9 ms·

How did the web lose faith in charging for stuff?

87 points by zaveri 18y ago

tsally 18y ago
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.
- brm 18y ago
  balsamiq freshbooks fogbugz coda writeroom textmate plenty more but thats a start...
- patio11 18y ago
  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.
- GeneralMaximus 18y ago
  The indie software scene is pretty good in the Mac world. No, I'm not talking about the iPhone here. The iPhone hype will soon die out and we'll see more useful applications and fewer fart buttons. I'm talking about desktop software here. I don't know how well indie developers in the Windows world are doing, but I'm sure they're making respectable amounts of money, too. (There isn't enough commercial software for Linux to say anything about the Linux software scene.)
- jshen 18y ago
  You have it backwards. There are far more examples of companies that charge, but they don't make headlines because they sold for billions of dollars.
- profgubler 18y ago
  Here is a niche one realmacsoftware.com. Also, I am pretty sure Smugmug.com is profitable.
patio11 18y ago
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 18y ago
  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.
- critic 18y ago
  > I know more than a few people who spend no money on "music" but several hundred a year on iPods Does one have to buy a new iPod every year?
mdasen 18y ago
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.
- tptacek 18y ago
  The marginal cost of printing another copy of the WSJ is low relative to the SG&A costs of running a newsroom, so I don't think this phenomenon is unique to web startups. But yeah, it makes sense that network effect businesses might sacrifice revenue for uptake. That said, the promise of big paydays seems like DHH's point: how many more of those are there? Even if the era of the San Francisco Startup isn't ending, there's also a huge bias in the reporting of outcomes for aspiring SF Startups: we only really hear about the ones "important" enough to get funded. Most companies that shoot for the moon on VC and free services fail. Your odds of winning with free are not good. You might even be worse off taking VC money; if you bootstrap on a free service and don't strike gold, you die in 6-18 months; if you get funded, you might lose 4 of the best years of your life on something with no chance. Just my thoughts about your comment.
axod 18y ago
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.
- josefresco 18y ago
  I think their point of losing faith is demonstrated by your last line: "...Clearly no one would ever pay..." Is that clear? Are we certain no one would pay a small monthly fee to use Google? What if it was tacked on to your high speed Internet bill? Having faith in charging is realizing you will and CAN lose 95% of your audience and still make a decent living, simply by charging.
  - axod 18y ago
    You make a good point. I was actually going to edit my post but for some reason it didn't let me. If it was a simple case of having something tacked onto my ISP bill, then I'd be far more likely to pay for things. I think that's an area ripe for development. Why ISPs haven't attacked it yet I don't know. Ad supported is still a pretty good model though and will be around forever. It does depend on who your users are though.
    - emmett 18y ago
      Because ISPs are terrible at picking winning technologies that are worth paying for. If they provided all their users with a search engine 10 years ago, it wouldn't have been google, it would have been some lame competitor.
      - swombat 18y ago
        On the other hand, perhaps they could get together to sort out a standardised payment method that would make paying for stuff online as easy as it is to purchase an iPhone app. No doubt, this would make them loads money and allow many more sites to charge money from their users.
ashleyw 18y ago
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 18y ago
  Give us a break with this "mom & pop" stuff. You want to compare Google to 37signals? Fine, I'll compare Apple to Twitter.
  - pchristensen 18y ago
    Fine, I'll compare Apple to Twitter [coke came out my nose]
  - ashleyw 18y ago
    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 18y ago
      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.
utnick 18y ago
The web didn't invent advertising as a business model. It has worked and been around for a very long time.
- tptacek 18y ago
  It works for a tiny fraction of the whole economy; in fact, even in media, ad-supported content is only a fraction of the revenue --- the motion picture industry is for instance significantly larger than ad-supported network television.
- run4yourlives 18y ago
  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 18y ago
what are you successful consumer subscription products?
greyman 18y ago
>>> 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.
ryan-allen 18y ago
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-blame-the-vcs http://www.businessinsider.com/2008/4/-free-is-killing-us-bl... 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.
c00p3r 18y ago
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.
known 18y ago
To succeed on web, be opportunistic and sell of quickly.
BenS 18y ago
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.
anamax 18y ago
I find the emphasis on marginal cost somewhat interesting because biz that don't recover average costs lose money.

