Consumers are getting so used to free services and subscriptions that anything more expensive than free is not acceptable. This business model works if there is a long-term strategy to drive revenue and growth.

Quite a number of Web 2.0 businesses are offering free products and services with a cap on capacity (for example BOX.NET, ZOHO, DROPBOX, Flickr, Picasa, just to name a few). This strategy does not work too well for newcomers because there are already so many“me-too” in the “red sea” fighting for the ever shrinking market share. If you want to apply this “free service” business model, the safest haven is in the “Blue Ocean” (Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant by W. Chan Kim and Renée Mauborgne). Create a unique selling proposition (USP) that separates yourself from the rest and give a trial period for customers to try. Because there are no similar products in the market, after the trial, if the customers like what they use, the chance for closing the deal is much higher.

Free products and services is a double edged sword. I would like to bring to your attention an article written in The Business Times dated 13 April 2009 “Pay for research, please” by Lynette Khoo. It is reported that consumers are not keen to pay for research offered by brokerage firms. Reports are expected to be free. To attract customers to sign up trading accounts with them, brokerage firms offer free market research. This is sustainable when the economy is booming and everyone wants a piece of action in the stock market. The transaction volumes generate millions of commission dollars for the brokerage firms which is used to finance a team of researchers. However, in bad times like now, transaction volumes are low, the research team becomes a huge liability. The company cannot remove this “free service” for fear of upsetting the existing customers who may happen to have trading accounts with their competitors. Furthermore, if their competitors are providing the “free service”, they have to bite the bullet and struggle to support the research arm.

No doubt you can cover the research cost by selling the service to companies who want to gain publicity in the investment world. By doing so, the research will be biased and does not provide the investors with an objective analysis of the company. This is not what the investors want when they are doing their due diligence on companies. In a weak market, as noted in the article, companies would prefer to conserve cash instead of hiring someone else to research on their company. On hindsight, would it be better to provide unbiased, objective research to customers who has successfully committed a certain volume of trade?

Back to the Web 2.0 businesses. Facebook is free for all to use after so many years. They wanted to first capture as much market share as possible in the shortest possible time (Competing with MySpace). Their success has attracted a lot of new entrants. I do not know if Facebook does have a vision on how to monetize their pool of “friends”. Their recent failed attempts failed when they infringe on privacy and other issues.  The ads on the site is weakly correlated (or not at all) with the content on the page. People who use facebook probably won’t be interested to look at the ads (I won’t, because all I want is to check the mails, find out what my friends are doing, upload my photos and done.) Likewise for twitter, there are so much information you can mine from Twitter but what do you do with these raw data? Again, Twitter was created without a long term strategy to make money. I see different strategic moves from such companies but they never really take off.

If you intend to set up another “free” service business (another  social network site??), think revenue and cashflow. Focus on growing market share in the direction of profitability. If your operating capital is coming from donations, think twice. I believe that companies like Facebook, Twitter and Skype need to be acquired by a bigger corporations that has proper social networking strategy. These giants will have the financial muscle (and stamina) to integrate and leverage on the existing pool of non-paying customers. Standalone, these companies  have growth limitations. That said, big companies may buy into hypes without having a strategy to integrate for profitability. Ebay acquired Skype and StumbleUpon without a well thought out strategy to integrate these tools into their business portfolio. This month,Ebay managed to sell back StumbleUpon to its original owner. It is definitely the right move. Skype is next. I hope the management will exercise more discipline when considering another acquisition.

My personal take is that Twitter should be acquired by Google. Its raw stream of data is extremely tempting and I am sure it is a right fit in Google’s data mining and analytical strategy. As for Facebook, it should start to reinvent and lead in key innovations in the social network domain. With millions of subscribers under its belt, it is time to jump out of the red sea and into the blue ocean. Only then will revenue starts flowing in.

What is your view?

This entry was posted on Wednesday, April 15th, 2009 at 10:10 pm and is filed under business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.