How did the web lose faith in charging for stuff?
37signals.com
37signals.com
So, while many applications might have very high fixed costs (like paying people to create wonderful applications like those in 37signals portfolio), they have marginal costs that are so insignificant that people would like to charge customers less and get more customers - often ending up with them wanting to give it away for free for maximum uptake (with the whole profit thing put off until later).
Beyond that, some applications you can't charge for. 37signals has a portfolio of applications that don't get better for users as more people use it. That's unlike Facebook, Delicious, Digg, Wikipedia, etc. If those services charged a monthly fee, it would degrade the content that the sites have. Facebook isn't useful if they only retain 10% of their user-base because they're charging $10/mo. So, some websites must try alternative ways of monieization since charging users isn't an option.
Finally, the web often forgoes charging for stuff because they get big paydays for it. StumbleUpon got $75M. Reddit commanded at least a few million. Digg is looking for hundreds of millions while having no plan for profitability. Facebook is looking for tens of billions with no plan to make money! Jaiku was bought for millions. YouTube for $1.5B. I don't need to go on. People get rewarded for the behavior of creating a site with no expectation of profits. As long as that's working, they'll keep doing it.
Personally, I think 37signals has the right idea. But that won't stop people from making free sites with no profit plan which they hope to get bought since it happens enough. Yeah, I'm not going to create visions for myself of taking over the world, but others thrive on that. As long as there is some potential of getting bought for millions and a low marginal cost, people will create those free sites.
That said, the promise of big paydays seems like DHH's point: how many more of those are there? Even if the era of the San Francisco Startup isn't ending, there's also a huge bias in the reporting of outcomes for aspiring SF Startups: we only really hear about the ones "important" enough to get funded.
Most companies that shoot for the moon on VC and free services fail. Your odds of winning with free are not good. You might even be worse off taking VC money; if you bootstrap on a free service and don't strike gold, you die in 6-18 months; if you get funded, you might lose 4 of the best years of your life on something with no chance.
Just my thoughts about your comment.
The concept of "free" and "eyeball economy" probably came from newspapers, because that's the paperless version of the newspaper business model: Newspapers are in the business of putting ads and classifieds in front of your eyes, not delivering news to paying customers.
Now, I can't find the reference, but I read recently that the subscription of a major newspaper (might have been WaPo or NYT) doesn't even cover the paper it's printed on, much less the delivery or the newsroom.
I don't understand how Facebook isn't running a billion-dollar ultra-segmented advertisement business, I would think they had the user data for it. Probably a privacy issue.
This isn't a fixed cost. Consider apps A and B. Both are exactly the same featurewise. A has 100k users and B has 100 million. B costs a hell of a lot more to create and maintain.
The material in a shoe costs a tiny, tiny fraction of what the consumer pays, but that doesn't mean they give them away for free (plus shipping) and slap an ad on the side.
Internet startups may have low marginal cost, but they have disproportionately high fixed costs. Good progammers make 2-3x what a factory worker does.
Moreover, marginal cost is on a sliding scale. One more customer to my Facebook app costs me literally nothing, one more than our current setup can handle may force me to shard my database. So the marginal cost is 0 for a long time, then some really large number for one unit, then 0 again for a while, etc. You really have to average it out.
Also, startups that do have significant marginal costs (YouTube, Pandora, etc.) still don't charge. So while everyone always touts marginal cost as the reason, it clearly is not.
I read the 'marginal cost' stuff in Varian and Shapiro, the former of whom is the chief economist at Google: http://en.wikipedia.org/wiki/Hal_Varian
It's a worthwhile book, because it goes into a lot more depth that any comment here could, and comes directly from the horse's mouth.
I've seen way to many web entrepreneurs think of their products' price in relation to costs and and I just don't get it. Try to keep fixed costs low, focus on how much revenue you can extract from your customers, and drive marginal costs as close to zero as you can.
Software costs a lot to make, what is low is the marginal cost: the cost to create one extra copy. The reason costs tend to zero is: if the marginal cost is zero, it's very easy to get into a price war. Maybe you won't sell it for $49, but your competitor might be willing to sell it for $29.
If it's that profitable though, competitors will show up. Indeed, there are plenty of 37signals competitors. What really differentiates 37signals is how very visible they are (their oldest, most popular product is their blog), which makes it easy for them to get enough people to sign up to turn a tidy profit. That is their barrier to entry.
> Why do you think Microsoft is such a cash cow?
Because they have a monopoly. Operating systems and office software have a lot stronger network externalities than project management software does.
I wonder how much that is per site regular. A typical reddit user probably won't click on ads more than a couple of times per year.
"My business is worth billions even though I have no idea how to make it profitable."
