Free Used To Scare Me / 04.01.08
If you haven’t already please go and read Chris Anderson’s Free! Why $0.00 Is The Future of Business and then come back here because I will be referencing it a lot (or screw it and just keep on reading).
I have never been a fan of making money through advertising. To me it is too unstable and yet for 99% of the sites out there that is the most logical way to go about things. Why? Well because most sites just don’t present anything compelling enough for people to pay for and if they did usually some other site would just offer it for free. Because of this the goal is to get as many people to your site as possible and simply place ads on the site. It works on occassion, but if you wanted most site owners to be honest they would tell you that the effort they put into a site doesn’t match the payday they are getting out of it.
And yet free is the future of all things digital it seems. The biggest example for free that Anderson harps on is Google. The idea is that every service Google offers is free with one exception: AdWords. That is the key behind the whole free concept and one point that isn’t emphasized by Anderson and forgotten by many.
Since Google controls their own ad inventory they get 100% of the profits and therefore it is in their best interests to create free services for people to use. They never run out of inventory so it doesn’t matter how many pageviews get used up. Not everyone has that luxury.
If Digg sold their own ads so they got 100% of the revenue there is a good chance they wouldn’t even come close to selling out their inventory (this is going under the assumption that they would partake in the CPM model of advertising). However, it is hard to imagine them creating a service around Digg that people would pay for and because of this advertising and free content is the way to go. What they can leverage though is their huge audience and they have done that effectively with revision3. Unfortunately costs probably still exceed their revenue since people and computers aren’t free (they have over 30 employees).
Because of their model they could not control the whole vertical if they wanted to unless they turned into an advertising company like Google. And that seems to be the key with free on the web. You need to control the vertical to really get maximum revenue out of the deal. Even if you are talking about a simple blogging model controlling all your revenue is how you achieve ultimate financial success. A great example is TechCrunch.
To my knowledge they don’t use Adsense and instead sell their own ads along with FM Publishing brokering their CPM deals. At last count they charged $10,000 per month for a 125×125 sidebar ad (pricing has been removed) with a minimum of 6 ads showing so just from those deals they were getting $60,000 a month. That wouldn’t be possible if a third party was making the deals.
The successful ventures always have something they sell 100% through them. Yes there are a few exceptions if you think about blogs, but many of them could be making much more money if they went out on their own and sold ads. It just becomes a balance between finding advertisers and doing something else. When King Gilette gave away razor for free he knew that he could control the pricing of the razorblades and therefore was successful with it. This is the exact same reason why Google can buy YouTube without worrying about how to finance it. This is also the reason why Google, Yahoo and Microsoft will start to look at purchasing more content-based sites.
Since they control the ad inventory they need to also start controlling the sites the ads show up on. From a user-perspective, trying to sell Digg to either Google or Yahoo doesn’t make much sense, but from a services perspective it makes all the sense in the world.
A different approach to the free model can be seen with 37signals and their suite of products. Basecamp was never free and yet it is successful. However, some of the other products are free which draws people to them and they upsale to the products they do charge for. 37signals gets into trouble though when someone offers a similar service for free that provides the same level of satisfaction for users.
Linux is free, but people aren’t leaving Windows and OS X in droves to use it because the same level of satisfaction can not be achieved. However, more and more people are using the free services of Craigslist over traditional newspaper classifieds because the level of satisfaction equals or surpasses what newspapers can offer.
Free works in different ways as long as you eventually control some aspect of the vertical. The biggest hurdle for companies that wish to charge for a service is actually getting the users to pay.
…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.
How many premium web services do you use today?
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.
The title of the above quoted article says it all: Free is a tactic, not a business model.
The usual line of thinking only involves two parties: you and your customers. The advertising model works when you introduce a third party that wants to tap into another party. That is why sites with traffic can make a lot of money if they can find the third parties willing to pay to reach the users.
Fox Interactive buying Myspace does not seem like a smart move if you simply consider they don’t control all the advertising. It’s also hard to convince third parties that you control the audience that they want to reach when your audience has so much range like Myspace’s. It becomes smart when you realize they utilize the service to push people towards their other offerings such as movies and TV shows where eyeballs really matter.
if you are building a media oriented business, particularly one that has low marginal costs, meaning you build it once and the cost to serve an additional customer is negligible, then you have the unique opportunity to focus first and foremost on building your customer base or audience
The problem I have with this statement is that although adding another customer doesn’t cost you a dime, that doesn’t mean you shouldn’t have a plan in place that monetizes that customer. Building up your audience is great, but what if you go months and don’t make traction in building up an audience and are left with nothing but unpaid salaries and bills?
I have come around a bit to the idea that an advertising model can dominate a successful business because I have been involved in one for so long. We do see opportunities with Chawlk to expand our revenue model and now that requires building a service that people are willing to pay for. Till then it’s all about the free. Well for our users, not our advertisers.