
How do free services on the web make money? - balajiviswanath
http://www.forbes.com/sites/quora/2013/02/26/how-do-free-services-on-the-web-make-money/
======
chewxy
Interesting coincidence - last night I finished my first post in a series of
posts about startup business models. Specificaly, advertising:
[http://blog.chewxy.com/2013/03/06/startup-business-models-
ad...](http://blog.chewxy.com/2013/03/06/startup-business-models-advertising/)

My startup is going thru a series of heavy re-thinks, so I thought I would
blog about the different models, and how to approach them in a rather thorough
fashion.

~~~
balajiviswanath
Thanks chewxy. The only issue is that advertising is getting increasingly
sophisticated and contextual. The big boys (Facebook and Google) have way too
much data and crowd out the smaller startups. So, startups should start
thinking beyond advertising as a main source of revenue.

~~~
chewxy
I maintain that if you know what you're doing, advertising is ridiculously
profitable. Most of the time though, most startups that use advertising do it
because: they don't have other business models, and so advertising is shoe-
horned in.

On the other hand, a startup that knows what they're doing will know that
building out the correct audience is the way to go - if you provide your
clients (the advertiser) what they want (quality, relevant audiences,
preferably with intent to buy), you can do quite well.

~~~
boyter
Any examples to support your case?

~~~
chewxy
Google (the search engine) would be the prime example. A search engine is the
service that Google provides, and by virtue of its service, they build their
product (audiences) by making the audience self-select into niches (i.e
intents).

Google isn't a startup anymore. If I were to be asked about more recent
startups, I'd list Buzzfeed, the 9gag peoples, Ben Huh's company (can't
remember the name) amongst those with quite decent strategies for advertising.
You may notice that they're almost all content based companies/startups -
that's because it's easier to build audiences with content.

------
KnowledgeSponge
There's a big one missing from this list that is somewhat recent.

Selling the placement of audience segmentation/retargeting cookies on a
publisher's site to a data aggregator like Bluekai (typically on a CPM bases)
who then sells that aggregated data to DSPs/DMPs for use in display
advertising.

If you want to learn about a whole different layer of the ad tech industry,
just start perusing some of the questions on Quora for Bluekai
(<http://www.quora.com/BlueKai>) and then do some digging on the companies in
the Data Aggregator and Data Supplier buckets of the LUMAscape for display
advertising ([http://www.lumapartners.com/lumascapes/display-ad-tech-
lumas...](http://www.lumapartners.com/lumascapes/display-ad-tech-lumascape/)).

~~~
dangrossman
I wonder how they're going to work around two of the four major browsers
blocking third-party cookies by default.

------
pcl
Ironically, the original author (who has some sort of Quora affiliation) did
not include "generate content and resell it to other free web services" in the
list.

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rmason
Here's one he forgot: I've seen niche content sites that after building a
community hold conferences. They may have advertising but it's the conference
that's their main money maker.

~~~
balajiviswanath
That's a good feedback, rmason. It is a niche model that could be added to the
article.

~~~
justincormack
Its not that niche eg TED.

------
david_shaw
_Disclaimer: I'm going to comment on my personal experience running a free web
application,<http://sleepyti.me>. It's not meant to be self-promoting, but I
feel that the experience is relevant._

There are a lot of ways to make actual profit (not just break even) with free
applications.

The Hacker News crowd doesn't always show a lot of love for the "small, free
application" crowd, and the echo chamber is correct that having a webapp
doesn't mean you're a startup.

I know that I don't consider myself the "founder" of my app, because my site
is not a company. I'm not trying to make it a business.

That said, though, this write-up glosses over what has been, in my experience,
the easiest and most straightforward way to profit from free traffic: _non-_
targeted ads. For me, that means a single banner advertisement served over
Google Adsense.

Now, like I said, I'm not trying to make <http://sleepyti.me> my primary
income. If I wanted to charge users, or enter deals with, say, large mattress
vendors, that would be different. But that isn't to say that the traffic and
feedback I've received hasn't helped me both personally and professionally.

Personally, I've received a lot of attention from my app. It's pretty popular
with college students, and it's gained media attention from outlets such as
Lifehacker, the Toronto Star, and most recently the New York Times.

I'm not listing these sources to self-promote, but to show that from a
personal exposure standpoint, it's opened many doors for me.

The same goes professionally: I had a brief partnership with YC-backed
WakeMate, which, although now defunct, allowed me to interact with an early-
stage YC company that I otherwise would not have been able to experience. I
get between 1.6 and 2 million hits a month, and the financial reward has been
steadily increasing through my single banner ad as well.

People always say that "if you're not paying for it, you're the product," but
I don't think that that's always true. I don't prey on my users, and I can
think of several free apps that operate in a similar--even _less_ obtrusive--
manner. Trello, for example, neither serves ads nor sells my personal data (I
hope!). Sometimes it's worth it for a developer to create something and truly
release it for free, without having the immediate motive of profit.

I always tell college students who ask how to break into an industry--whether
it's information security, professional programming, the startup world, or
anything else--to _do_ something. Sometimes a free application, such as the
one I created as a free weekend side-project, turns into more than what it is.
I'm more than aware that my experience is mostly a fluke, though. The take-
home message should be that _even if it doesn't_ become some massively-
profitable, highly-trafficked app or site, it's still something that you
built.

And that has value.

