This weekend the New York Times published a piece called Using ‘Free’ to Turn a Profit. The piece focused on Evernote, a web-based and smart-phone based application for taking notes, snapping pictures, and storing stuff you want to remember later. The following critique isn’t about Evernote (it’s an impressive product which a lot of people love). It’s about the incredibly low bar for “success” in our industry and how the tech-business press perpetuates the perception. (ugh, did I just turn into one of those who blames “the media”? Yes, on this one, I did.)
Let’s erase one claim right off the bat. The headline, “Using ‘Free’ to Turn a Profit”, is misleading and downright false as it relates to the subject of the story. Near the end of the piece Phil Libin, the chief executive of Evernote, says they are generating about $79,000/month in revenue. Then the article goes on to say “By January 2011, Mr. Libin projects, the company will break even.”
$79,000/month and they won’t break even until January 2011. So every day they’re losing money until 2011. And the title of the piece is “Using ‘Free’ to Turn a Profit”. What? How can the Times let a headline like this slide?
Then yesterday a piece pops up on Gigaom called How Freemium Can Work for Your Startup. This piece references the “Using ‘Free’ to Turn a Profit” New York Times piece. Om Malik says “And it in reading Damon’s article, the qualities of a successful freemium product finally became clear to me.” Then in the next paragraph Om acknowledges that Evernote doesn’t generate enough revenue to turn a profit. Later he says “I’m sure there are many more ways to build great freemium applications, but one [Evernote] has stood out for me above all the others.” The product may be excellent, but until their business cracks a profit I don’t see how Om can say it’s a model for how to build a freemium application (or a business).
This pattern — “success” based on forecasted future success instead of current success — shows up all over the tech-business press. Instead of metrics like “they make more money than they spend” we see stuff like “user count growth” and “followers” and “impressions” and “friends” and “visits” qualify success. Whenever you see someone piling big numbers into made up metrics, it’s a diversion. They want you to think that this time it’s different. But like Judge Judy says, “If it doesn’t make sense it isn’t true.”
Don’t agree? Would you take your next paycheck in page views? or users? or followers? or visitors? or eyeballs (remember that one from the 90s)? Go down to the corner store and plunk down a million impressions for a gum ball. They’ll probably call the cops.
If there was an airline that flew more passengers than anyone else, but lost money on each one, would we call it a success? If there was a restaurant that served more people than anyone else, but lost money on each meal served, would we call it a success? If there was a store that sold more product than anyone else, but took a loss on each one, would we call it a success? Would the business press hold these companies up as business model successes? Would anyone? Interesting, maybe. Promising, sure. But successful? Then what the hell is going on with the coverage of our industry?
What’s the rush? Why not wait until their business is proven? Wouldn’t the Evernote story have been 10x better if they’d actually been able to say “We’re making money with this model. It works.” Wouldn’t the New York Times be doing its readers a service by providing insight into a proven model with a proven example? Instead, we get an article titled “turn a profit” about a company that is over a year away from meeting that definition. There are thousands of interesting internet-based businesses that are actually turning a profit — and I know of dozens running the freemium model that are deep in the black. Pick one and write a great true story. Why all the fiction?
It still blows me away that David’s talk at Startup School 2008 was met with such enthusiasm (I know David was surprised too). The talk was simple. Come up with a product, charge money for it, make more money than it costs to run it, and you turn a profit! This is the formula that’s been in place since business began. Yet in front of a group of new tech entrepreneurs it seemed like a revelation, a brand new story never told before. David said people were coming up to him in droves after the speech thanking him for opening their eyes. Who closed them?
So I guess what ultimately bothers me most about this New York Times piece, and many other pieces just like it (see TechCrunch daily), is the example that’s being set for the next generation of entrepreneurs. They’re seeing business success defined as “the projections say we’ll profitable later”. They’re constantly being exposed to excuses. They’re being taught that profits are these things that only happen one day far away. That’s just wrong.
Aaron Steele
on 02 Sep 09Once an example like this is set, there is really no turning back.
Think about how most Americans think about debt. 50 years ago people would actually wait until they had enough money to purchase something before they bought it. Now, why wait? Buy it now and pay it back with 18% interest over the next 5 years. Or “It’s okay to spend more than you have, everyone does it.”
