Startup Companies Making Money From Free

I have been thinking about the comment left on my post about Blog Talk Radio and their attempt at monetizing their application.  Then I read today over at HipMojo the article about why companies that are basing themselves on ad revenue will fail.  It helped me formulate my own opinion about how companies in the tech world are struggling with making money.  It is a dance that seems hard to learn.

The game plan seems to be along these syllogistic lines.

  • Come up with an application that fills a need.
  • Develop the application.
  • Launch it and see if it scales, get user feedback and adjust its use accordingly.
  • Begin to build your user base until you reach some determined tipping point number. (This is probably the most difficult step in the overall business plan.)

These are the initial outlines I have seen.  During this period you may have an angel investment or a small first round to get to the tipping point number.  The next step is where it gets tricky.  Now that we are at our initial goal, how do we make it profitable?

Companies have built the trust and admiration of their users by providing a great application that is free and useful.  The users are making it an integral part of their lives.  The company has developed and gathered this large community.  They must leverage that into real money.  As I see it, they have but two choices, advertise or begin charging for the service they once before gave away for free.  A blend of these two would be a third choice.

Advertisers want eyeballs and reach.  The users are what they seek, and the more the better.  It’s all about the page views and the numbers generated from people.  Fewer users, the less they pay for your real estate.  Increasing page views and users increases revenue.  This is a hard fact as CEO’s try to guide the company to profitability.  If an application has 100,000 users it is worth more to an advertiser than 10,000 users.  Companies sell to advertisers and tell them, “We have 100,000 users at X amount of page views.”  The media buyers line up for those numbers.  Problem is, companies such as Blog Talk Radio have to sell based on those numbers, but then they must get the customer or users to get behind the plan. If they ask the users permission perhaps they only have 50,000 of the 100,000 users that will allow ads.  Now their property is worth 50% less to advertisers, and they don’t make money at that level.

Their second choice.  They begin charging the users for using the service.  Or as I indicated above the third choice, charging those that elect not to have advertising on the application a premium. The third choice allowing both opt in and opt out income.  This is risky as you may chase off users that were really sold on the application that was free, but not so warm to paying a fee for the service, or having advertisements show up on a usually clean page. 

It’s a chess match played by advertisers and CEO’s and ultimately users.  How can they all be happy?  I’m not sure that is entirely possible but their must be a compromise somewhere.  Companies are struggling to be profitable, advertisers are cutting their spend to increase their return on their own investment, and meanwhile, the user holds the power of being part of the community and whether the user wants to sell their eyeballs.

I have been touting 2008 as “The Year of The User.”  Companies have been building their user base.  The power the users hold with their attention and their eyeballs and presence make the other parties to the dance want to court them.  I’m not sure the answer, but I think ultimately it will raise the cost of advertising, and may force a new metric not based upon the number of eyeballs and page views.  Who flinches first has not been determined.

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Comments

  1. bahce says:

    Your post is very valuable, thanks

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