Posted May 27, 2008 11:10 am by with 35 comments

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I’m so glad to see the Financial Times take a look at the biggest flaw with the "free" model that’s embraced the web: you can’t make money with it!

“There is going to be a shake-out here in the next year or two” as many Web 2.0 companies disappear, said Roger Lee, a partner at Battery Ventures.

Despite this, venture capital firms are still eager to throw money around…

Yet that has not stopped a continuing round of venture capital fundraising and acquisition activity at high valuations as investors and corporate acquirers hunt for businesses capable of rising above a crowded field.

“If you look at some of the valuations, you wonder what fantasy of revenues they’re based on,” said Mitchell Kertzman, a partner at Silicon Valley venture capital firm Hummer Winblad.

Which brings me to my own experience.

While other start-ups spend their time raising obscene amounts of VC money–furnishing swank offices in Silicon Valley, holding elaborate parties, and hiring superstar employees–Trackur is proof that "old school" still works.

Take a look at how Trackur is a departure from a normal start-up:

  1. It was self-funded, no time wasted finding a VC firm.
  2. It has one employee–me. Everyone else is a contractor–great guys, mind you–but Trackur is very lean, when it comes to staff overhead.
  3. Speaking of overhead. Trackur is headquarted in Raleigh, NC–at my home to be exact. You’re welcome to stop by, but I need to ask my wife first. 🙂
  4. The total cost to promote Trackur has been just a few hundred dollars–smart marketing will always beat hefty ad budgets.
  5. It’s nimble. Trackur didn’t launch with a huge bang, which meant less pressure out of the gate. Likewise, it’s built to scale, as it grows the user base. That helps prevent the kind of issues faced by others.

Perhaps the biggest difference between how Trackur operates, compared to the many VC-backed start-ups is, we have a business model! I’m often asked to provide a free version of Trackur. My response is typically: "why?"

Offering Trackur for free would require a huge investment in servers, would take more employees to provide feedback and support, and would need VC funding just to keep the lights on. By actually charging for the service, I can:

  • Scale it with fewer issues
  • Spend more time on customers
  • Adopt a "cash in, cash out" approach–which means new features are added without being out of pocket
  • I retain 100% ownership and control
  • I don’t ever have to worry about explaining to a future buyer, "how exactly do you plan to make money?"

Twitter, YouTube, et al may have the limelight, but Trackur has the business model. While "free" start-ups are dealing with scaling issues and monetization headaches, I’m building a company that will (hopefully) continue to increase revenues each month.

You can have the TechCrunch/Wired/Lifehacker buzz, I’ll take the old fashioned model of actually  making money, thank you very much!

  • Ho man do I relate! I’m exactly in the same situation with WASP ( Self-funded, one guy, started off my kitchen table. Had a couple of companies who wanted to help (pay to get some control) and I preferred to keep it small and simple. The only difference is that I do offer a free version that has brought me good visibility and amazing feedback (and very little donations I must say!). I’m getting close to my first commercial release and my goals are quite realistic considering the market, but optimistic considering it’s a one guy venture!

  • @S.Hamel – I’m not against a “free” version, but when it’s your only version, how can anyone make money? 🙂

    Trackur has a 2 week free trial, which is plenty to help someone decide if they find it valuable or not.

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  • Andy, congratulations on Trackur. At the Universal Business Listing (UBL), we have been approached it with a similar model. No VC, Independent contractors,etc. and have found a model that work for fee with 40% to affiliate marketers. Wish we could do the “free trial” with our model, but it does not work for the UBL.

    Good Luck with this new venture. We hope to be an advertiser soon as budget will allow.

  • I think that the one who really has the best chance at monetizing the “free model” is Google.
    1) They already have a very well established ad network.
    2) Free web apps are added value to their ad network because
    3) it helps with user retention, tracking, and targeting.