A long term road to success doesn’t usually start with, “Let’s lose money for 5 years and hope we can turn a profit in year 6”. Obviously there are exceptions, but you’re right, that shouldn’t be the standard of “success”.
Chris Carter
on 02 Sep 09This isn’t just a tech industry issue, though I’d agree it seems to be the one industry that absolutely thrives on bragging about it. People just don’t seem to understand what profit really is and why you NEED it to succeed in business.
Personally, I blame the investors – they are the true enablers in all of this :p
(kidding about that last part, I don’t know if you can really blame any one group of people – based on the way our government has chosen to tackle problems of late, I’d say the overspend under-earn appears to be a societal issue)
Justin Jackson
on 02 Sep 09It seems like we have allowed “break even point” to drift farther and farther into the future.
Now, we allow high real estate prices, high startup costs, and high employee costs to push up our credit limits; hoping that sometime in the future, we’ll be able to pay it all back.
That being said, what is a reasonable time-frame for breakeven?
Timothy
on 02 Sep 09I completely agree with everything you said.
I’m very fortunate to have double majored in Economics. Without it I think I may have had ‘closed eyes’ just like others in the field. I talk to far too many developers who don’t understand the concept of business, and bringing a product to market.
Colin
on 02 Sep 09I think that used to be called Webvan, Kozmo or Pets.com
Scott Purdie
on 02 Sep 09Totally bang on with this Jason. I like the comparison with other industries and they definitely wouldnt be hailed as successes.
I think its pretty crazy when people say a company is profitable before it becomes profitable.
steve
on 02 Sep 09Jason, Your thinking is so last century… You want to define profit as ““they make more money than they spend”… You are just so “old school”. :)
Seriously though, great rant. I agree it is a bizarre headline to talk about making a profit, and then disclose that the business doesn’t. Journalism just ain’t what it used to be. I’m going back to the last century. :) ~ Steve
Thomas
on 02 Sep 09Would you call the ps3 a success?
Grant
on 02 Sep 09Thanks for this. I’ve never been comfortable with the potential for success acting as the actual barometer for success in the tech industry.
The hard part is a lot of companies that look like they might be successful get the attention while the ones that are quietly chugging along, growing, and making a bit of money are almost looked down upon.
tom s.
on 02 Sep 09Like others here, I agree. Although it isn’t mentioned, I guess the piece was prompted by Chris Anderson’s new book “Free”. Unfortunately, Mr. Anderson was wrong about the Long Tail and he is largely wrong about Free as well.
Andy Brudtkuhl
on 02 Sep 09Thank you for bursting the echo chamber that is all this “freemium” press coverage. It’s not a successful business model unless it’s profitable – it’s that simple.
DM
on 02 Sep 09$79,000/month? The same you made (total) on that eCommerce PDF you posted, which took about a month’s worth of work. By those numbers I’d be better off writing about web apps than making one.
tim
on 02 Sep 09what’s lost in all this freemium discussion is how difficult it is to build what are essentially, two competing versions of your product, and balance free vs paid users. it’s all good in theory, but practice it’s hard … you folk at 37S know this all too well.
plus, everyone knows bplans and projections are crap, especially when the competitive landscape can shift so quickly. much better to start charging for your product straight off the bat, so you can find out if anyone even wants to pay for it.
olivier blanchard
on 02 Sep 09The “free” argument in the business press is basically a wave of ripoff “opinions” triggered by Chris Anderson’s latest book: “Free – The Future of A Radical Price” (which is pretty good, by the way.) These writers are just jumping on the bandwagon without really understanding how the process works. (What a surprise!)
I just read this post twice, and it made me laugh both times. (In a good way.) David’s experience is one I can relate to as I try to explain the concept of R.O.I. (pretty basic, right?) to an army of Social Media managers and consultants who seem to have never heard of it.
For many, the discussion is a welcome one. A breath of fresh air. They ant to get right to the methodology as it relates to SM, which is great. But for many more, what I talk about seems to be a revelation as well. As if in 10, 20, 30 years of being in the business world, this was their first encounter with the notion of financial returns. Sadly, a third group also exists that violently opposes the notion that R.O.I. is a globally accepted business benchmark. That group seems bent on trying to bastardize the term and redefine the I at every term. I’m not sure where the disconnect is. Are our colleges, universities and business schools not teaching the basics anymore? What’s going on?
