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Start Charging Users for Services – Please

This is an exceptionally long post. This is what happens when I sit on a topic for a really long time.

The views in this post were influenced by having read two other blog postings related to this topic in the past month or so:

Deal or No Deal (David Hornik)
WTF (Russell Beattie)

And, a friend pointed me toward this article by Fred Wilson that I had not read before composing my post, but hits on many of the same themes in a more succinct fashion.

Something has been gnawing at me for a really long time and I finally decided to write about it. I have been chatting with many friends about what business models work today and I have not found many people who agree with the following statement:

For lots of new companies who are hosting/storing content for users or providing a valuable service of some sort, the road to self-preservation and self-determination lies in actually charging users to use your service.

Yes, I think that’s it. I have much more to say on this. Before you start pelting me with objections, I sat down and thought about some of my favorite products/services on the web today. I have listed them below:

37Signals (all their stuff rocks)

Before I go too much further, I would like to say that all of these companies offer a paid offering of some sort. I am not saying that they offer an exclusively for-fee offering, but they all have the audacity to actually charge for access to some portion of their product.

I’d like to point out that this argument/model is not universally applicable. Specifically, I want to carve out a
few niches where directly charging end users does not really make a whole lot of sense:

-Traditional search businesses (general search and vertical search when you have real scale)
-Consumer-focused community sites that achieve scale* (MySpace, Facebook, etc — sites with 20MM+ fanatical users in an attractive demographic)

In the new Internet world in which we live, I think one thing is true but has not been widely discussed. In the spirit of throwing out maxims, I also think the following is true for most popular new Internet services:

At some point, the very evidence of your own success (staggering compound traffic growth) will threaten your very existence.

Why do I say that?

Let’s walk through a hypothetical exercise for a new shiny thing on the Web:

a. As your user base grows, the amount of content you are storing on behalf of users will continue to grow as well.
b. At some point, your original architecture/infrastructure will be ill-suited to cope with the exploding growth you experience
c. To deal with the issues raised in b), you will have to raise money from investors, start charging users, or incur more personal debt.

What is a newco to do when faced with this dilemma? My guess is that you probably try to sell. In this market, with M&A exits for hot web properties being fairly constrained in terms of exit price, the option of taking VC money might be both painful in the short run and detrimental to your future M&A plans. Incurring more personal debt is a financing decision, but should not be used as an excuse to not address your business model issues.

There are a few reasons that I think the idea of charging users is not always heretical:

a. Having users plunk down cash for your product/service is a real validation of what you are doing.
b. When the actual costs of providing the infrastructure that people are using is clear, I would argue that users would not be philosophically opposed to paying for some services.
c. Paying for service brings cash in the door. That will allow you to continue to scrape by and grow.

I will just highlight Flickr and 37signals because I think they are on to something. I have plunked down cash (or had someone plunk down cash on my behalf) for products from both organizations. Why? Well, first of all they both had the audacity to actually ask! Second, they are both producing products whose value to me as a user exceeds the cost by a very wide margin. And, if I didn’t own my own domain with dirt cheap hosting, I would plunk down cash for Typepad as well. With the exception of major web properties, I don’t expect to get very useful products and services with real storage costs for free forever.

There has been so much chatter about the lack of business models with all of these shiny new things on the Internet. People have been trying to come up with crazy advertising variants or other new schemes to extract value from users. What about the oldest business model in the world? Why has it become so wrong to simply charge users when you are providing them with something of value?

I can hear the objections coming. Before you can say “But the point is to build a really large audience first and then figure out how to monetize it later — don’t you get it how this all works?” let me propose an alternative. It is true that these kinds of models can and do work — look at Google and AdSense if you need a really clear model. But this model has also failed. Napster was pretty popular. Friendster was pretty popular. Evite was pretty popular. Heck, I can think of a ton of businesses that got big but never got real. There are lots of things on the web that achieved scale but never really became businesses.

I don’t want to denigrate the advertising business model per se. Advertising is a business model that works really well when you have scale and advertisers who believe (or can get empirical evidence) that your user base is actually interested in receiving advertising content. Advertising is a rational choice in many cases, but it works best when you combine scale and relevance. And, I’d just like to point out that I don’t think that any one business model is universally effective — neither advertising nor charging users should be assumed to be always the answer or never the answer.

The thing that makes scale so attractive is that so few companies achieve it. If everyone could achieve scale, achieving scale would not be such a big deal or a powerful accomplishment. And it wouldn’t create billion dollar companies. Let’s not confuse scale in new Internet terms (read 500K to 1MM users) with real scale (add a few zeros to each of those numbers). It’s real scale that drives big companies and the reality is that most ideas out there will not achieve it.

So, there you have it. I would like to see more businesses out there who are doing cool things and have the gall to actually charge users for their products and services.

Comments? You can always email me.

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