The reason that the web lost faith in charging for stuff is that marginal cost is so low. What is the cost to 37signals of having another customer sign up for one of their services? If I sign up for the $49/mo. Basecamp product, they are offering me 10GB of storage as well as bandwidth and application processing. None of that has a high marginal cost. Maybe $5/mo? Plus, many users won't use all that space so it's a maximum of $5, but the average marginal cost would probably be a good deal lower.
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.
The marginal cost of printing another copy of the WSJ is low relative to the SG&A costs of running a newsroom, so I don't think this phenomenon is unique to web startups. But yeah, it makes sense that network effect businesses might sacrifice revenue for uptake.
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.
> The marginal cost of printing another copy of the WSJ is low relative to the SG&A costs of running a newsroom
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.
The WSJ paper edition is profitable. The for-pay WSJ online edition is more profitable. The core Trib paper edition is profitable. The point isn't that online is better than paper; the point is, plenty of businesses with low marginal costs charge high market-based prices. The marginal cost of a few more ground coffee beans is infinitessimal; the marginal cost of servicing one more customer at a Starbucks that is open anyways is very, very low, but Starbucks doesn't give away a loss-leader coffee product to gain share, and neither do its competitors.
Marginal cost is simply not a useful metric with startups. There are plenty of similar industries, and the notion that this means anything at all is garbage.
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.
> Marginal cost is simply not a useful metric with startups. There are plenty of similar industries, and the notion that this means anything at all is garbage.
This entire argument is flawed. If your marginals costs are so low, and you can charge $49+ (whatever) for what is essentially air, that means more money in your pocket. In fact, I'd argue that its much better if your marginal costs continue to get lower as you add more users! Why do you think Microsoft is such a cash cow?
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.
I think this is a point too often forgotten by web entrepreneurs. A product has no intrinsic value - its value is in the eye of the user. This is also to say that every single user has a different value for how much they are willing to pay for your product (which may in fact be $0). Simply because something costs nearly nothing to make, doesn't mean you should sell it for nearly nothing.
> Simply because something costs nearly nothing to make, doesn't mean you should sell it for nearly nothing.
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 your marginals costs are so low, and you can charge $49+ (whatever) for what is essentially air, that means more money in your pocket.
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.
"So, while many applications might have very high fixed costs (like paying people to create wonderful applications like those in 37signals portfolio)"
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.
I believe the point was simply that the cost isn't fixed. It rises in hardware costs, storage, bandwidth, labor, etc. with a user base. It would most likely be very much worth it to have the increased user base. But the profit/cost isn't a fixed ratio.
I think a large part of it was that back in the .com craze it was:
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.]
As an example of the markets you are talking about, imagine 3 people aged 25-35, starting a new business. I am that market, and I have made at least a dozen purchases. Each time it was like this:
* 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
My lower bound is probably 5:1. If you can save me five hours of work per year for the price of one hour's income, I'll take it. A good example is DNS hosting, or a SkypeIn number.
If everyone's out digging for gold, start selling shovels.
>>> It seems that the web has been so thoroughly infected by the memes of “the future is free”, “we’ll all live from ads”, “VC money will get us there”, and “acquisition is nirvana” that it has almost lost its faith in the simpler ways. <<<
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.
I wish there were more prominent examples (like 37signals) of small software companies that subscribe to this model. The VC funding, ad driven model has many, many examples and I think we can all benefit from a more diverse landscape of perspectives. I'd definitely be interested in hearing other examples people know about.
There are literally tens of thousands of small software companies that never stopped charging. Downloadable software got really, really viable with the Internet if you execute well. A lot of them aren't necessarily prominent because they've got their own little slice marked off and don't want to clue people in that there is money there.
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.
The indie software scene is pretty good in the Mac world. No, I'm not talking about the iPhone here. The iPhone hype will soon die out and we'll see more useful applications and fewer fart buttons. I'm talking about desktop software here.
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.)
Charging for stuff is the "mom 'n' pop" way of doing things; if you want to get big, that's going to be extraordinary hard. Youtube, Digg, Facebook, Myspace, etc, none of those would be as big as they are today if they charged users.
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.
I've been thinking about your comment for 20 minutes now, and still don't understand what you mean — what do google/apple, and 37signals/twitter, have in common (business model wise)?
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
I don't understand your argument, because you aren't being coherent. What's low-risk? Selling time tracking software and clearing $20k a year? Or selling bookkeeping software and being Intuit? Where's the zillions of users? Being Aviary and doing free online vector editing? Or selling Photoshop and being Adobe?
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.
Just the whole point of selling something to the end-user. There isn't much which can go wrong — you create something, people pay you for it, and you can grow (resource wise) as fast as your user base does. That's what I'd call "mom&pop", you start with something small, and you expand as your income grows.
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.
A is a low risk lower potential reward, B is a high risk higher potential reward.
