
How did the web lose faith in charging for stuff? - zaveri
http://www.37signals.com/svn/posts/1615-how-did-the-web-lose-faith-in-charging-for-stuff
======
mdasen
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.

~~~
bradgessler
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.

~~~
potatolicious
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.

~~~
davidw
> 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.

------
patio11
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.]

~~~
aristus
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.

------
ryan-allen
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':

[http://www.businessinsider.com/2008/4/-free-is-killing-us-
bl...](http://www.businessinsider.com/2008/4/-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.

------
greyman
>>> 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.

------
tsally
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.

~~~
patio11
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.

------
ashleyw
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.

~~~
tptacek
Give us a break with this "mom & pop" stuff. You want to compare Google to
37signals? Fine, I'll compare Apple to Twitter.

~~~
ashleyw
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

~~~
tptacek
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.

~~~
axod
It's a pretty simple argument...

    
    
      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.

~~~
tptacek
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.

~~~
axod
Not really.

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.

------
BenS
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.

------
axod
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.

~~~
tptacek
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".

~~~
axod
$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.

~~~
tptacek
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".

~~~
axod
The figure of 10% conversion rate seems pretty high to me. I'd expect
something more like 0.1%. People expect things like 'search the web' to be
free.

~~~
tptacek
If you're telling me you wouldn't pay 40 cents a month to use Google instead
of Altavista, I'm telling you that I do not believe you.

~~~
axod
I _might_ pay that if the small problem of micropayments (IMHO managed by your
ISP) was solved. But it's not.

~~~
tptacek
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.

~~~
axod
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.

~~~
tptacek
No offense, but are you even reading me before you respond, axod? Do you see
why I might ask that?

~~~
axod
>> "Google didn't have to be free; they chose to be"

I read that, and thought "That makes absolutely no sense, because they would
have failed if they had not been free".

Please explain how Google would have grown to its current size, had it charged
users to use its search.

Google chose to be free, because the alternative would have been certain
failure.

------
anamax
I find the emphasis on marginal cost somewhat interesting because biz that
don't recover average costs lose money.

------
utnick
The web didn't invent advertising as a business model. It has worked and been
around for a very long time.

~~~
run4yourlives
I contend that advertising is basically overpriced in general, and was a house
of cards waiting to fall.

Once the internet allowed an accurate assessment of how well particular ads
worked, its vulnerabilities were laid bare.

Note that I'm not suggesting it doesn't work at all, just that it has been
overvalued.

------
pclark
what are you successful consumer subscription products?

------
known
To succeed on web, be _opportunistic_ and sell of _quickly_.

------
c00p3r
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.

