I’m in the process of reading Chris Anderson’s “Free”, which celebrates how the idea of paying little or nothing for many digital products and services is inevitable. Anderson makes a compelling argument that includes the belief that free works because it encourages other economic activity. For example, free music allows musicians to attract more fans, who then cough up money for concert tickets, merchandise and sometimes CDs.
While I like and use plenty of free services (Gmail, Evernote, Skype, Firefox, Twitter), I’m also a businessman who recognizes that companies need to generate revenue to pay employees, do marketing and keep the lights on. However, companies plan to make money – advertising, premium services, consulting fees – they need a plan to drive revenue to make the business viable.
The problem, however, too many start-ups have little or no idea of how they’re going to make money. Instead, they have a “business model” based on the idea that if they attract lots of users, a way to generate revenue will magically appear. After all, this “model” worked for Google, which struggled to find a business model before “borrowing” its pay-per-click business model from Overture, so why shouldn’t it work for other start-ups.
This “we’ll figure it out later” business model is flawed because while offering free services is a great way to attract users, not having an idea about how to make money from some of them is not a viable build a business.
The biggest culprit of this business model is Twitter, which still doesn’t seem to know how it’s going to make money. Sure, there’s been talk about advertising, premium business services or analytics but nothing has emerged yet. Still, it has raised $150-million in venture capital based on the fact it has become a wildly popular communications vehicle with more than 50 million users around the world.
While Twitter may eventually find a way to make revenue, it’s an exception to the “we’ll figure it out later” strategy. The vast majority (99.999%) of companies never attract enough users to figure it out. When the seed capital or venture capital is exhausted, they’re left with a modest number of users but no way to make money. Pretty soon, the pink slips are handed out, the lights turned out and the doors are closed.
So why is that so many start-ups get launched without a clue of how to make money beyond the notion that getting enough users might let them attract some advertising revenue? Why do many start-ups attract investors without even having a rough idea about how to make revenue?
Make no mistake, free is wonderful for consumers, and there are clearly ways that free can be used as a powerful marketing tool to drive sales of other products and services. But for many companies, free is the un-viable business model. Without an idea of how to make money, they never evolve from being interesting projects to businesses.
Instead, most up of them end up as fodder for the “free economy”, never to be heard from again as they disappear into the digital ether.