Feb
21

The Business Model of Free

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Last week I interviewed two companies for an article I did for WebHostMagazine.com. You can check it out at Ecwid and Yola Partnership Democratizes Professional E-Commerce Site Creation. No really go ahead and read it, I am not going anywhere.

Anyway, not that you are back or faking that you went ahead and read it, there was something that both Ecwid and Yola said that has been sitting in my mind since the interview.  I am getting a little bit ahead of myself though. First, intros. Best way to describe Ecwid is shopping cart as an app. Fully integrateable into any site, to include Facebook pages, Ecwid is 100% AJAX, it hauls, and is super easy to use. Yola is a web host that focuses on being able to create an advanced website without the need of technical skills. Okay, so if you didn’t read the article you are now up to speed.

When asked about how Ecwid could afford a free version, CEO Ruslan Fazlyev said, “you cannot afford not to have a free version.” Yola echoed these statements when they discussed their free solution. The free version gives them a foot in the door to compete against larger companies such as GoDaddy and they are confident that once someone uses their solution that they will be so pleased with it they will stick around and “move up the chain.”

Everybody Wants to be, Closer to…

Free seems to be one of the most popular business models on the Internet. When we look at what people use, what downloads are popular, what sites get the most traffic, or any other metric that shows performance of some kind we will see free models come out on top.

For many service industries the differences between providers is not what they look like on paper but how they are experienced. Unfortunately, the large companies will net more users regardless of experience merely because they are known. Therefore a smaller company must use some sort of tool to ensure the audience experiences the service they provide. If the smaller company has done their job of selling that experience (high quality, targets the actual problem of the user, etc), then they keep the customer. If they don’t the customer moves on. This is especially true the lower the cost of the service is. If you only invested a few bucks, then its not too difficult to leave a company. If you invested several thousand you might pass up companies who may or may not provide what you need.

Free is as low an investment as you can go and provides ample reason to leave if the service even seems remotely subpar.

Not Everyone Can be Free

For many companies free ends up being a liability. A few months ago, I read an article on Groupon and how a few businesses were moaning that they placed coupons there for free what have you, and the customers came in and only wanted the free item and nothing else. These businesses lost hundreds and thousands in some cases. Why you may ask, well mainly because they didn’t change their business model to accommodate the two problems of the free business model.

There are two problems with the free business model when applied for the first time to a company. The first one is a problem of moving free customers to paying customers. The second is an extension of the first, how can we make the free option look better than a lot of the competition’s paid for solutions, but not as good as our own paid for solutions.

Bottom line

Do I agree with Yola and Ecwid? Sadly yes. By sadly I mean that I wish it wasn’t necessary. However, I think for many Internet businesses offering a free solution is a necessity. Free solutions commoditize industries and I think place the focus on the wrong subject. Instead of looking for quality or for a solution that truly fits a lot of customers instead go for what’s cheap and if it doesn’t work move on. Free helps to push this sort of behavior and unfortunate small and midsized businesses pay the costs. These businesses generally cannot benefit from economies of scale and unfortunately have to either find a parent company, fold, or offer a low cost/free solution AND make it better than the larger companies. Some businesses do this well like Ecwid and Yola, both offer a great product. Others however fail more rapidly once a free offering is introduced.

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