But, seriously, what IS your business model?
I wrote a funny little story over on the CA Blog about someone asking us what our business model is. It's pretty straight forward. We consult. We charge. We get paid. Most people get that (although we've had moments...).
But then I was chatting with a friend of mine up in Toronto who is looking around at the Toronto Web 2.0 world of online apps and watching them drop like flies. When asked, "What is your business model?" many of them pointed to adwords. They wanted their products to be free. Most of them even disagreed to charge for a premium account, thinking that offering a free service that when competitors charged would attract more users up front.
And I'm sure they attracted some. But is it enough to stay in business?
Personally, I've always been against offering web apps for absolutely free. Why?
[And yes, Google offers everything for free, but even they have a tough time getting adoption on their free products - even with their mega-mindshare...and believe, me, down the road when these products aren't making them money, they will abandon them. It's a business first and foremost.]
I'm really saddened by the recent news of a whole bunch of brilliant entrepreneurs throwing in the towel (I'll let them make their announcements) because they are out of money. And...this is only the beginning. Money runs out quickly.
This being said, there is nothing wrong with building something while working or consulting, then going out on your own when it is ready to launch, then throwing yourself into it. Think small. Get real. Charge for premium accounts. Give people trial periods. Create kick ass products that people can't live without. Or do the open source thing - the technology is free, but the support and customization is paid for.
Whipping out the credit card is easy when you find something really valuable. Other than Blogger, I pay the premium for every other service I used regularly (or expect to down the line).
I don't think totally free is good for anyone. It devalues technology. It creates an insane pile of entrepreneurial corpses. It becomes the sole value proposition for too many companies (but, we're free!). It doesn't actually help the customer in the long run.
But that's just another one of my crazy ideas.
Great related post by Brian O.
and
An awesome diagram from Peter Rip.
But then I was chatting with a friend of mine up in Toronto who is looking around at the Toronto Web 2.0 world of online apps and watching them drop like flies. When asked, "What is your business model?" many of them pointed to adwords. They wanted their products to be free. Most of them even disagreed to charge for a premium account, thinking that offering a free service that when competitors charged would attract more users up front.
And I'm sure they attracted some. But is it enough to stay in business?
Personally, I've always been against offering web apps for absolutely free. Why?
- Because it doesn't give a company a very long lifespan (reality)
- You have to get loads of funding, then answer to investors on that business model line....OR
- Get acquired, which is a 1 in a 1000 chance, which is, in reality, you getting a real job, which is probably the opposite of what you wanted to do and why you started the company in the first place.
- You are under oodles of pressure all of the time without an income.
- Your fans are disappointed when you have to shut down 'cause you are broke, which makes people hesitant about using another totally free service because they fear the same thing will happen.
- You devalue your own work and effort you have put into this. If someone came up to you and said, "Hey, build this site for my company for free," you would tell them to screw off. Yet, you are doing it right now.
- Most of the world still believes the adage, "You get what you pay for." Yes, MySpace is changing this, but in the business world (who have the $$ for your wikis and your blogging tools), 'free' is still met with aprehension.
- Adwords is NOT a business model. You'd have to grow hella big traffic to support yourself and the space is hella crowded. Even MySpace, with it's mega-traffic can't pull in the advertising $$.
[And yes, Google offers everything for free, but even they have a tough time getting adoption on their free products - even with their mega-mindshare...and believe, me, down the road when these products aren't making them money, they will abandon them. It's a business first and foremost.]
I'm really saddened by the recent news of a whole bunch of brilliant entrepreneurs throwing in the towel (I'll let them make their announcements) because they are out of money. And...this is only the beginning. Money runs out quickly.
This being said, there is nothing wrong with building something while working or consulting, then going out on your own when it is ready to launch, then throwing yourself into it. Think small. Get real. Charge for premium accounts. Give people trial periods. Create kick ass products that people can't live without. Or do the open source thing - the technology is free, but the support and customization is paid for.
Whipping out the credit card is easy when you find something really valuable. Other than Blogger, I pay the premium for every other service I used regularly (or expect to down the line).
I don't think totally free is good for anyone. It devalues technology. It creates an insane pile of entrepreneurial corpses. It becomes the sole value proposition for too many companies (but, we're free!). It doesn't actually help the customer in the long run.
But that's just another one of my crazy ideas.
Great related post by Brian O.
and
An awesome diagram from Peter Rip.
14 Comments:
Bravo!!!
I couldn't agree with you more. I've been thinking everyone has lost their minds recently up there in the Valley. Adwords sucks for revenue.
You're echoing a lot of the same thoughts that I've had. Here's a similar post from my blog:
When FREE Hurts
Tara,
Very very interesting considering that you were working at Riya! In some ways I agree with you, but only in some.
There are applications that provide a lot of value when there's a significant userbase. Remember, the tipping point...that's where certain applications need to get in terms of userbase before the revenues (and they dont have to be advertising based) start really flowing in. That's when you hear the Ka-ching of coins clinking against each other.
For example, consider the ability to add what I'm selling to mysapce. It benefits the user because a wide audience that is connected to the user becomes aware of the sale. Myspace could possibly make something off the transaction or the hosting cost. Something like this will not work unless Myspace has a significant userbase and people are REALLY connected to each other.
On the otherhand, the problem is that reaching that elusive tipping point isn't always easy and it actually may be stupid to wait to reach that when you have little money as a startup. Money is a huge problem when you're a startup!! We all know that. :)
I just think it's really hard to charge for social networking. Premium services, one may be able to charge for, but eventually someone will offer them for free. One has to come up with a better model to make money...somehow.
