Is free the only way?

If it's not as easy to build an audience or user base and resell it to a bigger Internet property, what's an online venture to do? Free or Paying is often presented as an "either-or" proposition. Sites such as Slate or The Streethave struggled trying to sell web content and in the end more or less gave up on subscriptions, while paying newspaper archives had mixed results. Indeed, if information wants to be free... then who's going to pay for it?

Most observers concluded from these few examples that it's not possible to sell content on the web, except for the supposedly above-the-crowd Wall Street Journal. For one, these sites had free alternatives and that's the argument people cite against Inside's paying model. We also mustn't forget many people still aren't sold on using the Internet for their daily activities. Just stop using Webvan for a while and visit the local Walmart. Like it or not, all that is Internet has to be compared with offline alternatives.

News sites get much press (in a somewhat circular if not incestuous relationship) but they're not the only field where players attempt to charge users. Online games publishers such as Origin (with Ultima Online) manage to sell users to themselves through subscriptions, thus extending their business modelbeyond shrink-wrap software. Auction sites, led by Ebay and recently joined by Yahoo, also come to mind, since they basically have you pay to meet other people. These are confined spaces that are not connected to their competition (and that will resist outside attempts to do so), so there's a lock-in effect hard to emulate in open systems such as e-mail or hypertext documents (in retrospect, instant messaging systems cut off from one another will seem as weird as if Nokia phones couldn't call Motorolas.)

Online brokers, already a lot cheaper than full brokerage companies, stopped their price war before it hit the bottom and commissions have stabilized. Some porn sites seem to be able to charge even though there is plenty of free smut out there (at least that's what I'm being told!) Compare Amazon.com's 2000 holiday season relatively conservative offer of free shipping for orders above $100, with the crazy DVD deals we had in 1998, back when Reel.com and 800.com were thought of as pre-IPO.

Indeed, recently the death of free has been on a lot of lips. A web application maker, while raising funds from voluntary users of a free service, ponders how to charge and prosper (but may have not felt concerned soon enough by this prospect.) So one might think the end of the dot com folly and the chilly financial markets will lead to equating free offers to the Christmas spirit and getting them out of the new new economy. Since so many organizations offered their stuff for free on the web, it's been difficult to assess the real price elasticity of demand. Now that what Michael Porter names bad competitors - these companies that undermine a whole sector profitability because of their unsustainable business models - are becoming scarce due to "market conditions", it should become easier to rise the price tag above the freezing point.

Free reborn as a business opportunity

But do we need to throw the baby with the water and give up free services altogether? The viral quality of web applications and services still leads to interesting results, as recent examples like Google or Moreover show us yet again. So why give up on low customer acquisition costs if the attractiveness of your offer can fuel word of mouth by itself? If you can't afford the Superbowl ads (not a bad thing) you have to find other ways to make yourself known. So let's try and give a fresh new look at free commercial Internet content and services, not as a fatality, but as a business strategy among others. As there's no such thing as demand completely remote from consumers, let's not go into B2C vs. B2B vs. P2P considerations, and instead think of the Internet in broader terms, that is as a tool for all sorts of markets.

• Gain traction to where? You prove there is interest in your service, and use your installed base to find partners and investors. Backflip had prestigious sites such as Salon or Red Herring use its service, but it nonetheless had to completely realign its strategy to convince investors they could make any money. Once again, it seems you need to have a workable business model these days. The critical mass you're building won't do any good if it collapses on itself. The web advertising market is only so big and dominated by the few largest sites, while hardware and bandwidth are quite expensive when sized to serve millions of users. So we might want to rule out for good the scenario where the site builds a huge following unlikely to translate into revenues but costly to maintain.
  
  
• Be an Internet Believer, control your costs and detract the nay-sayers. Keep your burn-rate in line with your actual revenues, don't tap VC capital, and take whatever advertising income you manage to sell. After all, there is such a thing as a web ad market, provided you have a targeted audience advertisers want to pay to talk to. Better yet, look beyond banners and find ways to send qualified leads to your sponsors, thus coming closer to being a direct marketing channel rather than a branding media. Clickz, recently acquired by Internet.com, looks like such an example. It's a longer road with a lower profile but that in itself is nothing to be ashamed of. Most of the recent layoffs in the dot com world are extraordinary mainly because you have a hard time figuring out why these companies needed so many people in the first place.
  
  
• Engage in a bottom-up sales cycle. Many sites now have a free consumer service they use as a showcase, but their real monetizable market is businesses. Look at Pyra, Octopus, Onepage or E-quill for (more or less successful) examples. Power users and web professionals that start using these tools may fall in love with them and start telling their companies or clients to purchase the corporate version. They have their toys to demo to support what is now "their" sales pitch. Put it another way, these companies get cooperative beta testers and supportive sales reps for free. Who's having a free lunch now? Netscape penetrated enterprise accounts with a "free" browser but ended selling them expensive servers too.
  