    CT Moore’s last blog post..3 Steps to Increase User Retention

  • @CT Moore – I agree to some extent–even Google is having trouble making money with YouTube. I think Google’s “free” model is causing others to adopt the same–and they simply don’t have the resources to compete.

  • @Andy Beal – No doubt that they’re having trouble with YouTube. I was thinking more along the lines of office-oriented applications, however, such as Google docs and, your main competitor, Google alerts. 🙂

    CT Moore’s last blog post..3 Steps to Increase User Retention

  • @CT Moore – lol, Google Alerts is fast becoming a “four letter word” around here. 😉

  • Well andy, actually nothing is ‘free’ in this world. So if something is free to the ‘user’ someone will definitely have to pay to compensate at the beginning.

    However, having a ‘free’ version with ‘some limitation’ often works for many businesses. Because even though the area is not that competitive today…ORM is becoming a popular topic and once users start realizing a need for it…there will be a huge demand for such systems.

    And a common rule is…demand attracts supply…and thus…in no time…there will be duplicate applications out there which will promise to have the ‘same features’ …….but usually they are just disasters!

    If the current Trackur Model of 2 weeks Trial & No Free option works for you then I guess its just fine and you should continue keeping it that way.

    However it would be interesting if you have a “FREE version” which will have the same capabilities as google alert (and perhaps a little more)……this way I guess you can increase your user base even more.

    Saad Kamal’s last blog post..McDar Keyword Analysis Tool

  • A real “business model”. Who would have thunk it? 😉

  • I’m fine with paid services, but every such service should have its prices right on the homepage or have at least a “pricing” link on the homepage. It took me quite a long time to find the pricing (the most important info for your customers) on

  • @Saad Kamal – I’m not convinced a free version does me any favors. It increases costs, with no guarantee that users will switch to the paid version. I’d rather have 2000 paid users, than 200,000 free users. 🙂

  • @Ole – a fair point, maybe we’ll make pricing more obvious. Thx

  • Nice startup there! It is a pain to monetize websites since the only options for most are only ads.

    MarketingDeviant’s last blog post..Watch the Fires burning across the River

  • Its ok for me with paid services.

  • This is a perspective to have. Thanks for sharing your business philosophy. I would probably do things the same way.

    Mike Morabito’s last blog post..Killer Quotes that could’ve been Creativity Killers

  • To paraphrase BSG, “All of this has happened before, and it will happen again.” The first Dot-Com bubble had the same sort of VC and startup excesses. They haven’t learned anything from the first brutal lesson. I’d say we’re partying like it’s 1999 right now.

    BTW, the companies that survived the last bust all had business models that involved customers paying them money. Imagine that.

    Don Draper’s last blog post..Social Suite Beta Tester Saves a Week a Month with Digg Analytics

  • There are a number of free alternatives for TrackUr. With some work you can use Google Alerts, etc.

    Elections guy’s last blog post..Obama wins Oregon primary

  • @Elections guy – don’t make me hurt you! 😉

    Seriously, go ahead and use the free tools. I listed many of them here:

    Trackur is much more sophisticated and offers more than Google Alerts or Bloglines.

    I built Trackur because I thought there must be a better option than using 26 different tools and having to manage each one–and there was, Trackur! 🙂

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  • Great article Andy. I’m still a firm believer in the “you get what you pay for” ideal. Advertising/marketing space will only go so far – but it can make a nice top up. But charging for a service makes it much more sustainable, and you’re less likely to run into financial problems that may alienate and drive away your loyal users.

    Gregory Brine’s last blog post..When building a successful website, think beyond the presentation and back-end code

  • Tyler Banfield

    It’s funny that we’ve gotten to a point where many people actually think it’s strange to have a business model that involves charging customers 🙂

  • Andy,

    Couldn’t agree more. The “entitlement” mentality that we see in life in general has bled over into the idea that everyone deserves what they want just because they want it. Not sure what happened along the way, but the last time I checked the definition of “profitable” there neede to be an exchange of funds! Keep up the great work.