I'm sorry, what did you say AIG and Chrysler? I couldn't hear you over the outflux of employees and stockholders.
a) Extraordinarily hard to actually charge money. The user experience sucked and people were being told that these strange new cyberpredators could drain their bank accounts on a whim if they ever even exposed their credit card digits near a monitor.
b) The main product offered was textual content, which has always been an extraordinarily hit-driven business in which the misses do not monetize in any sort of scaleable fashion.
c) There was a whole lot of stupid money, and if you've got stupid money burning a hole in your pocket, then who needs to charge customers when that is just going to depress the metrics that get you more stupid money?
d) There's also a problem that the web is relentlessly youth-focused. People who came of age in that brief no-money twilight expect everything to be free. People who have not hit that age yet have some transactional difficulties in paying money. (Though they clearly pay money for things that people assume are unmonetizable -- I know more than a few people who spend no money on "music" but several hundred a year on iPods.)
It surprises people every time I mention it, but there is an entire world of users out there who are perfectly on board with the notion of paying money for value. They have money, they have payment instruments which are easy to use online, they have problems which they currently treat with expensive and ineffective non-digital solutions. As an industry we need to focus on these folks in addition to the 21 year old unemployed WoW player who seems to attract about 85% of our efforts. [And though I mock overfocus on that market segment, you certainly see, e.g., Blizzard and Apple making a killing out of that guy.]
* hit some roadblock on the way to accomplish X
* find 3-6 solutions, pick the one most valued/recommended/easiest/etc
* slap down the debit card
* never think about that roadblock again
If everyone's out digging for gold, start selling shovels.
Does one have to buy a new iPod every year?
There was an article titled 'Free is Killing Us - Blame the VCs':
http://www.businessinsider.com/2008/4/-free-is-killing-us-bl...
This might sound cruel and heartless, but I hope the financial crisis has the VC-funded toy-companies fail and the legitimate small businesses prosper sooner than later.
This is funny. I remember it to be just the opposite - web was created with the idea of free exchange of information, at first mostly between scientists and universities. Later, commercial entities came and tried various ways to make money from the web. A few succeeded, a lot more failed. This guy just reversed it.
plenty more but thats a start...
Some examples off the top of my head:
SourceGear (source control) HelpSpot (help desk software) FogCreek (a few products, mostly dev-oriented) Antair (Blackberry stuff)
I don't have revenue numbers for them and wouldn't tell you if I did, but they all have 6+ employees, which means they are all almost certainly $1 million+ in yearly sales. (A few are substantially more.)
As Eric Sink said once: you don't really have to make a lot of money for the principals of a 3 or 5 man software shop to do VERY well for themselves.
I don't know how well indie developers in the Windows world are doing, but I'm sure they're making respectable amounts of money, too.
(There isn't enough commercial software for Linux to say anything about the Linux software scene.)
However becoming big is hard, so you're left with a big decision — a hard, if not impossible road to become massive while still being profitable and not charging users, or target only the (smaller) paying audience, but remain profitable from near enough day one. Or you could of course meet in the middle with a freemium model.
I don't see the problem with the free model, you just can't charge for everything.
[coke came out my nose]
And with the "mom & pop" stuff, I was just referring to it being a pretty low risk model — you make something, end-users pay you, you use that income to pay your costs (compared to building something, hopefully having tons of users, and then wondering how the hell you're going to support it, never mind profit from it.)
I'm not saying "mom&pop"/paid model is bad, quite the opposite, it's my favorite…but I can see why a lot of sites decide not to use it
The echo chamber thing is crazy here. We have a hard time finding success stories in pay services. That's because all we're considering is the ASP model. The ASP model is relatively new and heavily influenced by the San Francisco Startup model, where VC funded companies trade revenue for uptake because they will either get acquired or BK.
What's low-risk?
That's compared to building something, hopefully growing like mad, getting VC funding, getting mentioned a billion times on techcrunch, struggling to just cut even…and then hopefully getting acquired.
I know which I'd choose; for a real business, the paid model is leaps ahead! But what does that mean for the Diggs, Twitters, other massive sites, and big ideas still in peoples heads which can't be monetized by the end-user?
A. Charge users from day 1. Your profit is easy to figure out, you should be profitable early.
B. Build a userbase, *then* figure out how to extract money from it.
If A is failing, you can tell as you're going, and adjust. It obviously still requires skill, but it's just the time tested "make something, charge for it" model. As soon as you get users, by definition, you get revenue, and if you're competent, that means profit.
With B, you are deferring all or some of your income to some later stage. If it's not going to work out, you might not know that until the last minute when you're supporting a large userbase. You might never find a business model. OR you might hit gold.
Both models are just as valid as each other, it just depends on which you prefer, and which one is more appropriate to a particular set of circumstances.
Like.. you build a userbase and then one day you flip a switch and your 10,000 uniques open their wallets in unison?
When did it become fashionable in the business world to insist upon punching users in the face with a product or service?
The basic model of capitalism is that if you can't exchange some for of payment for your product, it has no value. You need to create real value in the mind of the customer.
If you don't to that, no matter how much VC you have, you will die.
If you're ad supported, that money comes from advertisers. I don't see why that's any less valuable than it coming from the customer.
