Free: a Tactic, not a Business Model

68 Comments

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.

68 Comments

Web

I think there are some websites out there who are making some money off people clicking on ads.

There was a post above that stated they were making $12K a month off ads, great for them, but in the scheme of things, that is chump change. Mediocre revenue, when your a business, $12K is not going to sustain growth in your business. A number of people here have mentioned the Google and TV models… great, but are they getting the hits that these companies are? In order to get BIG revenue from ads you need to have the eyeballs and the people clicking. Google and TV have the economies of scale and the distribution networks to do this, at great cost… 12K aint going to get you that pal… if it does I will eat my computer keyboard! Keep me posted…

I operate a site that is competing with free options. I don’t understand, in my line of work, why people would offer this type of service for free? What we do is get eye balls to people’s property, if you don’t charge for this service, firstly how do you pay for the high data costs of high traffic and secondly, how do you expose these properties to potential buyers? I know there are established sites and sites that can get good search engine results, but in the wonderful world of online media, if you don’t have the money to acquire the distribution networks, you remain a chump forever content to live the mediocre land of $12K a month with no real ambition.

Our site is new and yes we dont have many properties on there, probably because we are not prepared to give a service away for nothing… we hope that as it matures, we will have a viable and sustainable business.

ADAC

Not sure I really agree with you.

While just expecting “Free” to be good enough to base a business model on is a poor idea. Free with value has worked for many styles of business.

Google was mentioned above. I was thinking more of all the radio and tv stations, that did quite well for decades. This style of business works off the ability to gain users and then sell access to them (ads, commercials).

Still, you need a product that draws more attention than your competitors for this to work. The internet is a tough place for this business model though. While there is a huge potential there is an endless supply of competitors looking to take your traffic.

Obo

This is a silly article.

“Free” is an amazing multi-billion dollar business model that has been proven time and again.

Television is “free”. Numerous newspapers and magazines are “free”. Google is “free”.

Eyeballs are worth an enormous amount and they always will be.

Anne, if your point is that 1) It takes a whole lot of eyeballs… and 2) reaching critical mass is expensive (and maybe not worth that expense)… then very good — a gold star for you. And welcome to the Internet. The rest of us have understood this since Web 1.0

To make the absurdly broad claim that it is silly to give away free content and services in an effort to gain traffic, marketshare, ad revenue and brand value — is to tell an entire multi-billion dollar industry that it’s m.o. should be re-thunk.

Bzzzt. Wrong answer. I’ll take my somewhat modest ~$12k per month that my blog spins off and quietly continue to pursue “free” as a business model.

Now… I’m going to scroll back up and click on some ads.

Zoltan

Free is something most users need and want. But, if you offer a free service you have to be prepared and have plans to ask for money if ad supported model will not work anymore.

Terry

Thanks for stating the obvious so succintly. You may have heard that startups had a brutally high failure rate even before the Internet was invented. It’s the luck of the draw, and the cause is the high risk, low revenue and low market penetration of any startup- web-focused or not.

You spun around to contradict yourself in your penultimate paragraph, by admitting people aren’t the boneheads you imply. If you give away free content or membership in the (tactical)hope of earning revenue from advertising, that’s a business model. Whether it’s a viable one or not is another matter.

Are you kidding me!

I could not DISAGREE with you more – Of course free is a Business Model and always will be! It’s free for me to watch the super bowl every year and I think the NFL makes a little pocket change on the given sunday. It’s free for me to use all of Google’s services i.e. search,maps,email etc. the last time I checked their stock was over $400.00

I will give you this – free only works when you can attract tons of “eye-balls” If you have a TV show or a website that only attracts 1,000 viewers you don’t make money on the other hand if you can attract 10 million viewers you can make TONS OF MONEY

Bobby

Jobe Roberts

The free part really has to be the ability to try out the service fully (limitations should be the number of reps you get, BaseCamp/Flickr is an excellent example for doing it right). As for the fee, I’m a sucker for the yearly fee and extra bonus if it’ll show to others that I’m a paying member. I know, it’s sad but true. This makes a difference. No one wants to appear to be a leach! But if the fees are too high, chances are I’ll go without rather than using the service at all. Classmates.com is a perfect example of a site that appears to be just a rip off! They have too many price options, the free parts are way too limited, and with all the in your face notifications, it really feels like you’re being nickle and dimed!

flash dev

Good Points but do you expect me to pay to use digg, myspace, gmail? Those sites would not be popular if they were not free. Sure you can sell featured content or premium services, but its really hard to sell things online besides ads, and merchandise. PlentyofFish.com is free and they are giving all the personal ad sites a run for their money. Craigslist only charges for certain kinds of ads.

Agoracom

“Om, my father asked me a long time ago if I was building a business, or a hobby. If they are sending in checks, you’re in business. Everything else is just having fun. If these Web 2.0 companies refuse to charge for services, how can they operate for very long?”

MAY 2006 – My statement/question to Om at the Mesh Conference in Toronto

Anne, on behalf of all us Web 2.0 players that focused on building businesses rather than hobbies, I thank you.

It has been frustrating to watch the free/hobby sites get all of the attention, while real business apps such as ours have been virtually ignored for being perceived as “too small”.

True, we don’t have 2,000,000 users buzzing all over our site every month – but we generate more profit than most W20 sites combined. Yet, along with other sites like ours, we couldn’t muster any attention from the blogosphere.

As a result, I’ve been a vocal commentator about this imbalance ever since first meeting Om at the Mesh Conference in Toronto. I understand that some apps have to be free in order to flourish – but where is the love for those of us that took Web 2.0 tools and applied them to the real world for the purposes of acquiring real customers?

Thanks to your post, balance is slowly on the way back. Keep up the great work.

Best,
George

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