This post is inspired by a recent Jason Fried of 37 Signals post. It seems astonishing to me the amount of stuff that we now have at our finger tips that’s free – software tools, platforms, white papers, blog entries, Wikipedia, email, images, spreadsheets, collaboration tools, search, calendars, etc etc.
Now I am as guilty as the next person regarding enjoying the benefits all this stuff . It started for me with Google in the 90’s – couldn’t believe how efficient it was, helping me find facts and figures almost instantly. Of course Google found a really smart way of making money through advertising. (Approx 97% of Google Sales are advertising related.) At $21Bn of revenue, Google can afford to give away a lot of stuff. But here is my worry. How much of Google’s ad revenue relates to small start ups who take a chance that ad-words will bring them business. I wonder what the ROI is on these start ups aggregated ad expenses in a year? Is it really measured? Let’s say that $10Bn of Google’s sales relate to start ups. To see a 20% return these start up would need to generate $2Bn in sales! I doubt they are generating anything like that. So who is really paying for this free stuff? I’m concerned that the free model is influencing emerging leaders starting new companies. They are thinking – let’s get fans, supporters, followers for our free products and we will find a way to make lots of money. Are we really going back to the crazy days of the 90’s when businesses were valued on “Mindshare”.
What do you call a company that produces a product for free – you call it a product!
What do you call a company that sells a product but makes losses – a business with a broken business model.
Finally a company selling stuff for money and making a profit is called a business. Now it may or may not be a remarkable business but it is on the road to success.
I’m coming across an alarming number of start ups who are just not looking at realistic business models to make money.
By all means build the business model around very small sales prices but stop thinking free, I’ll build lots of volume then I’ll charge them for this great content later. Twitter and Wikipedia are terrible “idols” for young businessmen, understanding the economics of making money. My advice to early stage companies is to build a compelling story around your product/service and get some early paying customers that validate your business model.
I couldn’t agree more. I’m shocked to see companies like Twitter and Faceboom being referred to as successful when they don’t make money, or profit. Some of us entrepreneurs are smart enough to be thinking revenue from day one. Of course this means we’re less likely to need investors once we have paying customers, allowing us to keep greater ownership than the startups still looking for funding at later stages. I’m sure this latest Internet bubble of funding for a service that is free will burst soon!
and without real customers paying real money, the chances of getting funded in this environment are very low – Thx Ian