87 points by zaveri 18y ago

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.

brm 18y ago
balsamiq freshbooks fogbugz coda writeroom textmate plenty more but thats a start...
patio11 18y ago
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.
GeneralMaximus 18y ago
The indie software scene is pretty good in the Mac world. No, I'm not talking about the iPhone here. The iPhone hype will soon die out and we'll see more useful applications and fewer fart buttons. I'm talking about desktop software here. I don't know how well indie developers in the Windows world are doing, but I'm sure they're making respectable amounts of money, too. (There isn't enough commercial software for Linux to say anything about the Linux software scene.)
jshen 18y ago
You have it backwards. There are far more examples of companies that charge, but they don't make headlines because they sold for billions of dollars.
profgubler 18y ago
Here is a niche one realmacsoftware.com. Also, I am pretty sure Smugmug.com is profitable.

patio11 18y ago

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 18y ago
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.
critic 18y ago
> I know more than a few people who spend no money on "music" but several hundred a year on iPods Does one have to buy a new iPod every year?

mdasen 18y ago

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.

tptacek 18y ago
The marginal cost of printing another copy of the WSJ is low relative to the SG&A costs of running a newsroom, so I don't think this phenomenon is unique to web startups. But yeah, it makes sense that network effect businesses might sacrifice revenue for uptake. That said, the promise of big paydays seems like DHH's point: how many more of those are there? Even if the era of the San Francisco Startup isn't ending, there's also a huge bias in the reporting of outcomes for aspiring SF Startups: we only really hear about the ones "important" enough to get funded. Most companies that shoot for the moon on VC and free services fail. Your odds of winning with free are not good. You might even be worse off taking VC money; if you bootstrap on a free service and don't strike gold, you die in 6-18 months; if you get funded, you might lose 4 of the best years of your life on something with no chance. Just my thoughts about your comment.

axod 18y ago

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.

josefresco 18y ago
I think their point of losing faith is demonstrated by your last line: "...Clearly no one would ever pay..." Is that clear? Are we certain no one would pay a small monthly fee to use Google? What if it was tacked on to your high speed Internet bill? Having faith in charging is realizing you will and CAN lose 95% of your audience and still make a decent living, simply by charging.
- axod 18y ago
  You make a good point. I was actually going to edit my post but for some reason it didn't let me. If it was a simple case of having something tacked onto my ISP bill, then I'd be far more likely to pay for things. I think that's an area ripe for development. Why ISPs haven't attacked it yet I don't know. Ad supported is still a pretty good model though and will be around forever. It does depend on who your users are though.
  - emmett 18y ago
    Because ISPs are terrible at picking winning technologies that are worth paying for. If they provided all their users with a search engine 10 years ago, it wouldn't have been google, it would have been some lame competitor.
    - swombat 18y ago
      On the other hand, perhaps they could get together to sort out a standardised payment method that would make paying for stuff online as easy as it is to purchase an iPhone app. No doubt, this would make them loads money and allow many more sites to charge money from their users.

ashleyw 18y ago

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 18y ago
Give us a break with this "mom & pop" stuff. You want to compare Google to 37signals? Fine, I'll compare Apple to Twitter.
- pchristensen 18y ago
  Fine, I'll compare Apple to Twitter [coke came out my nose]
- ashleyw 18y ago
  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 18y ago
    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.

utnick 18y ago

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

tptacek 18y ago
It works for a tiny fraction of the whole economy; in fact, even in media, ad-supported content is only a fraction of the revenue --- the motion picture industry is for instance significantly larger than ad-supported network television.
run4yourlives 18y ago
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 18y ago

what are you successful consumer subscription products?

greyman 18y ago

>>> 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.

ryan-allen 18y ago

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-blame-the-vcs http://www.businessinsider.com/2008/4/-free-is-killing-us-bl... 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.

c00p3r 18y ago

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.

known 18y ago

To succeed on web, be opportunistic and sell of quickly.

BenS 18y ago

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.

anamax 18y ago

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