C2C Balloon

Freemium model rocks!

Posted by Horacio Poblete @ April 17, 2009 in c2cballoon

5 comments

We’ve been discussing the weaknesses of ad-based revenue models for web applications. Now we would like to share what, in our opinion, is the best way to monetize a web startup. Let’s remember that startups need to produce positive cash flow, which doesn’t simply mean occasional funds or a second round of venture capital.

We believe that if you have a web application that makes users more efficient,  helps them save money or improves their organization, you should seriously consider adopting the Freemium model. It’s great for consumers to have a free starter account (which is generally for a limited time or with limited features) so they can test the application’s features and learn what it’s all about. For the prosumer market segment you can offer Premium, Pro accounts with enhanced features.

Free = Consumer
Premium = Prosumer

In Freemium model some heavy users are willing to pay for the service and subsidize the costs of running the business. The average conversion rate of free to premium offerings is about three percent. However, it is still important to provide a free service so users can become fans of your startup and help spread the word about your great service. You can offer a basic free service and charge for Premium enhanced features. If you do this it will be ok, but we suggest dealing differently with your free accounts. People don’t want to feel that they are getting a free, “second class” service account. Make them feel respected by giving them all the best features, but in a small quantity. They want a taste of the same high quality as paid accounts.

Apart from “Freemium,” there is also a “donation” model which deserves attention. Let’s check, for example, the Remember The Milk “Pro” account. For only $25 you get a one year Pro account. And what does it mean? Basically that you get “a warm fuzzy feeling for supporting RTM”. So they are not really charging for Premium features but asking for a donation to support their great service. I did it and I was glad, as it is a great web application.

Now let’s do some math. Remember The Milk has more than 500,000 members. Let’s apply an average conversion rate of two percent to this amount. They earn at least $250,000 per year in donations, or, more than $20,000 per month. This is not bad at all, and I’m glad for Bob T. Monkey.

Although it’s our favorite model to monetize a web startup, Freemium model is not a magical solution for every web business. It will not work well under certain circumstances, such as if you have a consumer-facing social network.

Please leave your comments and we can discuss where and when to not apply the Freemium model.

Should I charge for my web application?

Posted by Horacio Poblete @ March 19, 2009 in c2cballoon

3 comments

For some time now, I have been hearing about how web applications need to be free, or very close to free at the least.

The interesting fact here is that these “free future” gurus are often owners or founders of social networking sites. And as we discussed on our last post, no one has a clue as to how to go about making cash from a social community; the ad-based revenue model works only for huge and very particular social sites. So why then should we consider that this “free” model is worth it for everyone?

If you have a consumer-facing application, perhaps you don’t really have much of a choice and you have to bet on creative strategies to make money for your business indirectly. But if you have a fancy and useful business-oriented web application, why on earth wouldn’t you charge for it? Why do some pseudo-gurus insist on turning the word “charge” into a dirty one?

Let’s say this very clearly. Startups need to become cash flow positive, and as one friend always tells me, “in an economic crisis cash is king.” There’s nothing to be ashamed if you focus on profitability, especially if you are building your web business in a socially responsible way. Humanizing Technology remember? Let’s be consistent here. We simply cannot expect entrepreneurs to invest in bringing brilliant ideas to life and building sustainable web businesses based on the weak ad-based revenue model.

Even if you have big subsidies and raise huge capital, you should put a price on your idea if you have a niched product. You’ll be amazed - and maybe you shouldn’t – at the number of people who are willing to pay for a good web application.

Do you believe you have a great product? Does it help your clients save money, make them more efficient, or just be more organized? Then don’t hesitate and put a price tag on that web application.

Do you want to make money with a new social networking application?

Posted by Horacio Poblete @ March 12, 2009 in c2cballoon

2 comments

Well, welcome to the club! There isn’t a clear and killer way to monetize social networks yet. Consumer-facing applications are struggling to pay the bills using the traditional advertising model, and even if you read in the news that “Facebook is worth $15 billion,” you may face significant challenges if you want to make money by building your own social networking application.

The interesting thing is that even if nobody has a clue about how to make millions with a social community, they still can sell it. Blame the “bubble” for this irrational behavior.

People may tell you that these sites have zillions of members, high traffic, marketing potential, blah, blah, blah, but ask yourself if you would pay just $10/month to use MySpace or Orkut? Your answer is probably a resounding “No!”

Here, we are talking about big, huge social sites. It just doesn’t seem reasonable to me to believe that small or new social networking applications can really be profitable with an ad-based revenue model. You have more chances of winning the lottery than to have the same luck and success as Facebook.

I’m not saying that social networking is not for businesses, but the big problem is that it’s not clear what it is you can do with a consumer-facing social network when it comes to making cash. There’re some great business-oriented examples like LinkedIn, but they don’t count only on advertising to be profitable.

If you want to do something cool, and you don’t care about its profitability, then go for it! And write to us as we really love to talk with passionate and idealistic people like you. But don’t do it for the money. Coolness shouldn’t be confused with business utility or profitability.

It’s about time we had a reality check. Startups must recognize the need for profitability. I think some investors are going to lose of lot of money if they’re rooted in irrational behavior. And this time, they can’t really blame any economic crisis.

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