Category: Business models
January 15th, 2010
Why freemium is bad for business
I’ve never been comfortable with free products for business use, even though it’s difficult to avoid using them if you’re a small or one-person business (web analytics, for example, has been all but wiped out as a low-end paid service by Google’s free offering). As a long-term observer of the scene, my worry is that the track record over the past decade isn’t encouraging; many more free services have failed or faded away than have continued successfully. That’s why my New Year advice to SaaS and cloud vendors was to concentrate on “sound business revenues, earned in exchange for delivering real business value.” So yesterday I was pleased to read Lincoln Murphy’s newly published white paper, The Reality of Freemium in SaaS, which lays bare many of the drawbacks of the model for providers.
The trouble is, many SaaS vendors will still be tempted into loss-making freemium plays of the kind Murphy warns about because there seems to be so much demand they can tap. That’s why I want to devote this blog post to examining why businesses should spurn free online services. Dear Mr/Ms Customer, it is not in your interest to be lured into using free for your business, and here are four good reasons why not:
It means vendors don’t invest in proper access controls. Most low-end free services target individuals (’consumers’) and so they’re built around giving access to a single user. If you’re a business, you’ll probably want more than one user to have access to the same account, but that sort of access control infrastructure is expensive to set up and manage, so free services won’t support it. That’s fine if you can start off free and then migrate to a paid version when you need more access control, but many freemium vendors don’t offer that option.
Here’s what I discovered this week when I wanted Read the rest of this entry »
December 31st, 2009
Tips from 2009 for a prosperous 2010
A recurring theme ever since I started writing this blog (and indeed before) has been my concern to see more robust business models adopted by SaaS and cloud players. The second most-trafficked posting here in 2009 (and the most liked by those expressing a preference) was What have we done?, which appeared in February at the nadir of economic pessimism. In the ensuing months, optimism has made a comeback, and with it I’ve noticed a renewed enthusiasm for the revenue-lite business models I rued in that post. At a time when traditionally we wish each other prosperity in the New Year to come, it seems appropriate to review the arguments on both sides of the free-versus-paid debate. Is it better to use viral marketing to reach the largest possible user base in the belief that revenues will surely follow, or should entrepreneurs and start-ups rely on predictable customer revenue streams right from the outset?
I know that many VCs still favor the approach espoused by the likes of Twitter and Facebook, which uses venture funding to grow a dominant user base before worrying about revenues. Personally, I see some big flaws in this model:
- It’s difficult enough to pull off in the consumer market, much tougher still in the business market, even if you’re targetting the volume small business market or professional individuals.
- If people are going to point to Facebook’s growing revenues as proof that the model works, I’d urge them to look under the covers at where exactly these revenues have been coming from.
- It looks a bit too much like pyramid-scheme economics to me. There are a handful of well-publicized success stories, and hundreds of forgotten or unheard-of failures. That’s fine for the VCs who back the winners, but it’s tough on the entrepreneurs and angels who lose out.
My preference, often expressed throughout the year, is for sound business revenues, earned in exchange for delivering real business value. I think this is especially true for providers that target the small-to-mid-sized business market, since these in the main are organizations that themselves earn their revenues by producing real goods and services of value and selling them to customers. This is a sound, stable, reliable source of revenues that’s relatively recession-proof if you spread your footprint wide enough. Selling concrete, measurable services plays well with larger enterprises, too, but it takes longer and costs more to close each deal, so you need to be careful you’re not spending more on customer acquisition than you’ll earn back once they finally sign up.
Giving away some services for free still has a role as part of a marketing strategy to help get your company in front of prospects for your paid services — popularly known as ‘freemium’. But it must be carefully costed, monitored and managed — for more on this, see How to make freemium pay and What your bank can teach you about freemium. Too many start-ups are masquerading as would-be Facebooks or YouTubes — persuaded that they’re ramping up user numbers in readiness for Read the rest of this entry »
November 24th, 2009
EuroCloud UK and a lesson in SaaS marketing
In the midst of a busy schedule the past couple of weeks I’ve been preparing for the launch meeting in London of EuroCloud UK, the British instance of the Europe-wide SaaS and cloud industry community network that was first unveiled last month. Any readers from UK SaaS or cloud ventures who will be in London this Wednesday are welcome to come along, by the way — there will be quite a few people there from some of the country’s key players — but please make sure you register online (using the link above) before you come to make sure your name is on the guest list.