Not that I've figured it out, but someone will. In the meantime, take a look at LinknSurf (www.linknsurf.com) - that's my startup. I would love to hear what you have to say about it.
Shoot me an email at harsh at wirkle dot com if you want.
Overall, I do agree that free apps can suck a business dry. However, don't you think that a free, limited use, teaser app in addition to full featured or premium apps actually enhances revenue?
@harsh
I actually pushed riya to do a 'freemium' service. But now that they are going pure search, they'll have to do alot of deals (not adsense) to make money.
AND MySpace, with all of it's users actually doesn't make money from ads. In fact, it was reported that Yahoo! withdrew from MySpace because it was losing money on there.
@diane
Yes. Freemium and trial based are my preference (I may have not been clear in my post...sorry). And...I believe in reasonably priced software.
Tara,
Thanks for the quick reply.
We agree on that point. :) I don't think that advertising should be the only model to monetize a social network. All I was saying was that having a well-connected large userbase gives you the opportunity to come up with other sources of revenue besides advertizing.
I do agree with you about advertizing.
Some great points here Tara. The idea of free versus premium, or even freemium is something that any startup needs to consider, the sonner the better. Revenue models are crucial to success but many times these days, since more people are building things to "scratch their own itch", sometimes revenue models get overlooked and the unlucky go back to work. Also a good thing to consider is that many of the recent "successes" have had more then just a few attempts before they figured things out.
Tara is correct in saying that MySpace isn't pulling in much at all from ad revenue. So what could MySpace and sites/services like it do to create a solid revenue stream? Can it be done?
Recently, in Business 2.0 magazine, there was an article on MySpace and CyWorld which points out some interesting numbers the two sites have. Link Below:
http://money.cnn.com/2006/07/27/technology/cyworld0727.biz2/index.htm
Here's a quote:
"The bulk of Cyworld revenue comes from the sale of virtual items worth nearly $300,000 a day, or more than $7 per user per year. By comparison, ad-heavy MySpace makes an estimated $2.17 per user per year."
As we can see here, Cyworld has found a successful revenue stream - but unfortunately, even they state that their South Korean site's methods or even layout wouldn't work in the US. The people behind Cyworld stated, "... expects to make more money in the United States from advertising than from acorns." You'll need to read the whole article to understand what acorns are in their context.
What is the new business model for startups when the playing field is filling up with competitors with free services? Will the big advertisers/corporations of the world leave TV and move their dollars to the Web? Just think... a single car commercial could run a startup for months... maybe corporate sponsorship/partnering could become a new form of funding? It would similar to a corporation sponsoring a car and driver in a race. They would just need to learn how to leverage the opportunities. When you consider a commercial campaign on national TV is going to cost at least $100,000 - we're looking at enough money to get a startup rolling.
Now if the corporations that could do this relize that they can both promote their products/services while also securing an investment - I think we may have something that could work.
In a way, it's still advertising/PR - except there's a greater opportunity due to a longer campaign and the potential for greater levels of integration for the sponsoring corporation. For example, Social Networks would be a perfect environment for such a relationship.
Now, depending on the corporation, and what their product/service is, their sponsorship also gives THEM opportunities that didn't exist.
* They can run their own ad campaigns
* run contsts where the site users create ads for them
* they can add their slogan/name to the RSS feeds the site serves
* they can add on intro clips to videos
* they can get press about the site they are sponsoring
* and on and on...
Why spend all that money on a TV commercial - when that same money could support a community online for a year - where the ad is a destination of living, blogging, sharing, and creative people?
I've considered this as a means for funding my site/service at http://www.ArtistServer.com
Free is a really great way to find your audience.
The best one I know of. The fallacy is: finding your audience is not what a business does. It's how a business starts. It's how you learn where the market is, how big it is, and what you can do in that market.
And it's ok to not make profits while you're finding your audience. As long as you can get to the next step.
Profits are profits. And they may come from ads. It's very hard to argue with money in the bank.
It's not ads that are the problem, or charging that is the solution. It's the illusion of success.
When it comes to startup and private equity, there's no transparency. You can't tell how much the other startup is making, burning, or booking. It's not public information. You can only guess. And most people gauge page rank, link love, and VC appreciation. Those are all good numbers, but they're indicators of the find your audience stage.
They're the wrong number.
So if you judge success by someone who's still finding their audience, or figuring out how to make money, but happens to be serving ads in the meanwhile, you're using the wrong metric. You're thinking short term and optimizing to get to where you found your audience, but not to make it past that stage.
Why is that I (almost) never disagree with your opinion. You totally rock with this post of yours and now this time I agree with lot of what you say is not just based on theoretical premise/hypothesis of mine but rather through experience.
Cheers,
Rajan
http://rajan.wordpress.com
I get it. Everyone says you need to charge. Ad revenue is not sustainable. I'm still looking for something more than these same two statements being repeated over and over again as part of the vulnerability of Web 2.0
Although it is beside the main points of your excellent post. I thought it worth mentioning the recent Myspace / Google deal where "Google must guarantee Fox Interactive minimum payments of $900 million over three years, as long as Fox meets certain traffic and other commitments." (ref)
The bottom line is Companies fail because they run out of money.
Dang you HTML! Must...not...click... blue button... most click Preview.
My links in my last comment should have been:
ref: http://news.com.com/Google+pledges+900+million+for+MySpace+honors/2100-1032_3-6102952.html
Companies fail: http://www.foolswisdom.com/~lloyd/wordpress/index.php/what-is-your-business/
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