If Charging is Wrong, I Don’t Want To Be Right!

When I met with Anthony from Squarespace last week, one of the topics we discussed at length was charging users vs. providing a free ad-supported service. Squarespace provided a free service when they began operations but quickly moved to a paid-only service. Anthony said the members actually appreciated the paid plans and he didn't have to support another 250k customers on a free ad-supported plan.

This past weekend, Nick from Techcrunch wrote about a new iPhone service from a company called Mundu. He believes the service should be free, here is his comment:

“So why in the world will they eventually charge $11 for it? There are way better ways to monetize software. Offer a free version and drop an advertisement into the conversation every once in a while, for example. But if Mundu wants to get a lot of users fast before Apple adds their own apps, they can’t be screwing around with charging customers. The marginal production cost of software is zero. That’s what the price should be.”

While the marginal production cost might be $0, the actual cost to produce the software is not $0 and keeping the company running and the software up-to-date is not $0 and neither is paying the labor costs.

Brad from 37Signals had this to say in response to Nick:

They forget that not everyone has Google’s search subsidies, Yahoo’s traffic, or Apple’s hardware revenues making up for their “free” bundled software. The rest of the companies in the world have to put a price tag on their wares and sell them on the public markets. And surprise!… The public is happy to pay for great products. Advertising-subsidized product revenue is just a teeny tiny sliver of the overall economy. Most of the rest is buying and selling of goods.

It seems at every conference I get into a discussion of free-vs-paid services. The accountant in me always wants to charge for services rendered. I never hear anyone say that eBay, Paypal, or Microsoft should give their products away for free. Yet every startup it seems has to be free or face the wrath when they decide to charge. I think many startups are afraid to charge because as soon as they stick their shingle out there with a price, they fear the Google free-monster will invade their territory. It's simple: you charge for a service, you might have less customers than free but you will most likely generate more revenue from that set of customers. The downside to paying is that competition might hurt and the customers you do have will be much more demanding of service and satisfaction.

Question: When you started working on your product or service, did you have a plan in mind of how to generate revenue? Was it assumed amongst the team that you would just be free and ad-supported?