasm means you should look for someone other than users to pay–advertisers perhaps.

However, the reason there’s a huge gap between people paying you nothing and people paying you something is because that’s where you go from hobby to business. Between zero revenue and positive revenue lies your business model. Going from zero pay to a penny is where you’ve discovered how to make money–and that’s what businesses are about. The penny gap separates the winners from the losers, economically speaking.

VC Fred Wilson wrote in defense of free in 2005: “free is a great way to make money. You just have to know how you are going to get paid for being free.”

That’s the key to having a business: getting paid, not whether you offer free samples in the morning newspaper to convince people your shampoo smells really great.

To be fair to these VCs, they’re not advocating doing everything without pay. They’re suggesting free as a tactic towards getting paid in other ways: through advertising, or by premium services (as in a freemium model), or maybe even through being acquired by a company with a large wallet. Free is only a tactic, though, not a business model.

Conflating the two misleads web application developers into thinking they don’t need to do the hard work of figuring out what’s really of value to users before they build and launch their online service. Who loses? Users, because we have to suffer through introduction after introduction of half-baked web apps that we’re not willing to pay for with our money or our attention.

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  1. A great post…could not agree with you more.

    It is amazing that even after the Internet bust, some people still think “free” is a business model.

  2. Right on! Free has become the default model of choice for most Web 2.0 startups chasing after traffic and in turn advertising revenue. Even if at the end you decide to utilize alternative revenue streams, the goal of any startup should be to create something that users are willing to directly pay for. If you can do that, you’ve got something that that 99% of startups don’t have – a product or service that has real value.

  3. Joel Cheesman Tuesday, March 13, 2007

    Interesting. I wrote about the possible demise of the vertical job search engines today, due primarily to the lack of revenue: http://www.cheezhead.com/2007/03/13/writing-on-wall/

  4. An advertising suported bussiness model is only free to the end user and most of Google’s services are free to the user so they can sell eyeballs to the advertisers .

  5. Excellent post. 37Signals is one of the services (basecamp) that ‘hooked’ me into paying.

    As a community, however, we have to be ready and willing to pay for exceptional products. Using free as a business model, or even as a tactic, is precarious at best. I think it’s part of the reason we see such junk brought to market. You get what you pay for.

    Most applicatons are launched on 50K or less . The VCs make it worse by chasing any of this junk that gets some users behind it. There is a serious lack of innovation and technology advancements because of this. IMHO.

  6. Thanks for paying for Basecamp, Mark!

    Regarding free free free… It’s unbelievable how often people ask us “What’s the secret to monitizing your product?” The answer is simple: You charge for it.

    No one is going to pay for something unless you ask them to pay for it. I’m constantly amazed by the timid strategy of many web-based companies. They are afraid to charge for their products. That’s basically saying “what we’ve built is of little value.” When you go into it like that you’re in trouble from the start.

    So bottom-line: Build something worth paying for and charge for it. Businesses charge for their products and services. It’s a much easier road than trying to make money from advertising or a lottery-ticket buyout.

  7. Anne 2.1 » Blog Archive » The Eleventh Thing I Hate About You, Web 2.0 Tuesday, March 13, 2007

    [...] idea that free is a business model. Free is not a business model, it’s a tactic. It can be a very powerful tactic in the right hands–and with the right business model. [...]

  8. License 2 Code » GigaOM » Free: a Tactic, not a Business Model Tuesday, March 13, 2007

    [...] GigaOM » Free: a Tactic, not a Business Model [...]

  9. Jeffrey McManus Tuesday, March 13, 2007

    Great post, Anne. I’m starting to get pretty bored by people (mostly VCs) who say that my business sucks because it doesn’t leverage search. Yes, there is a ton of momentum behind search. But somehow, software products made money before search existed, and they will continue to make money long after the search pie has been sliced infinitesimally thin.

  10. Jeffery

    You are spot on – there is a ton of software products that make money by getting customers to pay for it. If you are a mac user, there is a good chance that you paid for at least two pieces of software on your machine. I just calculated – I have about nine apps that cost me between $20 and $40.

    They were free to try but buying them wasn’t hard because they solved a specific problem. I think the same logic holds for web products as well – some of the web 2.0 products need to stop free access after a little while and get people to upgrade./

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