To get 'A' right, you have to line up product and price. That's not low-risk. Your argument that B is higher risk/reward than A is nonsensical; it depends entirely on the particulars you choose.
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.
Spoken like someone who wasn't old enough to see pets.com crash and burn really.
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.
It's not less valuable, it's just that in that situation the "product" is not your product...the user base is your product. There is a fundamental difference between improving a product for customer.paying-user and improving the user base for your customer.paying-advertiser.
It is less valuable imho. The public has a bit of a history with falling in love with the latest 'free' craze, then quickly abandoning it for the next flavor of the week. Look at the whole concept of 'social networking', first you had BBSs, then that went away in lieu of mainstream chatrooms, they then lost mainstream popularity to MySpace, and as we speak, MySpace is being overwhelmed by Facebook. Tomorrow, no one will care about Facebook for something new and shiny and Web 3.whatever.
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.
I know this is a weasel thing to say, and I apologize in advance for that, but I don't see where we actually disagree.
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.
I think it should be argued here that what you are trying to sell also really matters. 37Signals sells business software. I don't think you can get away selling social network software or search engines to consumers.
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.
A more useful discussion would be, what kind of apps should be paid? and what kind should be free? In my opinion paid apps/services have to meet a few criteria:
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.
Brilliant. I love the idea of bootstrapping start ups, but I love it more when the start up has some kind of business model behind it. The real achievement is not only to get 'eyeballs' but paying customers. After all, once you're keeping yourself afloat, you can continue to do what you do.
There was an article titled 'Free is Killing Us - Blame the VCs':
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.
On an earlier post they describe how they came up with the pricing for their products - "Just think to yourself what you'd pay".
Well, for myself, and a fair number of others, that figure is 0. So you have to think of other ways to make money.
Clearly no one would ever pay to be able to use google to search, yet we all value it enormously.
I'm sorry, what? If the options were "Google for $5 a year vs. Altavista", you think Google wouldn't have still have gone public?
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".
$5 a year is a ridiculously low income when compared to advertising. I seriously doubt google would still be around if they had tried to charge users to search the web. Altavista wasn't that bad.
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.
Google has over 128MM users. Assume Google just gets the "really amazing product" conversation rate of 10%; at $5/year, that's a recurring revenue stream of $64MM/yr, at the lowest conceivable price point you can come up with for a good product.
"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".
You're being a message board geek, axod. If you have to pick your poison, and it's signing up for recurring credit card charge versus using Altavista instead of Google, I already know what your answer is. Google didn't have to be free; they chose to be, because given a spectacular product, they had spectacular freedom to find the best way to make money.
Hmm do you think they would have gotten so big if they hadn't been free from the start?
How would they have got the message out that they are better? Free trials? :/
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 think their point of losing faith is demonstrated by your last line: "...Clearly no one would ever pay..." Is that clear? Are we certain no one would pay a small monthly fee to use Google? What if it was tacked on to your high speed Internet bill?
Having faith in charging is realizing you will and CAN lose 95% of your audience and still make a decent living, simply by charging.
You make a good point. I was actually going to edit my post but for some reason it didn't let me.
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.
Because ISPs are terrible at picking winning technologies that are worth paying for. If they provided all their users with a search engine 10 years ago, it wouldn't have been google, it would have been some lame competitor.
On the other hand, perhaps they could get together to sort out a standardised payment method that would make paying for stuff online as easy as it is to purchase an iPhone app. No doubt, this would make them loads money and allow many more sites to charge money from their users.
Right. It just needs to be a generic payment system. Much as we had premium rate dial up ISPs for a while to access porn (Apparently).
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 bill
But this falls flat once you remove the assumption that a user only accesses the internet from a single ISP. So what happens when I decide to make that purchase on my lunch break at work? Or from the free wifi at the coffee shop?
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.
I would pay $10/month, maybe even a lot more for a search engine that learned my interests. Fore example, if I say 'spring', I am not interested in soap, or perfume, or early season vacations. Or if it finds a match in a forum, it discounts posts that have no follow on. My list is quite long, but I could see paying $100/month if it saves me a few hours per month.
"Clearly no one would ever pay to be able to use google to search" - So if Google started charging you a dollar a month tommorrow you would gladly start using Altavista instead?
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.
Sure, if it was an iPhone app, then definitely - people pay for it - it's easy. You just click. I'd probably pay something for a google iPhone app if it was good enough.
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.
Come on, PayPal works just fine. They even have recurring payments. Its silly to pretend theres "problems" with accepting payments on the web. Anybody can do it via PayPal.
It works for a tiny fraction of the whole economy; in fact, even in media, ad-supported content is only a fraction of the revenue --- the motion picture industry is for instance significantly larger than ad-supported network television.
There is no wonder that the rules of the game were dictated by big players, like facebook or google. They taught ordinary internet users (the mass) that good quality (usable and well-designed) services could be free.
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.
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.