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The only business models I want to work on any more have some mass-market component that is absolutely free, and a niche companion product that makes money off of the exhaust fumes of the mass-market component.

The last two businesses I started are Stack Overflow, which is free, where the careers business on the side makes money on the small fraction of Stack Overflow users who are looking to get better jobs, and Trello, which is free, but the business of providing administrative tools to large organizations using Trello can sustain the whole business.

This is more than just "freemium" or "advertising-supported." Freemium and Ad-supported business models are special cases of this general model. The real insight is that the free product has a chance to reach an enormous audience which provides distribution/advertising/marketing making it trivial to go to market with your paid product.

What Marco is reporting here is that the old-fashioned "make something and get people to pay for it" business is much harder to pull off and likely to always be left in the dust by someone making the same thing for free, getting 100x the user base, and getting 1% of them to pay for some value added feature.




Demonstratively, you are right, as you have shown with Stack Overflow and Trello. But, I think it will take a while for developer mindset to adapt to this new idea. While in reality it may be more difficult to execute on the "old-fashioned" model, in concept it seems much easier to approach. I build something, and then people pay me for it, simple. The new model of I build something, give it away for free, and then come up with a way to make money from a niche part of that seems like a huge risk to take, especially for someone who has not had the previous successes that you have had (using the old-fashioned model) and so doesn't have the same reputation, connections, and capital to support their new venture.


Right. It's not so easy to pull off for someone bootstrapping (but then again, rich players / people with audiences / people with social capital will always have an advantage, this is no different)


Agreed, it's completely unintuitive to a lot of software developers. I run a revenue API company for app developers to help them monetize free apps, and in three years, of all the paid app developers I've spoken with, exactly zero have initially believed me that free App Store apps can generate revenue to even approach the revenue they think they'll capture with a for-pay app. They don't realize that the avalanche of free apps is going to crush them like a Mack truck.

Common sense, creator's optimism, and B-school economics all suggest that paid beats free, I get it. But, sh-t's changed. Chris Anderson wrote Free: The Future of a Radical Price five YEARS ago, but I wish more creators and developers on HN took the ideas described there to heart.


Insightful.

On the other hand, many self-funded businesses are doing quite well charging for services targeted to non-mass markets -- for example, SmugMug (for professional photographers), FreshBooks (for invoicing & accounting), 37 Signals (for team productivity), etc. Some of these businesses are essentially one-person operations -- e.g., AppointmentReminder.org.

I would include FogBugz in this list.

"Make something and get people to pay for it" seems to works well for many vertical/specialized markets, some of which are quite large.


n.b. I'm honored to be included in that august company, but just to avoid people getting the wrong impression, Appointment Reminder is quite a bit smaller than every product on that list.

With regards to the larger point: there are many, many ways to successfully take money from customers.

If you want to build a business mostly on the $20 to $50 per month low-touch SaaS model, you can do that, quite successfully. (ConstantContact, 37signals, SmugMug, etc)

If you want to build a business which addresses customers with low-to-medium touch sales and costs between $25 and $X,000 per month, you can do that.

If you want to build a business which dogfights for $75k to $250k a year enterprise deals, you can do that. (Welcome to the world of boring enterprise software, where there exists surprisingly little visibility since the relevant people don't blog so often, but it basically makes the world go round.)

If you want to do a hybrid low-touch model in the $20 to $50 space, mid-touch in the $X00 to $X,000 a month space, and high-touch in the Enterprise space, you can do that, too. (Some companies move there after discovering that the mathematics of the low-end model are a bit painful if you happen to hit constraints on e.g. market size.)


Based on our experience, this all rings true.

And may I suggest zero touch until you get to $XXX/mo or you are very, very confident that Mr $50/mo will almost never ever cancel.


Smugmug -- started 2002

Freshbooks -- started 2004

37Signals -- started 1999, basecamp in 2004

FogBugz -- started 2000

Point being, these are "old" business. If you are starting something today with all the hundreds of thousands of free apps and freemium based models, the same lessons would not apply.


All of these are also apps for businesses, not casual entertainment for consumers. Also, they are mainly delivered via web, not Apple or Google app stores, which makes it possible to offer a time-limited free trial with no free plan.

I'd hypothesise that both of these are more important factors than being started in 2003 vs 2013.

For a freelancer, $100/month is a good deal if it allows you to get a few more billable hours per month. For a larger established business, $500/month is pocket change that nobody will even notice (and the customer who signs up isn't even spending their own money).


Google Apps marketplace allows for free trials.


    >What Marco is reporting here is that the old-fashioned "make something and get people to pay for it" business is much harder to pull off and likely to always be left in the dust by someone making the same thing for free, getting 100x the user base, and getting 1% of them to pay for some value added feature.
Joel, do you see bootstrapping as viable in your ideal market or does it become a VC only game?


Depends on your definition of bootstrapping.

Joel started both SO & Trello bootstrapped off of the revenues of FogCreek, if I am not mistaken.

So don't see why he would disagree with seeing bootstrapping as viable.


Unless the cost of maintaining a 100x userbase outweighs the combined $$ value of the value added feature for the 1%.


Stack Overflow benefits from network effect, and in the "sharing economy" of people contributing their knowledge in exchange for "internet points". Thus, you do generate value (not necessarily monetarily) off of even free users, if they contribute to discussions.

