Every successful start-upÂ needs aÂ revenue model. Some choose one early in the game, while others choose to wait. The latter strategy sounds very familiar in the web 2.0 world. These start-ups prefer to build their user base before settling on a revenue model. Not only does this tactic affect short-term cash flows, but also the long-term perception of service quality.
Quality? How so? Well, if a start-up chooses to provide a free service from the get-go, suspicions around the quality may arise. This may not seem obvious or apparent at first. Some people might even find this statement offending. But subconsciously, people may initiallyÂ judge the service to be inferior simply based on the perceived monetary value.Â In other words, even though the service may be of high quality, the free price tag may signal low quality to some observers.
For obvious reasons,Â a givenÂ service needs to be tested, analyzed, and compared to other similar competitor offeringsÂ to determine the actual level of quality.
The downfall of charging for a service from the start is purchasing dissonance on behalf of the user. This creates a barrier to entry for service adoption. Subsequently, there is likely a longer path to critical mass. Having said that, revenues are being generated from Day 1. Furthermore, the perceived quality of the service will likely exceed that of a free offering. This strategy seems quite rare in the web 2.0 world, as start-ups are afraid to introduce initialÂ barriers. Instead they try to build a userÂ base as quick as possible, ignore monetization, then try to sell to a bigger company (AKA the web 2.0 revenue model). Failing that, they slap on Google AdWords and pray that they can generate enough page views to cover costs until the next round of financing – definitely not a sustainable model for about 98% of start-ups.
The “free-mium” model offers the lack of commitment and security of a free product, as well as the option to upgrade to a premium offering with added functionality. Many popular web 2.0 companies, such as Flickr and LinkedIn,Â offer this tiered system.Â 37signals is also very well-known for its suite of free-mium web applications.Â By offering a tiered system, a given start-up is able to project an image of quality and confidence. These two characteristics radiate from a company that can offer a free service, but is confident enough that the premium offering will sell itself.