Free – is not a business model

Firstly – I’ll start by saying I think Chris Anderson is an incredibly clever guy. I thought his book ‘The Long Tail’ was and is the future of business. But when it come to ‘free’ he has got it wrong this time. As has Seth Godin and all the other ‘free’ converts.

As Malcolm Gladwell correctly points out, they are forgetting many of the fundamentals in business, by getting caught up in the stale newspaper argument, which in the new digital economy, is the easy and soft target of who will disappear. The irony of this ‘newspaper’ argument is certainly lost in the broader economy. The non digital economies are a lot bigger than newspapers and other beleaguered digital industries.

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So why is it that ‘Free’ is not a business model. Quite simply, any business without a revenue generation model wont exist over time. We only need look at the the dot com bust of the late 1990’s to see this reality. It’s also much too easy to get caught up in the success of Google and others which ‘started free’ to build demand. But many of the subsequent ‘Free’ offers like Youtube, Facebook, Myspace, Flickr may have been successful for the owners, only because they sold to a business with a large chequebook – not because the business itself was financially successful. The Google business model is not too dissimilar to that of Network TV – generate eyeballs, sell advertising….. Nothing new here.

The real question in the so called ‘Freeconomy’ is how many businesses can be supported by the advertising sales model? So why the idea of ‘Free’ is being touted as new is beyond us here at Startupblog.

Here’s what ‘Free’ really is – it’s part of the marketing mix. It’s the 4th P – Promotion. It always has been and always will be. Anything a company gives away for free is a promotional tool to sell something. If these businesses who use the so called ‘free model’ fail to sell something there are only two options for them as time passes:

  1. Go broke & run out of cash
  2. Get bought by large company who values what they have created, albeit ‘non-financial’

Whether it be Proctor & Gamble, giving free shampoo in letter boxes in 1957 or Google giving free search and maps in 2009. It’s part of the mix to attract potential customers, who will be converted into on going revenue. It isn’t free. Free is not a business model, moreover it’s sampling & promotion for associated revenue generating activities. So to call it the future of business as ‘free’ is absolute folly.

Sure Anderson can argue that digital stuff is becoming so cheap it may as well be free – as per the transistor example he uses. But the thing that really costs money is building demand and infrastructure – the kind of stuff that’s really expensive. The other point to consider is the example of some things which previously cost money (a newspaper) is now available free on line, doesn’t mean everything is heading down the free path. Rather it means that certain industries are dying – not that ‘paying’ will be a thing of the past. In fact there are just as many examples of items which were once free, consumers are now being charged for Education, Toll roads, Water, Seeds.

The advice I’m giving here is simple.

No business can survive without revenue. Free, isn’t free, but a promotional expense, the 4th P. If your industry is getting flooded with free – it’s on it’s deathbed – look elsewhere. Industries die all the time when the revenue dries up just like those trying to cope with the current digital conversion. Don’t assume you can build something awesome and give it away with the ability to sell it (the business) or something associated later – chances are you’ll run out of money before that.

The future of business isn’t Free, and the idea isn’t new, it’s part of a complex marketing mix. And if you want to own a startup to thrive, my advice is simple. Have a price which isn’t all zeros.

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Consumer language & leadership

It’s one thing to be clear and succinct in our copy writing, and it’s another thing entirely to create language which means something to consumers. Language which paints a clear picture in the consumers minds that you can solve their problems. The best way to do it is to relate numbers to something we are all very familiar with…. ‘Join for the price of a coffee a week.’

In recent times some of the world leading websites have done this beautifully. Web businesses where scale matters to the end users, websites where this type of language can be the difference between a click out, and instant confidence.

Seek.com.au – A new job loaded every 30 seconds (Great this’ll have the job for me for sure…)

Elance.com – $201 million in provider earnings. (Wow, I will make money using this site…)

Flickr.com – 2744 uploads in the last minute (This is a safe place to store my photos…)

As soon as we read information like the examples presented above we know we are in the right spot. That we can do our business right there, right at that moment. And I know what you are thinking, this is the type of language that is limited to the successful few – not so, all it takes is a little bit of creativity to find some numbers which mean something….

We just need to work out what we are the most, best, biggest, quickest at, and there will be something. Maybe your site is the hyper local expert. Has more X from your city. The most members in Y community or the lowest click out rates for the industry? Even a micro website does something the best. And as soon as we work out what we are the ‘most’ at, we need to put it right there on the home page, no better yet, the top of every page on our website.

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Community overload

Today I had a discussion about an entrepreneur who runs a well know business in Australia. He commented about building a community, then working out how to extract revenue later.

Seems everyone is trying to build on line communities these days. How many auto generated emails are you getting? My inbox is full of them. Sure we know it works, we know it’s crucial, we know its all about the community. Interestingly when we say community we don’t really mean it. We mean bunch of people who we can do direct selling to. But here’s a thought:

There are only so many communities we can all belong to.

People are suffering from ‘Community Overload’.

The law of diminishing returns is not excluded from community participation. We only have 24 hours a day – something the internet hasn’t been able to revolutionize just yet. And just maybe some of our people / customers / community don’t care as much about what we do as we’d like to think.

It just might be time to flip our thinking a little here. Maybe we can just sell something instead. Maybe create a great product or service which people value – and just leave them alone. The ultimate community which matters is family and friends, and the best way we can serve that group is by not stealing time from it.

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Threadless – quotes from Ross Zietz

On Monday night I went to the Threadless in Conversation shindig in Melbourne.

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In truth I expected a bit more on the business side, and little less on the design fan boy love.

In the spirit of creating value I have written below some quotes I took from Ross which are in blue, and my thoughts are underneath which are in black.

‘We’d rather just have a conversation’

– Still largely one way. We listen, but to those who deserve to be heard.

‘Started in 2000’

– Another example of overnight success taking nearly 10 years.

‘We saw the idea for threadless and said what if we just did it?’

– Again ideas are free, ideas are everywhere, doing creates winning.

‘I saw a tiny little ad for it in a magazine & just submitted a design & got hooked’

– Action….

‘My interview was in an Irish pub on St Patrick’s day drinking green beer’

– Pretty cool, why do people sit in stupid rooms to conduct interviews, maybe alcohol should be at all job interviews?

‘My title (Art Director) doesn’t really represent what I do. I do all kinds of different stuff’

– Job titles are an outdated idea from the Industrial Era.

‘ Our prints are not selling well…’

– Even successful businesses have flops.

‘Interacting with the community is the first part of my job’

– They all say that. But I wouldn’t know as I prefer Neighborhoodies.

‘My eduction didn’t prepare me for it. It was on the job I learned.’

– Education is just a ticket to the ball game.

‘People want to win, so they tell their friends’

– Viral stuff is about them, it’s never about us.

‘We’re going back to American Apparel. Custom is too hard’

– They create the Illusion of customisation.

‘We’re good friends with the guys at Twitter’

– Collaboration and relationships win in business. Who you know matters.

‘They opened a store because it was a cool idea and people asked’

– Sounds like a diworsification to me.

‘Whenever we have a sale volume goes up like a 100%’

– Even cool brands have price sensitive customers.

‘We email voters to remind them when a shirt they voted on is printed’

– Sounds like a little like spam, er sorry, bacn, but it must work.

‘The oldest person in our company is like 35’

– Is culture age dependent? I’m really curious. Comment if you have the answer.

‘We had a CFO who was like 50 or something and he just didn’t fit in’

– hmm, Did you let him?

‘Our team at threadless has 32 people’

– Sounds like a reasonably tight organisation. We don’t need huge numbers of people to get stuff done.

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