Karl M.
on 02 Sep 09Welcome to the socialist paradise. “We’re all socialists now” according to Newsweek. The evil capitalists are being bleed dry, and we get to run a company at a loss on the promise that someday we’ll produce a “profit”. Ha ha, foolish capitalists.
When that money is gone, we’ll turn to the investor of last resort, the government, and our wonderful track record of losses, combined with our political connections and the demonstrations of how our product can serve the state and party will get us all the money we need.
All hail the Dear Leader!
GM, AIG, Bank of America – none of these will ever be required to turn a profit, only serve the interests of the state.
Those who make a profit are clearly stealing it from the People, and/or poisoning persons of color.
Welcome to the new America.
Jeffrey
on 02 Sep 09Karl, what the hell are you talking about? Something tells me that if this post was about puppies, you’d likely have posted the same response. Time to switch to decaf, friend.
mitch
on 02 Sep 09Many people simply won’t pay for things online and don’t view software as a product (or service in 37signals case). Since it isn’t something you can hold in your hand, what is the value of it? This has been an issue with anything digital for a while now: just ask the record industry and more recently the movie industry. Since it’s so difficult to get somebody to pay for something they don’t see the real value in, these companies have to come up with new ways to measure success. Of course, you can’t survive on popularity alone and so we get these revenue models based on advertising, product bundling and other insincere methods. Should more companies charge for their product? Absolutely. In the long run it would weed out the poorer products and give the software industries the capital they need to create amazing products in the future. As much as I love Linux, and its free model, it simply can’t compete with the polish that comes from the money that Apple pours in to development.
Miles K. Forrest
on 02 Sep 09Maybe some of the blame for this type of thinking should be aimed at the school system. An entire generation has been raised with the idea that everyone wins all the time, with no losers.
Take kids baseball for instance. It used to be that at the end of the season, trophys were handed out to the team that won the most games, with ribbons given to others for participating. My 7 year old son’s baseball season ended with everyone receiving the same medal. Nobody lost. Of course, nobody really won either.
Making money is the business equivalent of keeping score. If you’re not turning a profit, you’re not really playing the game.
PierreSmack
on 02 Sep 09Maybe these entrepreneurs are all looking to add “nonprofit experience” to their resume.
Peter Lindholm
on 02 Sep 09“If there was a restaurant that served more people than anyone else, but lost money on each meal served, would we call it a success? “
This one is actually true for a lot of the Michellin awarded restaurants. At least in Europe these restaurants are considered more than just successful.
Robert
on 02 Sep 09I like to call it the credit card generation. We’re used to debt and think nothing of it. As long as we can convince ourselves that “one day” we’ll make a profit, we’re satisfied and feel successful.
Castles made of sand fall eventually…
The Realist
on 02 Sep 09No need to get worked up on small, growing companies that don’t make money right this instant. In the biotech industry, for example, it takes 14 to 16 years ON AVERAGE to break even. That means you bleed red every day, every week, and every year for almost a decade and a half. Do some of these fail? You betcha. But that’s how the game is played. Tech is no different. The Amazons, the Googles, and the Yahoos didn’t make their first dollar until years down the line. To hit a home run, you’re going to strike out a few times. So what’s the moral of the story here? If its in your plan to make money from day one, you’d better do it. If its in your plan to bleed today but bank tomorrow, you’d better follow through. Its useless to argue which plan is superior in all conditions. Look at what you got and where you want to be and let that make your choice.
The rest of the comments about freemium and Anderson’s free are bit offbase. No doubt, giving away your product isn’t a long term business model. But consider this. If you provide a service on the web that costs X dollars, what’s going to prevent a competitor from providing the exact same service but, in a bid to win market share, gives it away for free? Nothing. That’s how competition works. If I go into the red for a while to put you out of business, that might be the right cost-benefit decision. If I can outlast you, I will get all the spoils. Folks, war of attrition is alive and well in tech. This dynamic isn’t going away, so rather than complain about it, factor this into your business planning and be prepared.
Adrian Ionel
on 02 Sep 09Excellent post.
People will pay
on 02 Sep 09People will pay a $1 for +5 more hit-damage on their sword.
I think the barriers are not cost – $10/month is a meal.
Barriers which offer biggest challenge: 1) can I get this somewhere else for free? 2) do I trust you with my payment details 3) is it worth the time to take out my card and enter payment info.
