Quick Hits: Thoughts on Free/Freemium

There has been a lot of chatter recently in the blogosphere around free business models following the release of Chris Anderson's book and Malcolm Gladwell's subsequent review.  I thought I'd chime in with a few comments from the early stage entrepreneur perspective.  I don't have a lot of time today, so you're getting bullets and not the well written prose you are accustomed to getting from me ;-)

• "Free" is indeed the most frictionless way to get attention.
• This concept should not be equated with "the easiest way to build a business" -- the two are not necessarily the same.
• "Free" should also not be confused with "inexpensive to operate" -- Free at scale means that all of a sudden things can get very expensive.
• Despite all the obvious benefits of "Free", it's also a good way to never get your customers to pay you directly.  It's harder than people think to flip the switch from "Free" to "Paid", which is why you see so few examples in the marketplace of that actually succeeding.
• Companies without a way to directly monetize customers die unless they have a realistic way to generate revenue indirectly.  Google figured this out, Facebook is now figuring it out, and Twitter is well on the way as well.  Twitter may very well end up offering "Freemium" services, but they'll likely never freeze out a consumer who refuses to pay.
• This, obviously, is the key to Freemium -- making sure you deliver enough of a Free service that people who don't want to pay stick around while delivering a differentiated Freemium service that enough people actually want to justify the effort.  This is tricky.
• Companies that rely on a "Free" business model are to some extent relying upon either M&A or clever monetization tricks/schemes to succeed from a business perspective.  So if you're investing or working for a company that is relying upon this, you really should watch for indications that the management team is on to something and/or that they are listening.
• "Free" is ridiculously chic right now.  Most Web 2.0 type businesses are depending on some clever monetization scheme to succeed.  Very few will actually achieve profitability on this strategy because it's *damn hard* to create an indirect & defensible scheme for making money.  For one, it takes scale -- enough Users that indirect monetization actually works.  On the business operations side, the best candidates for success are those businesses that obsess over their cost structure *and* have an inexpensive way to scale.
• My final point -- but I'm pretty confident that all the indirect schemes will play out over the next few years.  We'll have a few winners and *a lot* of losers.  And when we do, people in our business will start asking the question "why not just charge people to use this?"... and "Paid" will be the new black.

Maybe we're ahead of the curve.  Maybe we just "don't get it".  And maybe we're not as cool as the "Free" crowd.  But I have a handle on what our services cost to operate.  I know how many customers get us to profitability.  Most importantly, I know roughly how I'm going to monetize them -- and it isn't based on hypotheticals or schemes.  Call me old school, but I prefer this approach to the hopes and dreams I've believed in before.  What can I say?  It feels like 1999 all over again, just without all the free cash flying around.

Comments

[Tommy Perkins]

Great points. When I was looking at startups in the Bay Area, what I found simultaneously admirable and terrifying was the tolerance of startup founders and investors for the template of grabbing eyeballs and then letting the wisdom of crowds dictate the revenue model at a later date, when some as-yet-undefined critical mass had been achieved. I'm all for the notion of "radical trust" and good on ya if you've engendered that kind of patience from your investors, advisors and employees, but people tend to write off the effort and expense of gathering all those eyeballs and of competing for their continued attention.

Facebook and Twitter might yet produce Google-sized revenues, but so far most of the real money they're producing is for entities not named Facebook and Twitter.