Editor’s Note: It is no longer a new idea that innovation in the enterprise space is driven by creativity in the consumer space. (GigaOM guest columnist M.R. Rangaswami wrote about this last year.) Last week M.R’s own site, Sandhill.com had a nice post with tips for how b-to-b startups can succeed with ad-supported models–even be “entertaining, like iTunes”! Winning with an Ad-Supported Model is authored by Scott Abel and Jay Hallberg, cofounders of Spiceworks, which sells free, ad-supported IT management software for small to medium-sized businesses.
Scott and Jay write:
In the past, enterprise software companies have thrived with a variety of business models. We should know: We’ve worked for a lot of them. [These include] software-as-a-service (SaaS), open source and others …
So when we set out to develop a software product that would be supported by an advertising revenue model, several experts urged caution. However, we believed that the “consumerization of the enterprise” – corporate adoption of consumer-like services and business models – would accelerate during this decade … [to include the free, ad-supported model]. Fast forward two years: Our product, the Spiceworks IT Desktop, has evolved to become what we call the “iTunes of IT” with a user base of 250,000, and we’ve added 50,000 new users in the past two months alone.
But the secret to succeeding with a free ad-supported software business has to do with far more than just advertising…and is not for the weak of heart.
For entrepreneurs starting a [enterprise] company, it is easier to join an ad network – if they can generate enough traffic. For an existing software vendor, the switch involves a leap of faith and betting your career to change business models.
We’ve identified  unique attributes [for] success with an ad-supported model.
1. Target a Substantial Market
When we started Spiceworks, we discovered that there were 4.5 million IT professionals worldwide working at approximately 2.3 million SMB companies. This large audience is critical for any ad-supported business. Even with the impressive customer growth that we’ve seen to date, we still have a lot of market headroom to expand.
2. Pick an Application that Will Work with Ads
Our application works with ads because the user is in it all the time and the ads are relevant to their job. Would it work with network monitoring or remote control? No. The user is not in it that often and when they are they need to solve a problem right now. These products are better suited for a license- or subscription-fee.
3. Tap into Buying Power
The audience cannot just be large, it must be equipped with significant purchase influence and buying power. Our target IT professional in a SMB controls a $125,000 annual budget. For our 250,000 IT Pros, that’s almost $32B in annual spend, growing at more than $3B per month! Ad-supported software companies tie together large, valuable audiences with marketers in ways that were previously physically impossible. In the past it was prohibitively expensive to try and reach an audience of 250,000 SMBs around the world. Because of their size, the cost to find them and reach them far outweighs the money you can make on them. With the ad-supported model, you have an efficient channel to reach them all in one virtual network.
4. Think of Your Company as a Network
Although we are considered a software company, more importantly, Spiceworks is building the “SMB IT Network.” Which other companies have built “networked businesses?” Google with search and advertising, eBay with a marketplace, iTunes with music and video, LinkedIn with contact management, and of course Facebook is doing this with a new form of social communication.
5. Know Your Customers
It is critical that ad-supported vendors know exactly who they’re selling to. For Spiceworks, we specifically target IT managers at companies of 20 to 250 employees. We don’t go after very small offices, and we don’t go after larger companies. By intimately knowing the needs of our market, we can develop and market products that make a difference in their business productivity.
6. Create Recurring Value
As an ad-supported software company, if we create a product that is not useful or doesn’t work or is difficult to use, we cannot make money — period. In the ad-supported model, you only make money when your software is in use. We needed to design a product that is so valuable that our users come back frequently and stay for long periods of time – to learn about other products, share information with other users, and of course, perform the IT management tasks the software is intended to do.
… Spiceworks and other ad-supported vendors are emerging as examples of Networked Businesses that are growing due to the consumerization of business applications. That involves creating value for users and advertisers in a Social Business Application and making money in lots of consumer-like ways… If we do our job we’ll make managing IT in the world’s small- and medium-business simple, easy and fun (!) for IT pros– much the way iTunes has for entertainment. At the same time, we’ll finally make it easy for technology companies (or anybody who wants to reach SMBs) to cost effectively access this highly valuable market.
Scott Abel is CEO and Jay Hallberg is VP of Marketing for Spiceworks.com. Both are co-founders of the company.