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.
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.
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.
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.)
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.
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.
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).
>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 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.
(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...
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...
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).
 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/
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)
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.
I guess I need to give it more thought.
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.
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.)
Well, great food for thought, thanks.
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.
I think Angry Birds priced it right -- here is a complete product for free, here is an _expanded_ complete product for a buck.