It seems like a no-brainer for the rest of us, but some business owners – especially those establishing venture capital (VC)-backed tech startups – have strong preference toward growing user base by keeping their services free of charge. So, which strategy to adopt? Should I monetize my products/services or keep them free as long as I can?
While growth and innovation are typically what VCs are looking for, my profit-oriented mind is always telling me that a business is a good business if it makes money.
I’ve seen too many startups – especially tech startups which are burning investors’ money to pursue on development of everything else but revenue – went out of business.
They have grown in value – often to an astronomical value, such as Instagram’s $1 billion acquisition by Facebook, while generating zero, zip, nada, nil dollar in revenue (according to Business Insider, Instagram actually “generates” $2.7 million… in losses.)
I remember a sad story of how a good startup goes out of business…my favourite social news sharing site for finance topics, Tip’d, went out of business due to high operating costs (read: Run out of cash.) It’s now a job search site) It was having plenty of users. The admins and mods are active in maintaining the order in the house. It tried to monetize via ad networks, but it seems that it’s not enough.
You see, for us bootstrappers, we can’t afford to play around; we need to reach our break-even point as soon as we can – or else, we will run out of cash. We need to start monetizing our service as soon as we can and focus on profit – not for the sake of profit itself, but simply because we can’t afford to lose money for too long and we want to stay around serving our customers and the local community as long as we can.
To entrepreneurs who love to startup for the sake of the excitement and the so-called “potential”, perhaps revenue-generating business is boring – even considered as “fatal”. But to me, there’s nothing “fatal” about generating healthy profits and continuously grow them while solving other people’s problems with our products and services.
The way I see it, startups with strong growth but little or no income aims for capital gain when they pursue their exit strategy, typically via acquisition. Well, there’s nothing wrong with that, really. But for the rest us, that’s a luxury.
Want examples of my kind of successful business? It’s simple, really… just check out the 2012 Inc. 5000 list. The list-toppers are generating strong revenue with strong year-on-year growth – my kinda companies!
However, I do respect entrepreneurs who focus on marketing and development via all the benefits of offering their services free of charge. When done right, you can grow your user base and get free marketing for your service/solution due to its popularity (well, it’s free, and people love everything free!)
Investors will somehow come to you and invest in your business; even better, there’s potentially a company or someone who will acquire your business (Facebook, perhaps?)
Get funding first or bootstrap first? Monetize it or grow it? Sell it or keep it?
Well, there’ are definitely things going on in the entrepreneurs’ mind; so many questions to answer and so many issues to address.
As I mentioned above, there’s no right or wrong in starting out – every decision you make has its own set of pros and cons. Want to know what’s going on in entrepreneurs’ mind? Check out this infographic (click on the infographic for a larger version):
Indeed, starting up is a long hurdle. It’s a marathon, not a sprint race. It takes a lot of courage to carry on, knowing the fact that many – if not most – of them will fail within 5 years of operations.
I know I where I am slanted toward, but I think you and I should agree that, whether you are focusing on revenues or growth of your customer base, you need to always focus on the customers and your community. Otherwise your business is meaningless.
So, here’s a question for you: If you are starting out a business, what’s your plan? Will you focus on freemium strategy or revenue-centric strategy? Please share your opinion by leaving a comment…