Acting as EuroCloud UK co-ordinator, I’ve found myself in the past few weeks making some snap buying decisions about online services that I imagine are similar to the decisions many SaaS prospects in start-ups and small businesses are making every day. Trade associations, like government organisations, have to be conscious of the need to be economical in how they spend the funds entrusted to them, so I’ve been wary of incurring commitments. Furthermore, the organisation is as cash-constrained as any start-up — until we start signing up members, we’re decidedly pre-revenue. We’re time-constrained too, since none of us involved in the start-up team are getting paid for our time.
Short of time, short of cash, unwilling to make big upfront commitments: how do such customers make their buying decisions? I thought it might be instructive to share some of the thought processes I’ve gone through with readers of this blog.
The need to promote the launch and track registrations for the event created the first really crucial ‘crunch moment’ when a buying decision had to be made. Read the rest of this entry »
November 5th, 2009
Microsoft cuts BPOS price to squeeze Lotus
While most observers portray Microsoft’s sortie into online email and collaboration services as a titanic battle to keep Google off its productivity applications turf, the real target of this week’s price reductions is IBM’s Lotus unit. In a briefing earlier this week, Ron Markezich, corporate VP, Microsoft Online Services told me that most of his team’s customer wins are at the expense of the IBM division: “Seventy-five percent of our enterprise customers are coming from a non-Microsoft platform — predominantly [Lotus] Notes.”
The half-price reduction for hosted Exchange seats (from $10 to $5 per month) and a one-third cut in the cost of the full BPOS suite (from $15 to $10) is designed to keep those deals flowing through. IBM earlier this year introduced its own hosted LotusLive iNotes service at an aggressive $36 per user per year. Microsoft’s old pricing was at a level destined to give prospects pause for thought. At $60 per year, it’s close enough to raise fewer objections. The lower pricing will surely help, too, in those cases where Google’s $50-a-year service is the competition.
Interestingly, we now have a market price established for online corporate email services in the $35 to $60 per year range (indicative of a new price range for all categories of enterprise software?). As Microsoft VP Chris Capossela told CNET’s Ina Fried, “it’s the price that customers are really excited to buy our suite at … We’re pretty excited about the price and not so much focused on free services or the price Google or others might charge.” You bet.
Microsoft execs were happy enough to focus on Google when it came to throwing brickbats this week. Every briefing seems to have included a drive-by shooting directed at Google. “It takes more than a few billboards to win enterprise accounts,” Markezich told me, in a reference to his rival’s current ‘Going Google’ ad campaign. “There’s been a lot of investment in billboards. I question how much investment there’s been in enterprise capabilities.”
There’s also been a concerted effort to question the size of Google’s paying customer base. While Gmail is hitting the volume mass market, Microsoft currently has the edge in large enterprise accounts. Google spent a lot of PR dollars to promote its recent win of a 35,000-seat account at Rentokil Initial, along with its 30,000-seat contract with City of Los Angeles. Microsoft Online Services is currently scoring much larger wins, including a 110,000-seat implementation at pharma giant GSK, a “large number” of which are already deployed, Markezich told me. He also disclosed the existence of a much larger, as yet unnamed customer, currently “in the midst of deployment” to more than 300,000 users.
October 5th, 2009
The as-a-service business model
It’s interesting to see other industries taking a lead from SaaS and learning lessons from what I’ve started calling the ‘as-a-service’ business model. Especially when you consider that most ISVs still haven’t the least idea what SaaS really entails.
An article republished yesterday on paidcontent.org is by guest author Mika Salmi, former president of Global Digital Media at Viacom/MTV. Time To Change The Lens: Media As A Service discusses the impact of digital distribution on the media industry and argues that the software industry’s transition to SaaS illustrates what lies ahead:
“Shipping or downloading a static physical or digital product is a dying business. Pioneers like Salesforce.com, and now Google with their office apps, are showing how a ‘product’ is not a discrete thing. Rather, it’s an ongoing relationship — with continuous updates and two-way communication — with customers and even between customers.”