~~~
NathanKP
Exactly. I did the very same thing, made a small app that showed off my coding
skills. It only made about $1000 through Amazon Affiliate sales over the
course of a year, but it got some press coverage and got me numerous job
offers, one of which I ended up accepting.

There is a lot of value to be had from providing a free web app if you are a
lone hacker looking for a job.

~~~
davidw
So - the people who make enough to pay you a salary - what business are they
in, and how do they make their money?

I'm not trying to be snarky. Well, maybe just a little, but in a good-natured
way - I think you got a good deal that probably met or exceeded your
expectations, which is commendable!

But you did not create a sustainable business. To do so with ads is not
impossible, but since each user generally gives you way, way less revenue than
with something where they pay for it, you really have to parsimonious with
resources per user.

------
jacques_chester
Advertising sucks because worldwide inventory grows faster than the supply of
eyeball-hours to view the ads. So there's constant downward pressure on
prices.

Subscription sucks because you have to fight subscriber fatigue ... if you can
get someone to sign up at all. People sweat over $5/month memberships;
meanwhile they spend $20/wk on coffee.

Micropayments suck because everyone hates the mental overhead.

I have a solution I call "microsubscription". The only problem is that it's
been tried by others and failed. Naturally I feel I've got the magic
ingredients that the others didn't have, but ... we'll see.

~~~
chewxy
And yet, there are still sites that will command a high eCPM. The difference
is of course, the audience quality.

Like I mentioned in my latest blog post[0],

> Real time bidding engines are getting more and more intelligent, and would
> be able to guess with quite good results, how valuable a user is to the
> advertiser. This allows the advertiser to only pay high amounts for
> audiences that matter to their ROI, while paying low amounts to audiences
> that don’t.

> What happens is then this: a segregation of high paying advertisers and low
> paying advertisers form. When I say high paying advertisers I mean
> advertisers who would pay high for the right audience. They will pay
> significantly higher than the low paying advertisers, who would “spray and
> pray” their ads in hopes of reaching the right audience.

I maintain that if a startup is able to build the correct audiences
(StackOverflow building an audience of IT professionals for example), the
revenue from advertising will be substantial.

[0] [http://blog.chewxy.com/2013/03/06/startup-business-models-
ad...](http://blog.chewxy.com/2013/03/06/startup-business-models-advertising/)

~~~
jacques_chester
My original motivating problem was: how do blogs I like make money?

Blogs that aren't about answering Oracle Obscure Platform 6.75a-R2 questions.
Blogs that aren't about mesothelioma. Blogs that aren't "review" websites.

Honest, good old fashioned smart people writing thoughtful stuff.

Based on who I've talked to in areas of business and politics and the visible
spread of ideas in Australian public intellectual life, the demographics for
the blogs I directly host are _amazing_. Highly paid professionals all round.
They're read in ministry offices and C-suites all over the country.

To scrape some of this high-quality audience $$ I'd need to adopt a very high
touch advertising policy and use invasive user tracking to prove my
demographics. I don't have time or the moral flexibility and neither do the
bloggers.

Hence: how do the blogs I like make money?

(Answer right now is: at their dayjobs.)

The technology I've developed allows users to be tracked visiting
participating websites without the websites being able to piggyback on my
scheme to track users across multiple sites. It's resistant to the visit
falsification attacks present in any standard tracking scheme.

Pointless without a business, of course. So watch this space, I suppose.

~~~
chewxy
Ever thought of advertorials? Advertorials + rev share would be a good idea
had you not listed "moral flexibility" in your list of constraints.

