A year or so ago a friend and I were discussion SaaS and Web 2.0 in general. He said something which resonated for me;

Yeah, I still worry about the whole web 2.0 show me the money thing

His concerns (and those of many if they’d admit it) come from the ever increasing trend towards giving products away and business models based almost purely on the value of membership rather than the value of dollars.

There’s an interesting post over on the Many Niches blog. Brandon says that;

There’s a reason that “free” and “fail” both start with “f” and have four letters.  “Free” is my new four letter word.  A business model that is based on free is frail and bound to fail…. The free movement is completely wrong minded…. Developers need to be paid, and they don’t accept page views.

Now it needs to be set that Brandon is somewhat biased, working as he does for a reasonably large company based in Redmond who make significant money out of charging significant amounts for software. Clearly there are alternative models, advertising supported software (even if I’m dubious) or third party partnership supported models – but it’s also easy to see that both of these models aren’t free, they just shift the locus of transaction to another party.

But if we’re talking about truly free – that is software that has no direct or indirect monetisation path – that is a totally unsustainable model – both 37signals and mashable cover it well.

To put it simply..

  • bandwidth costs money
  • development costs money
  • administration costs money
  • founders need to eat

Any business that thinks they have something viable that is based on a true free offering (and I mean true free as opposed to user free) is crazy.

Ben Kepes

Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

  • Jason Rothbart |

    Hey Ben, Couldn't agree more? It never ceases to amaze me how many companies continue to be created and funded with the hope of attracting eyeballs and monetizing them later. It is still going on. My other observation is "free" isn't really free. If you are a business that relies on free software, you are paying through decreased productivity, security issues, performance or marketing BS. There is not such thing as free. Jason

  • A friend asked my input a few years ago on a business idea. My second questions was "how you are making money"? His idea was to start it free and charge later. It doesn't work that way. Start charging from the Day 0. You may change the prices – up or down as the market dictates – but changing from FREE to something will kill your business.

  • Mike Riversdale |

    Ben, surely you know that "free" isn't "free". When I take SME's through Google Apps (a "free" service) I am very honest that it's NOT "free". It's paid for by advertising (as you mention) which in turn they contribute to by paying for it with their "data" and "attention". TV3 is "free" to the consumer but it's not really is it? Same deal. And those that "give away" their s/w (Silverstripe for example) are using the software to generate an audience for their service offerings. "Free" isn't "free" there either. Another example – I give "free" preso/speeches at conferences, put up free IP on my websites but it's all designed to generate the same for me, a demand for my services. I think "free" is different to how software/computer stuff has normally been moved around (as a product, like shoes, cars and other physical stuff) but the alternative ways of making $$$ are also occurring. It's not one or the other, it's a world of every which way 🙂 The trick is to be very clear HOW the money is coming and not be sucked into some sort of hippy concept of "free".

  • @Mike – I understand that Google docs isn't "free" and that it's monetised through a third way. But the issue I have is more about those services that aren't monetised in anyway (twitter anyone?) and have no real plan towards monetisation. So I guess there are three classifications…. -Software paid for by the user -Software paid for by some third party (advertising) -Vaporware (software that, in effect, is paid for via borrowing against a future value of the provider) This third classification is about as sound as pork bellies, or sub-prime loans

  • Mike Riversdale |

    I don't know about Twitter, do you? Who would've known how Google's free search would make so much money – probably not even Google themselves. BUT, I agree, if there's no concept of having to make money and plan then it's gonna be "auto-magical". Many of the earlier (we're only talking months ago) Web 2.0 companies would've gone the way of, be good, get noticed and get bought" … I think those days have slipped away quite nicely. Meebo.com – what would you say WAS (say a year ago) their plan? And now what would you say it is?

  • @Mike re Meebo – a year ago it was a "build it and they'll cone" play with an idea of the value created by creating a sandpit where everyone could play nicely Today….. I struggle with that one. Maybe ride out the next few months and see how the industry shakes down and where value can be built? 'dunno

  • Marc Lehmann |

    When will people realise businesses are multifaceted and some components can be given away? Do people think Ford make cars? No way, they are in the business of supplier management and labour hire. Assembly is incidental almost. I think you can fail at being free but free doesn't mean fail. The biggest success story of the last decade has proven that. The art is knowing what, how much and when to give stuff away for free. Plain and simple. It's just maths.

  • Sure Marc – but when it's not strategic and discrete free but rather fr in the form of not knowing any alternative then there's a problem.

  • Marc Lehmann |

    I agree. Cash is the price to stay in the game so yes without it free products don't help much. If you PV the value of memberships and apply costs and probability of monetising them then it has real value still. Digg knows this 🙂

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