Sometimes it takes someone outside our own industry to be so clear-sighted about what’s happening within it. Salmi gets right to the point without getting distracted by discussions of virtualization or subscription pricing. He identifies the core of the as-a-service business model as being the way that it changes relationships with customers:
“This is not just about putting up a pay wall and charging a subscription fee … The ‘S’ in MaaS is not an afterthought or tacked on, it is the entire ecosystem attached to the content.”
If only there was so much refreshing clarity within the software industry, where, as I mentioned in my last post, most people seem to believe they can simply plonk their existing software on the Web or into a pay-as-you-go subscription plan and be successful without having to make any other changes to the way they do business. The as-a-service business model is much more than that, requiring a real-time service infrastructure and culture, able to interact with and respond to the needs, interests and dynamics of customers and their own connected networks.
September 22nd, 2009
Is keeping big media alive good for the future of journalism?
The spectacle of various media tycoons over the summer proclaiming that paywalls are coming back for news content has felt like watching a car crash in slow motion. I suppose if you’re a news publishing executive you have a vested interest in blaming the Web for killing print media, but frankly I think it’s time to put a stop to the bluster. It’s not the Web that killed their businesses, it was the media owners’ own callous lust for profit during the boom years when making money was easy and good journalism was too hard to cost-justify (especially if you left morals and integrity out of the equation).
So while I applaud the latest initiative by subscription billing start-up Zuora to save journalism, I don’t believe that saving big media is the way to do it — even though Zuora’s platform, in other hands, may play a key role.
Many people are worried that the tradition of fearless, relentless investigative journalism that is one of the guarantors of our democratic freedoms is under threat from the financial bankruptcy of big media and its consequent inability to fund such initiatives. But it was the industry’s moral bankruptcy that killed off investigative journalism and replaced it with mindless reproduction of press releases and spin — all the while diminishing reader loyalty and respect. Good journalism costs money and (like prudent banking) it became a casualty of short-term greed, with the Web coming along just in time to pick up the mantle of convenient scapegoat.
Casting around for solutions, some people feel that investigative journalism in the online era should be Read the rest of this entry »
August 24th, 2009
Packaged software, an accident of history
Everyone takes it for granted that the natural order of business is to sell software just as though it were a physical product, shipping it out as a manufactured item and charging a one-time perpetual license fee. In contrast, selling software as a continuously updated service, on a pay-as-you-go subscription, seems like an anomaly. But the accepted status quo is in fact merely a quirk of history, brought about by government action.
It was a ruling in an anti-trust suit against IBM in 1969 that gave birth to the independent software industry, as Rubicon Consulting’s Michael Mace relates in a fascinating blog essay published in May. Independent software vendors (ISVs) are so-called precisely because they were defined by their autonomy from the vendors of computing hardware platforms such as IBM. And since the platforms were physical products, the newly independent software vendors adopted the same product metaphor.
In other words, the genesis of the packaged software model and its one-time perpetual license fee was a government-engineered fork in the history of software. Or as Ryan Martens, founder and CTO of Rally Software, put it when he and I were chatting about this when we met in November last year, the concept of software that everyone takes for granted today was designed by an IBM committee at the behest of Washington DC.
That hardware product metaphor also gave rise to the whole waterfall methodology of defining and building complete software products and then launching them into production as finished artefacts, Martens pointed out. Hardware, of course, has to be built like that, but software doesn’t, as agile development practices (such as those supported by Rally’s application lifecycle management software) allow a more iterative approach. When combined with a SaaS delivery model, the feedback loop Read the rest of this entry »
August 17th, 2009
How mobile networks flunked my summer roaming spend
O2 and Vodafone could each have made an extra $100 or more from me this summer and doubtless from hundreds, maybe thousands of other travelers. But their antiquated billing systems and inadequate demand forecasting have cost them my business and hammered a further nail into the coffin of whatever scant vestige of customer goodwill they had left.
Let me start with O2, the holder of the UK iPhone monopoly (though soon to face Orange as a competitor, it’s rumored). Data roaming charges are a punitive £6 ($10) per megabyte outside of Europe and a still-scandalous £3 ($5) per megabyte within the European Union. The only way to bring data roaming into barely palatable realms of affordability is to buy a 50MB ‘bolt-on’ package for £50 ($84) prior to traveling, thus reducing the cost to £1 ($1.67) per megabyte. Over the past year of iPhone ownership I’ve got used to activating the 50MB bolt-on in advance of journeys abroad and then canceling it once my trips are over. Perhaps misled by the name, I had started to imagine that it might be possible to add a further bolt-on mid-trip should I find myself approaching the 50MB tariff ceiling prematurely.