You're valuable to the customer, and valuable to the advertisers.
Getting big off VC without a viable profit stream is what I have an issue with.
When you spend money on something, most people invest more thought into it. You have to make an actual value judgement, rather than saying, well why wouldn't I have a Twitter account, everyone else does.
It's not your user base that is the product, it's what you do with your user base. One word, case in point, Yahoo.
Maintaining the size, quality, and ad conversion rate of your user base in a free/ad-funded business is where that business adds value, as opposed to fixing and improving a consumer-funded product. It's probably a lot more work than a consumer-funded product because, as you said, people are distracted by shiny new things and free sites have no "buyer's willful blindness to quality" so you must constantly manage your 'shininess' so they come back.
As for consumers making a value judgment, that does happen with ad-funded businesses; but the advertisers are your consumers and it's the advertisers making the value judgment about whether serving ads to your user base is a good way to spend their money.
Also, social network-type software requires a critical mass of users in order for them to be effective. If all of your friends weren't already on Twitter and Facebook, perhaps you wouldn't be either.
It's not as straightforward as selling your software from day one to make money.
1. substantially better than free alternatives 2. deliver significant value at limited (user) scale 3. not built on open source technologies w/restrictive licensing
For broad consumer-services, those 3 criteria actually limit the universe of services significantly.
Clearly no one would ever pay to be able to use google to search, yet we all value it enormously.
Having faith in charging is realizing you will and CAN lose 95% of your audience and still make a decent living, simply by charging.
If it was a simple case of having something tacked onto my ISP bill, then I'd be far more likely to pay for things. I think that's an area ripe for development. Why ISPs haven't attacked it yet I don't know.
Ad supported is still a pretty good model though and will be around forever. It does depend on who your users are though.
It could just be a very simple setup:
1. webapp notices you're on ISP A
2. webapp asks ISP A to bill you $3/month
3. you get an email from your ISP asking for authorization
4. you click the link and it's added to your billIt works just fine and no need to get the thousands of ISPs that exist involved, which is incredibly messy.
Going the ISP route is far cleaner, since they already have a billing relationship with the customer.
There was a time that this would have worked, but I think there are too many people that aren't tied to a single physical location for their internet services. And we haven't all switched to something provided by a cell company.
Clearly, Google had better ways to make money; when you have something as excellent as Google, you have options. But don't take as your thesis that "even Google had to go free".
I'm simply pointing out that some services don't really work too well as a 'paid' model.
Also you've got the fact that some of your competition is going to be free. If you want to now charge users directly, you have to be at least 10 times as good, or be offering something seriously different to make them pay.
I'm still firmly in the freemium camp.
1. Make something, get people to use it
2. Grow, make profit from advertising (Stay lean, keep costs low)
3. Once you're big enough, some subset of your users will be willing to pay for extra features
If you instead go for paid only, I don't think you can reach anywhere near the same audience.
"But $64MM is fuck-all compared to the billions it makes now!" Of course that's true, but that's besides the point. Almost any product company number is going to suck compared to what Google can post now. I'm not arguing that Google should be a free service. I'm saying they had options, and it wasn't necessarily between "free or die".
Things that are "paid only" don't seem to scale quite as well.
Of course if/when a decent micropayment model emerges from ISPs, then it'll likely change everything.
I read that, and thought "That makes absolutely no sense, because they would have failed if they had not been free".
Please explain how Google would have grown to its current size, had it charged users to use its search.
Google chose to be free, because the alternative would have been certain failure.
I Don't think it's quite that clear.
The fact is though, they make far more from advertising than they could ever hope to make charging.
Perhaps it's your own personal situation, but I would certainly pay for something as high quality as google is. Hell, I pay for fricken cable TV, and google is much more valuable than hockey games and the the odd HBO drama.
I think if you're going to ask "What would I pay for this?" you have to be honest with yourself and with your product. Are you the only guy you know without a cellphone? Are you living everyday on Ramen? Sometimes, "you" needs to be qualified. Assuming you are average though, it is a good start.
The web doesn't have such luxuries. Payment on the web still pretty much sucks. Especially for low value recurring fees.
With iPhone apps, you can pretty much trust Apple. They'll take your money and pass it on. If there's an issue, you take it up with Apple. Apple are the only ones who have your credit card number. That's why it works so well.
We need something similar for the web, managed by the ISPs, if we're to make paid for content more viable.
Once the internet allowed an accurate assessment of how well particular ads worked, its vulnerabilities were laid bare.
Note that I'm not suggesting it doesn't work at all, just that it has been overvalued.
So, if you trying to establish another service for masses it must be free, and meet the de-facto standards of quality. Tweeter is a good example.
It is possible to charge users for some very special and unique service, but only for a limited time, because free (no-cost) alternatives will emerge sooner or later.
It seems to me, that if someone wants to build such service he should think about some market-place or ecosystem (like in adult segment), not for public services for masses, because this market is already divided by rich and strong players.