(I can't speak to Trello as I haven't needed/used it)

I'd argue that the success of the IAP model used in the app stores is much more of a response to the lack of free trial versions, which is kind of like the drug pusher "the first hit is free" sales method...


That's an exciting model when it works.

But it's worth warning founders that choosing where to draw the line between free and paid is the life-or-death tricky part, and it's not always obvious.

I wrote a fairly popular article about this: http://wensing.tumblr.com/post/25167979206/the-anatomy-of-pr...


I would go even further and say that this model is a special case of the more general advertising/marketing model of "Give Valuable Stuff Away For Free". As an example at a smaller scale, content marketing (in terms of blog posts, videos, pdfs, and other informational content [1]) is a great way for businesses to get eyeballs on their page and establish themselves as authority in a particular subject.

This even works on an individual level. I would say that contributing to open-source development on Github is a great way for individual developers to "Give Away Valuable Stuff" and in term become more visible and attractive to respected software businesses who may want to hire them (as full-time employees or freelancers).

[1] Brendan Dunn and Eric Davis have a great podcast about this which provides an excellent definition of content marketing: http://brennandunn.com/episode-006-the-sales-pipeline/


Great example of this is Buffer app that makes $2MM from ~16K users and 1MM free users: http://blog.bufferapp.com/from-0-to-1000000-users-the-journe...


What are your thoughts on say something like a video course? i.e giving it away for free and doing an upsell on consulting or stick to charging for the course?


That's the twitter/blog model for a lot of people. They give away really great content, build their brand, and then hold conferences/sell t-shirts, etc...

The only challenge with that is you have to be really skilled/gifted to get traction in a very noisy environment.

The other challenge with something like "consulting" - is that you don't get a lot of opportunity to scale - you are limited by the number of hours a day you can work (as opposed to conferences, where you are limited to the size of the venues you can book/fill)


>The other challenge with something like "consulting" - is that you don't get a lot of opportunity to scale - you are limited by the number of hours a day you can work (as opposed to conferences, where you are limited to the size of the venues you can book/fill)

Ideally, you do both. One fills in the gaps for the other depending on the cycle of product/service you are in.

I did what you outlined in the first paragraph in a niche market. I have huge foothold, though it took me 4-5 years to get here, and there's a lot of upward mobility to still be had.

I travel a lot during the fall/winter for conferences and large group projects, and do a lot of consulting during the spring/summer. That tends to be how my industry cycles.

IMO, you want to have a broad service offering behind a veil of a major product. For example: Giving talks and conferences is my main product, fueled by a book/DVD set. Profit margins are highest there and scale well. However, this just doesn't work for certain segments of the population, so doing high-priced consulting to pay the light bills is always good - or my current strategy: Doing consulting for a discounted rate while taping the conference for later use in products.


Yes, the brand value approach I understand. Thing is, I don't really want to upsell to events and I agree regards consulting not being scalable, but i have a dilemma regards pricing for my course.

I guess I need to give it more thought.


You know best - but don't overlook the possibility of in-person training for groups. It's halfway between an event and a training course.

I just spent a couple weeks with 7 other people learning about Cisco Routers from a single instructor - Total cost was $7300 each - so, $50K for a two-week class.

There's really good money in in-person class training.


True online as well, by the way.

The kicker is that this plays really really well with established companies. Pretend you're hypothetically a Cisco Routers consultancy. Parachuting into a random company and solving their Cisco Routers problems requires a very experienced consultant, both in terms of technical mastery and in terms of soft skills like interfacing well with clients' technical staff, dealing with political problems where you have imperfect background of who the key players/concerns are, and generic client relations.

Presenting about Cisco Routers (after the presentation has been substantially pre-written) and talking about them intelligently in response to audience questions requires a more limited, and far less expensive, skill-set.

This allows operating consultancies to do training offerings using more junior staff than they use for their consulting offerings, but to sell them at rates and quantities pegged to their consulting reputation rather than at the rate/quantity suggested by the person who will be tasked with delivery. And customers will often be quite thrilled, because training existing employees is often far, far cheaper than hiring pre-existing experts on the open market.

(There exist many other ways to do it. Pure-play training companies exist, for example, and there are companies which focus on synchronous online training, asynchronous online training, hybridized models, etc etc.)


Great advice Patrick. Thank you!


Yes, just went on the similar thing for Elasticsearch - and a number of my colleagues did the same. It was around $800/day, and the class was about 20 people - so there's definitely some money in it.


Wowsers!

Well, great food for thought, thanks.


Totally doable. People are very willing to pay for personal training as a supplement to a video course. I've done this before, except I also charged (much less) for the non-hands-on part, but the far more expensive 2 hours of one on one training sold out first.

Another interesting example in this area is Michael Hartl with http://ruby.railstutorial.org/ which is now perhaps the most popular Rails tutorial out there. You can read it all online for free but he makes very good money selling the PDF and screencasts of it.


Hmm. My course is on Udemy (i didn't want to create my own platform). I've got over 1.5hrs of video content, worksheets, examples, quizzes and live workshops. I'm struggling to quantify the right amount to charge for it.


Zero-marginal cost offerings practically require such a thing.


This is what I thought too. It's a losing proposition for developers that have expensive fixed costs of development.

I think Angry Birds priced it right -- here is a complete product for free, here is an _expanded_ complete product for a buck.




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