No such luck, I discovered, when I phoned up to activate data roaming for my family vacation this month. It turns out the 50MB is a monthly ration and, since I was phoning up several days after the start of my billing period, I could only secure a pro-rata 40MB of £1-per-megabyte data roaming for the current month. Furthermore (and at this point I understandably went up the wall into the poor call center agent’s earpiece), since the ‘bolt-on’ had to be activated for a full monthly billing cycle, I would have to pay a full £50 charge for the following month (when I have no journeys abroad) before I could cancel it, thus jacking up the charge to an absurd £90 for a measly 40MB of data roaming while I was actually traveling.
After putting up with my extensive remonstrations, the agent got authority to waive next month’s charge, but I was still left fuming at the total mismatch between what O2’s no doubt hugely expensive billing system is able to handle and what I as a consumer actually need and want to do. This notion that there is a 50MB roaming entitlement that is spread across a billing period is clearly Read the rest of this entry »
July 7th, 2009
The costs of free
A talkback commenter took me to task yesterday for an assertion I made (repeating Chris Anderson’s line from his book Free: The Future of a Radical Price) that “The cost of distributing content and software online has fallen close to zero.” chris@… retorted:
“Phil, you are close enough to the business to know that this is just not true. I’ve been in plenty of budget meetings … and seen the costs in the publicly traded SaaS companies to know that Capital Expenditures is a big chunk of the costs.”
So I thought I’d follow up today by running through the various elements of cost that a provider of free software may or may not bear — and by extension, identify those costs that customers will expect you to bear if you decide to charge a price. This is especially timely given the news emerging yesterday that PayPal is preparing an API that providers will be able to use to collect, aggregate and distribute micropayments, since that could motivate quite a few new entrants into paid on-demand services. As the discussion below makes evident, there’s quite a delta between free and paid, because adding a price instantly adds a lot of additional infrastructure costs. So there are limits to how micropayments can work.
I did qualify my assertion about the cost of distributing software online. Here’s the fully hedged version from my post yesterday:
“Software with mass market appeal — so long as it’s easy to develop, operate, support and maintain — now costs virtually nothing to deliver to customers.”
Now let’s dig into those components and see what’s really involved in driving the costs of software distribution as close to zero as makes no difference. Read the rest of this entry »
July 6th, 2009
Free is not a business model
The usual blast of hot air is wafting around the Internet in a renewed discussion of how to make money from giving content and services away for free. This has been prompted by the publication of Wired editor Chris Anderson’s new book, Free: The Future of a Radical Price. A lot of people seem to like the idea of being able to make money without having to charge for what they do, presumably because the idea of asking people for money makes them uncomfortable, or because they haven’t the vaguest notion of how to go about building a charging mechanism into their website (vide Twitter, Facebook, etc).
The unfortunate side-effect of this kind of wishful thinking is that otherwise sensible people write utter tosh about this topic. I’ve just read a blog post by Mark Cuban, in which he asserts that Google “lives and dies by free.” I don’t think so. Maybe Cuban is privy to a Google scheme that I’m not aware of, but I’ve not heard of Google giving away advertising, unless you count the $50 introductory vouchers it uses to get people hooked on AdWords. Google’s business model is selling ads, and it has so little effective competition that it gets away with charging a fat premium for those ads. Sure, those ads run on content that’s free at the point of use, but none of that content is owned by Google. Google’s genius is to have built a business that allows it to make money by piggy-backing on other people’s free content. The rest of the Web absorbs the risk, Google gets the profit. Nice one, guys.
Not even Anderson believes that people can make money without charging someone for something. In a revealing blog debate hosted by John Gapper of the Financial Times, he spells out that his book is not about free so much as freemium — the notion of giving away some things for free as a means of luring potential paying customers. In a statement that will intrigue the many readers of this blog from the SaaS industry, Anderson elaborates: Read the rest of this entry »
Phil Wainewright is a commentator and strategist on emerging software industry trends. See his full profile and disclosure of his industry affiliations.
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