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.
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
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.
Just the whole point of selling something to the end-user. There isn't much which can go wrong — you create something, people pay you for it, and you can grow (resource wise) as fast as your user base does. That's what I'd call "mom&pop", you start with something small, and you expand as your income grows.
That's compared to building something, hopefully growing like mad, getting VC funding, getting mentioned a billion times on techcrunch, struggling to just cut even…and then hopefully getting acquired.
I know which I'd choose; for a real business, the paid model is leaps ahead! But what does that mean for the Diggs, Twitters, other massive sites, and big ideas still in peoples heads which can't be monetized by the end-user?
A. Charge users from day 1. Your profit is easy to figure out, you should be profitable early.
B. Build a userbase, *then* figure out how to extract money from it.
A is a low risk lower potential reward, B is a high risk higher potential reward.
To get 'A' right, you have to line up product and price. That's not low-risk. Your argument that B is higher risk/reward than A is nonsensical; it depends entirely on the particulars you choose.
If A is failing, you can tell as you're going, and adjust. It obviously still requires skill, but it's just the time tested "make something, charge for it" model. As soon as you get users, by definition, you get revenue, and if you're competent, that means profit.
With B, you are deferring all or some of your income to some later stage. If it's not going to work out, you might not know that until the last minute when you're supporting a large userbase. You might never find a business model. OR you might hit gold.
Both models are just as valid as each other, it just depends on which you prefer, and which one is more appropriate to a particular set of circumstances.
Spoken like someone who wasn't old enough to see pets.com crash and burn really.
The basic model of capitalism is that if you can't exchange some for of payment for your product, it has no value. You need to create real value in the mind of the customer.
If you don't to that, no matter how much VC you have, you will die.
It's not less valuable, it's just that in that situation the "product" is not your product...the user base is your product. There is a fundamental difference between improving a product for customer.paying-user and improving the user base for your customer.paying-advertiser.
It is less valuable imho. The public has a bit of a history with falling in love with the latest 'free' craze, then quickly abandoning it for the next flavor of the week. Look at the whole concept of 'social networking', first you had BBSs, then that went away in lieu of mainstream chatrooms, they then lost mainstream popularity to MySpace, and as we speak, MySpace is being overwhelmed by Facebook. Tomorrow, no one will care about Facebook for something new and shiny and Web 3.whatever.
When you spend money on something, most people invest more thought into it. You have to make an actual value judgement, rather than saying, well why wouldn't I have a Twitter account, everyone else does.
It's not your user base that is the product, it's what you do with your user base. One word, case in point, Yahoo.
I know this is a weasel thing to say, and I apologize in advance for that, but I don't see where we actually disagree.
Maintaining the size, quality, and ad conversion rate of your user base in a free/ad-funded business is where that business adds value, as opposed to fixing and improving a consumer-funded product. It's probably a lot more work than a consumer-funded product because, as you said, people are distracted by shiny new things and free sites have no "buyer's willful blindness to quality" so you must constantly manage your 'shininess' so they come back.
As for consumers making a value judgment, that does happen with ad-funded businesses; but the advertisers are your consumers and it's the advertisers making the value judgment about whether serving ads to your user base is a good way to spend their money.
I think it should be argued here that what you are trying to sell also really matters. 37Signals sells business software. I don't think you can get away selling social network software or search engines to consumers.
Also, social network-type software requires a critical mass of users in order for them to be effective. If all of your friends weren't already on Twitter and Facebook, perhaps you wouldn't be either.
It's not as straightforward as selling your software from day one to make money.
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.