Jeremy Schneider - Post 2: Giving it Away for Free
Posted By: Jeremy Schneider
Posted: 3/27/2009
After thrashing around for the first couple years after starting my business, my partner and I decided to drastically change our business plan. The good news was that we would finally have some direction. The bad news was that our new business model involved giving away the vast majority of our services for free. I think I must have been inspired by watching that "South Park" episode with the little gnomes. They had this great idea that went something like this:
Phase 1: Give away the vast majority of your services for free
Phase 2: ???
Phase 3: Profit!
Although, thinking back, I’m pretty sure their phase 1 involved stealing underpants. But that is neither here nor there. The point is: the system appeared solid. It did seem to hinge on phase 2, but I was pretty sure that would work itself out once we got started.
How did it start? Early on, we were selling custom software. Basically we were building websites, creating databases, whatever people needed. It was a tough way to make a living, because after each project was done, we were back to square one and had no product of our own that could potentially gain momentum or that we could sell with a low marginal cost. One thing we had going for us is that we started carving out a niche in the property management industry. Landlords were generally behind the technology curve and we made a few easy sales of a database-powered website to showcase their properties.
The worst idea I ever heard. We had made some connections in the industry, including some friends at the Washtenaw Area Apartment Association. At this point Jamie Schmunk, a board member of the association, approached me with an idea. He said we should build an apartment search for the apartment association so visitors to their site could search all of their members' properties. I listened intently, smiled, nodded, thanked him for the input and decided it was the stupidest thing I had ever heard.
First of all, creating a fully featured apartment search of many landlords' properties would be a ton of work. The apartment association didn’t have the kind of money it would take to make it worth our while, and it sounded like a maintenance nightmare dealing with all the property managers updating their information in our system. Plus, the property managers were already paying to be members of the association, so trying to up-sell them to list their properties on the site seemed unfair and unlikely to work at best.
But then I remembered Phase 1. So of course, we couldn’t charge the property managers to list. No one would be willing to pay for it, the search would be useless to renters, and the system would die a slow painful death. I did like the idea of more landlords using our system, even if it was for free. It seemed like a good way to get landlords familiar with us, which had to be good, right? So I decided, maybe we could bite the bullet and develop an apartment search for the association for a few thousand dollars. But even that would be steep for them and, more and more, I was liking the idea of getting more landlords in our system. So maybe we could lease them the apartment search for $600 per year.
Then I decided I need to stop splitting hairs and just give them the damn thing for free. I should point out, at this point in the story, that I was only a year or two out of college and had virtually no business success up until this point. I was used to living on a thousand bucks a month, so putting in a month or two of unpaid work on a gamble seemed like a perfectly cromulent thing to do. Plus those little gnomes had to be onto something, right?
Our free service was born. Between the new apartment association website and the various clients who had paid us to develop their websites, we already had a need for a centralized database of rental properties. We decided to expand on that and create a syndication service for landlords to advertise their properties. They list once on our website and advertise on a bunch of different sites. This way, they only have to update their property information in one place. And we decided to give this service away for free!
But why give it away for free? We still get this question when our users find out how valuable our service is. I can answer it in a few ways:
• Because we can. In this crazy Internet world of ours, the marginal cost of providing our syndication service to the next user is tiny.
• Because we have to. This isn’t strictly true, but with craigslist out there and 1,000 more hungry entrepreneurs wishing they were craigslist, it’s harder to pull off a “pay to post” business model these days.
• Because it’s good for business. We currently have about 50 new property management companies registering with us every single day to take advantage of our free service. This gives us an incredible opportunity to sell them stuff. That kind of visibility would otherwise cost a boatload of money in advertising expenses.
Ok, I actually did have a sneaking suspicion of what Phase 2 was. Giving away your service is all fun and good if you can get away with it, but most of us can’t pay the rent in warm fuzzy feelings. If you ask a lot of web startups with a “give it away for free” model how they plan to make money, they’ll just trail off muttering something about growth and advertising. Certainly, some web companies get big enough to get away with this, but for the rest of us we need something slightly more tangible.
Here’s the secret: Sell something! It’s the business model high school drug dealers have had perfected for decades. Give a little away, get them hooked, then make the sale. Well, maybe it’s not exactly like high school drug dealing, but here’s the point: High school drug dealers, much like the underpants gnomes, are seasoned business professionals and we should take a page from their playbooks whenever possible.
So what do you sell? I certainly don’t recommend selling drugs. The tax implications alone make it an unappealing business. You, of course, are better off selling something that is an extension of your free service. The term “freemium” has become popular when describing companies that offer their basic service for free, but charge for the premium service.
Flickr, in my opinion, has the killer freemium model. You can use nearly all of their photo sharing site for free, but they lock down your monthly upload allowance making it painful to use. When you upgrade, you get unlimited uploads and storage. It’s exactly what you want: the free version is attractive and extremely painful to use, and the paid version is all rainbows and butterflies, encouraging people to upgrade.
RentLinx uses a slightly different strategy, which I’m going to make up a word for right now: freelated. With a freelated business model, you give away your entire service for free, but sell a related product (as opposed to crippling your main service). Our related product is a rental housing search for landlords' websites. Instead of hiring a web developer to build a search of their properties from scratch, they can plug in their listings directly from our centralized database that they’re already using. Selling this product is much easier once they know us and love us, rather than trying to cold-call and push a new service on them!
Is it really that easy? Of course not. If it were, I wouldn’t have time to write this blog because I would be too busy trying to figure out how to get the entire Swedish Bikini Team into my Olympic-sized hot tub. But honestly, we’re still in the Wild West days of the Internet and the landscape is constantly changing. Businesses need to proactively evolve or the next craigslist is going to come and each your lunch. (I’m looking in your direction, newspapers). The moral of the story? Be like the gnomes.