  • It’s funny, just today I was reading a Wired article from a few months ago called “Free! Why $0.00 Is the Future of Business.”

    It’s a different situation to your case but Chris Anderson makes some interesting points.

  • @Adam – I read that article while flying to a conference. It made me think long and hard about Trackur’s revenue model. After much back and forth, it came down to this: a free model would bring more publicity, but not revenue. A paid model would take more work, but generate revenue from day one.

    How many start-ups do you know generate revenue–or make a profit–from day one? 😉

  • Makes sense. I think the “free” model has merit but there has to be a logical connection, as in some of the examples in that article – giving away razors to create demand for and sell razor blades, giving away music to create awareness and sell concert tickets and merchandise, etc. With web services that connection is typically generating ad revenue or gaining enough attention and users to be acquired. But advertising is not always a logical fit, and hoping to be acquired is not exactly a sound business plan…In addition individual entrepreneurs are not always in a position to use a loss leader model.

  • We’ve had the same issues over at Promote-My-Site. We provide some free tools with the goal of getting awareness, and we monetize with ads. The problem is that this doesn’t work well with tools — people are focused on their task and tend not to click the ads. But for building up a group of users, it’s been a great strategy. Our plan is to start rolling out some premium tools with a ready audience. But if it were all free, I doubt you could bring in enough revenue to cover the cost of the development.

    I think a lot of what we see “free” on the internet is because people wouldn’t pay for it. It’s a question of business value.

    Do the math: if you can sell ads for $1 CPM, you’d need 250K hits to make the same money that you could get from 5 paying customers at $50. The free model doesn’t work with small target audiences. It’s a heckuva lot easier to find 5 paid customers than 250K hits if you’re providing real value.

    Don Draper’s last blog post..Social Suite Beta Tester Saves a Week a Month with Digg Analytics

  • @Adam – I agree, “free” has its place, but shouldn’t be the standard.

    @Don – you hit the nail on the head with your last paragraph. I’d shudder to think what CTR ads on Trackur would get, and I’m sure I’d need a lot of clicks to make any money that way.

  • Imagine that… charging for stuff. 🙂

    You know you’ll get no arguments from me on this issue. And I hope to take a closer look at Trackur this week… I’m way behind!

    Brian Clark’s last blog post..A Cranky, Skeptical Loudmouth Looks at Social Media Marketing

  • Hi Andy,

    I agree more with your last comment that “free has its space”, but not too much with your initial post on thw WSJ.

    “Free” by itself will not bring revenues. Revenues come when free is used in a sound business strategy which has a clear way of generating money. Twitter is free but does not (yet?) have a business plan. Google is free, but generates revenue through ads.

    So, in the end, it comes down to what you support throughout your post: the business model. And this model can make use of free or not. You chose not to.

    A good article on the same WSJ article is, IMHO, this one at techdirt:

    They are much better at explaining the necessary connection between free and business model and between scacity and zero marginal cost.

  • It’s funny Andy, but I did not see a brief explanation of what your product does in your opening post. While granted, some will work harder to find out what it is exactly, others who are skimming the post might have benefitted from a quick blurb on what exactly it is… Maybe it’s the inner marketer in me who has too much time to look at silly things like that. I even re-read twice to see if I missed it…

    One question I have for you is, are their tools that you use, that are free? And if they were not offered for free would you be willing to pay for them?

    What about the RadioHead business model? I know some have used that with varying degrees of success..

    Marc Meyer’s last blog post..10 random social media facts, lists and questions I have for our web 2.0 world

  • @Marc – I guess I’m trying to make the post about the model, not the product. Still, you could have clicked the link to the Trackur site. 😉

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  • I agree wholeheartedly about avoiding VC capital – why make yourself a slave to debt and push back your breakeven point right from the start. I began my first business without a loan, VC capital or much in the bank and it was a real struggle at first – but boy am I glad I did it that way now.