Free-But-Advertising-Supported Products: Why leave cash on the table when the customer is willing to spend it?

I am so very tired of seeing monetizable services given away for free with the flimsy excuse that money will be made through advertising.  Once you set a price for a product, it is very hard to raise it.  Set it at free and you’re stuck with it for the life of the product (or the company).

I’m not saying all ad-driven businesses are bad.  As with all things, there’s a time and a place for an ad-driven revenue model.  But more often than not it’s a cop out, and a crappy one at that.

Here are some cases where ad-driven revenues make sense:

1)  Some products simply can’t be commercialized in the traditional sense because of their very nature.  Search is a great example.  Many sites do it, some better than others.  All have their revenues driven by advertising and that’s fine.  Webmail and web browsers are two other examples.

2)  Some products are new and different and they require lots of users to be useful.  Free becomes a pre-requisite to make user adoption as frictionless as possible.  Ad revenues become a way to staunch the bleeding from the balance sheet.

3)  Some products are highly disruptive, taking on an entrenched business and redefining the business model in the process.  For example Craigslist (not advertising supported, but free for most users) took on local newspaper classifieds with a free model and are apparently winning hands down.

There are probably other examples, but in each of the above cases, there is a clear reason to go with Free/Ad supported.  There’s also the Fremium model, which is another beast (and another post) entirely.

But there are plenty of products that fall outside those categories that people will willingly pay for.  And if that’s the case YOU SHOULD CHARGE THEM.

No other industry I’m aware of is so willing to give away it’s revenues. And I, for one, am tired of it.

Here’s a case in point…  At the recent Startup Weekend in Chapel Hill, we came up with Workperch.  It’s a simple idea.  Entrepreneurs often don’t have nice office space and occasionally need it for a couple of hours or a day.  Many companies have space that’s not in use 100% of the time.  Workperch is a match-making service for people who need very temporary space and companies that have it.  You pay when you book a space and workperch takes a piece of that payment.

The value add for the location is that we handle identity verification
and billing, and make the booking process simple.  We’re also building
demand that can generate additional revenue for them.  We don’t charge the locations an upfront fee because we want a low barrier to entry, but they do "pay as you go" through the percentage we take off the booking.

The value add for the individuals that need space is that they have no easy way to get it otherwise.  There are no strings attached and no long term commitments or contracts.  You book space as and when you need it.  A base level virtual office program will cost hundreds of dollars per month, with facilities such as conference room usage adding $100-200+ per day.  With Workperch, people can find spaces for $10-30 per hour on a one-off basis.

Here’s a use case…  disruptorMonkey is like any other startup: every penny counts.  We don’t have offices and we will hold off on formal office space for as long as possible.  But at least a couple of times a month, I’ll have a meeting with an advisor or board member and want something a little more private than Starbucks.  With Workperch, I’d search for a space, pay a nominal referral fee (not a "rental fee" because we’re not sub-leasing) and be all set.  The host location gets to pocket most of the referral fee and Workperch pockets 10%.

It’s a useful service that people would be willing to pay for.  If I don’t want to pay, I have free alternatives (Starbucks, Carribou, Panera Bread etc).  Workperch will never be a billion dollar business, but it could build a healthy customer base and generate decent revenues.

And yet during the weekend people repeatedly "felt" it should be free.  We were somehow taking advantage of our customers, or that we’d never gain traction if it wasn’t free or <insert vague argument here>…

So let’s say we made it free.  What would that do?  In the absence of a fairy godmother, we’d need a revenue source.  So Ad-driven is the way to go, right?  Well not really.  Workperch will never be a premium destination for millions of people, so revenues from something like AdSense will ALWAYS be minimal.  Sure, we could make it some kind of entrepreneurial portal site and try to build a huge audience, but that’s an awful lot of work that has nothing to do with the core business.  It’s an unnecessary complication.  The alternative is to sell our own ads.  And that’s just dumb — not enough traffic to make AdSense work and now we’re adding expense because we need salespeople to sell the ads.

There are numerous other reasons why it’s a bad idea, like undermining our ability to verify identity.  But as Occam says, the simplest answer is, all things being equal, the most likely.  And in this case, if people will pay for a product, there’s simply no reason to give it away for free.