  
• Increase distribution and reach. Groove is giving away its client software in an attempt to build a user base that partners will want to market to, much like Notes developed a whole ecology of third-party developers and integrators in the nineties. Here, they don't try to charge individual users, but play a one-side pool shot, since they need third-parties for their platform to attract enterprise accounts. Syndication might also work as way to distribute content free of charge to the end user while the host site pays a fee. ASPs have tried and mixed different pricing models to accommodate their client needs and grow as fast as possible.
  
  
• Give something to support collateral usage. Sure there was a market for paying real time stock quotes. But how big was it compared to the market growth generated by free ones? The later probably lead to a higher number of trades which generate revenues that more than offset the loss of paid quotes. This model is the flip side of the syndication model (yes, someone has to pay the real time quote provider.)
  
  
• Give one side of the house, sell the other. Attract and retain end users with your free service and sell them to the professionals that want to address them through you. We're not talking advertising here, but transactions or services. It's unlikely independent car dealers or real estate agents will do much online business on their own. Intermediaries that cater to their needs and bring them leads, or better, help them close more deals are likely to get paid in the process. Homestore.com is managed by the National Association of Realtors, while Microsoft teamed with banks to sell loans through HomeAdvisor. The strong consumer traffic at their sites allows them to sell services (from web sites to software) to agents, brokers and MLSs. In the process, dot coms may have to realign their grand plans of revolution with the hard reality of how these industries work today. Likewise, Paypal is free for consumers but X.com gets revenue on the money flow, a bit like retailers earning money on the float, the difference between consumer cash payments and their own delayed purchases to suppliers. Consumers don't pay to get through the revolving gate, but the rotation generates a margin nonetheless.
  
  
• Identify opportunities for paying premium services. It's increasingly obvious Yahoo! wants to bill users for some services and possibly content as well. A multi-tiered structure, as pioneered by Hoover's, lowers the barrier to entry (as perceived by users), while more advanced features or premium content come at a cost (see X.com again.) The difficulty lies in finding the proper balance between giving away attractive stuff and keeping enough to charge to allow a significant revenue stream.
  
  
• Undermine your competitors' revenue. Some companies deliberately try to undermine their competitors' revenue base by introducing a free alternative. The cost to fund a loss leader might be less than the threat of a thriving opponent. Microsoft "always free" Internet Explorer was a way to make sure Netscape wouldn't ever get much from the sales of Netscape "sometimes free, sometimes not" Navigator. Sun StarOffice looks like a recent example of such a strategy. I leave it to you to base your corporate strategy on Sun Tzu's writings!

Don't shoot yourself in the foot

For good measure, I'll throw a couple of practices I would rather avoid in order not to undermine any strategy based on free products and services.

• Don't be free too long if you plan to switch to a paying service. You'll educate your users not to be customers. They, need we remind, are by definition paying users. (In fact customers don't even need to be users, they just have to pay, as everyone who sold sitting-on-the-shelf-and-dust-collecting system management software knows.) Your users might even convince themselves they're entitled to your service for free, and resent you for stopping the free spree (we'll see what happens with Napster.) Free trials should be limited in time (eg. eMusic's 30 day trial) or occasional and rare enough that you don't undermine the value perception of what you're trying to sell.
  
• Don't give away unrelated free stuff, you'll get the wrong "customers." Free gifts will attract deal chasers that are highly volatile and near-impossible to retain. They'll come for the PalmPilot (or BlackBerry or whatever is the current trend), not you. There will be always a segment of the population that has fidelity only to the biggest bargain. Deal with sweeptakes at your own risk, as you might find your user base is built on sand. Sweepstakes or freebies work for mass-market products such as fast-food or beverage, but they're difficult enough to participate without purchasing the stuff that most people but the most hardcore freeriders won't bother. On the other hand, sites dedicated to helping you getting free gimmicks on the web abound, because all it takes to try and get lucky is to feed an html form with half-truths about yourself.

Free yourself from the hype

There does seem to be a swing of the pendulum from free to paying services on the web, and that is a good thing to move to sounder business practices. However, we don't want to give up leverage opportunities unique to the Internet, nor marketing tactics that have shown their effectiveness. As with all things, fashions need be taken with a grain of salt.

Olivier Travers, 29, is the cofounder of a looking-for-funding startup that produces digital video DIY tutorials targeted to (r)etailers, manufacturers and consumers. He is an occasional contributor at Traffick.com and has his own weblog at http://webvoice.blogspot.com.