I noticed you host John Quiggin. I used to read him a lot. This is how he
would use his blog to make money: sell his books to his blog audience. Tyler
Cowen, the guy behind Marginal Revolution used to have this trick where he
would give you access to his private cooking blog if you bought his book. Some
form of managed affiliate system would be my best guess.

Also, mesothelioma is soooo 2005. :P

~~~
jacques_chester
When I wrote my honours project (which was the first version of the tech I
developed) I mentioned merchandising; it's pretty hit-driven though.

I personally make money on affiliate links to Amazon. By which I mean "I get a
minute subsidy on my book habit".

Some of the bloggers make a few dollars on advertising, but the amount has
steadily fallen because they aren't sufficiently narrowly focused to be worth
finding a niche advertiser. And they aren't sufficiently widely read that a
more general A/B brand-awareness advertiser would pay much over open-market
CPM.

~~~
chewxy
You seem to have found the problem by yourself. IMO this would be the trough
of sorrow[0] for any startup with advertising as a monetization plan - the
growth but no growth phase.

In my blog post I mentioned that here there are basically two paths to go -
both of which you have identified. If you want to stick with advertising,
choose one?

[0]<http://www.avc.com/a_vc/2012/03/the-startup-curve.html>

~~~
jacques_chester
I am choosing to invent a new model, actually :)

~~~
chewxy
pray share (microsubscription has been done before as you said). How would you
do it?

~~~
jacques_chester
Email me.

Edit: "invent a new model" is hubristic code for "independently invent a new
model that actually can be analogised to some pre-internet models".

------
belorn
Nice list where the author is trying to make a comprehensive list, but then I
also have some criticism of the article. It lacks some models, and it makes an
implied relationship between for-profit and non-profit. In the English
language, this is commonly refereed as making money vs raising money. A
charity or non-profit (say Wikipedia) is commonly not talking about making
money.

Some projects is funded by an indirect sponsorship model. Best example here is
google and their model of giving 20 percent of an employees time to do what
ever project that the employee wants. While Khan academy model is direct
funding, projects that are an result of the google employee free time model is
indirectly funded project.

Then we have non-profit and what they will consider to spend money and man
hours on. Sometimes, that not even remotely related to their primary purpose,
but is just something that interest the people in the organization.

------
saosebastiao
Note that many of these fall into a bait-and-switch category. You use the
product for free for a while, and then all of a sudden you are spammed to high
hell, or functionality is taken away unless you pay.

Paying isn't really that bad of an option sometimes.

~~~
nonamegiven
That's not bait and switch.

> "Bait-and-switch is a form of fraud used in retail sales but also practiced
> in other contexts. First, customers are "baited" by merchants' advertising
> products or services at a low price; then customers discover the advertised
> goods are not available. Other products are "switched" for them; however,
> these items are often costlier."
> <https://en.wikipedia.org/wiki/Bait_and_switch>

Bait and switch means that you're promised or enticed with one specific thing,
but that thing is not available and you're offered something different. The
idea is that you wanted something, so fuck it just buy it and get it over
with. And of course some people won't even notice the switch.

Free now pay later and the other schemes are not bait and switch. When you get
there/sign up, you have the free version right now, exactly as advertised. And
there is no attempt (usually) to hide the fact that free is only for N days,
after which you'll need to sign up.

Similar for free/paid for reduced/enhanced. You're getting exactly what's
being offered.

~~~
saosebastiao
But they are bait and switch when the terms and offers change after you sign
up. Instagram for example.

------
timmm
They don't. They hemorrage money in an attempt to get some claim of silicon
valley gold.

------
trentmb
Gullible VCs.

------
qwertzlcoatl
I clicked the link and got a full page ad and thought that was the joke.

------
BlindRubyCoder
Many times they don't. It's usually something like Instagram where they give
out a product for free in hopes that piles of people will start using it, and
they'll "figure out something later". Worked out great for Google and
Instagram, not so great for 999,999 other startups who tried it.

Personally, I like the idea, but it's tough.

~~~
camus
I always thought if you have a product that works but is free , you can
commditize it by selling your infrastructure as a service ( paid API , hosting
, etc ... ).

For instance , instragram could sell a way to make instragram clones in the
cloud, like wordpress has a free blog script and sells blog hosting for that
script, you get my point. Once you understand a domain and develop an app for
that , should be easy to sell your app infrastructure as a service for
thirdparty apps.

~~~
derrida
The problem? They can't really sell that.

Want to make an Instagram clone? Write a web interface for Imagemagick Youtube
clone? Interface for ffmpeg... This gets boring quickly. :-)