JohnO
on 02 Sep 09Of course in this industry there is near-zero sunk cost, only your time. Which only makes it more sad to run at a loss.
OsandiSays
on 02 Sep 09NO WILL READ THIS COMMENT
Except you. You who may understand that the value isn’t in ‘MAKE IT FREE’ but if people find use for it, then perhaps you have translated something meaningful to your customer.
VALUE DOESN’T ALWAYS MEAN $. BUT LET’S SUBSTITUTE THE WORD MEANING FOR IT JUST FOR NOW.
I AM NOT A MAN OF ABSOLUTES. But I absolutely see how thinking SOLELY profit has blind-sided business from innovating: becoming $-centric (ahem, microsoft).
You’ve heard it before: ‘Yeah, so that’s a great idea but, what’s it gonna cost us?...oh, we can’t do that because it costs TOO MUCH!” Or…
“GREAT, we can CHARGE MORE FOR THAT’ though why anyone would pay more for IT hasn’t become clear because company are not quite sure what IT means to their customers.
I like the idea of Freemium-Thinking In REVERSE. For company’s to think: ‘WHAT IF WE HAD NOTHING BUT $ COMING OUT OF OUR A$$? LET’S DREAM BIGGER AND BETTER THAN EVER BECAUSE $ IS NO OBJECT…IT’S COMING FROM OUR A$$!!
See because in the natural world, there is no scarcity of nature’s resources, however there is for the one’s we’ve become dependent on and that is shifting fast!
Making things under the idea of Meaning and Experience versus Functional Benefit and Profit will make more sense the more we see a balance of market exposure with the internet and conversations between user’s interests and the company. We have to give people what they need and what they want and $ should come up only when the customer believes it’s worth anything.
twitter.com/OsandiSays
Brian Armstrong
on 02 Sep 09Jason THANK YOU so much for finally saying this…I thought I was going crazy and I was the only person noticing this!!
One small point to add: why is revenue the default metric when talking about companies? “He runs a $20 million a year business” etc… Revenue is absolutely MEANINGLESS…your profit margin on that revenue could be 3% like a grocery store, 99% if your a consultant, or negative. It seems to me profit is a much better metric for measuring success but companies are always listed in the media by their revenue.
Thanks for keeping the business community sane! It’s a breath of fresh air…
Greg
on 02 Sep 09Since when are we taking newspaper stories seriously?
These journalists aren’t interested in reality. Reality doesn’t sell. Why waste time putting significant thought into what you’re going to write about? They just collect some “facts” and quotes and move on to the next story.
Jason, great job on pointing out the ignorance of that article. One thing that caught my eye, though is this line:
“Wouldn’t the New York Times be doing its readers a service by providing insight into a proven model with a proven example?”
Are you implying that a model that has resulted in profit is then a proven model? There is no “proven” model. If there was, everyone would be using it and every business would be successful.
Pete Bowen
on 02 Sep 09I wonder how many of the people building web apps like these have ever owned a business?
I’m a techie at heart (got my start writing games for AppleIIe as a teenager) but I’ve spent most of my career being self employed or a business owner. I know one thing for sure:
It’s much more fun building web apps than selling them.
You get all sorts of positive reinforcement when you build a cool free app. Fame, interesting people, press etc.
Contrast that with the feedback you get from building a web app that requires that people pay for it.
Sure, you get some raving fans but you also have to deal with the rejection where people don’t see value in what you do: The website that loses 50 visitors for every one or two that convert. The 9 people of every 10 who take a free trial and then never hand their card details over.
Building unprofitable free apps seems like a hobby rather than a business. Nice work if you can get someone to fund your hobby.
Derek Pilling
on 02 Sep 09The tech sector, particulary the web component, is filled with stories of profitless prosperity; sell every customer at a loss and make it up on volume. In the long-run, it never works. The only exception is when there is a “greater fool” willing to acquire the eyeballs in a buyout for more than it cost you to acquire them. The prominence of the greater fool success stories (Skype, YouTube, etc.) far outweight the massive number of failures that profitless prosperity thinking has caused. Only when the greater fools become more disciplined will the discipline back-up into the ecosystem and impose discipline on all.
Anonymous Coward
on 02 Sep 09I read that yesterday and through-up too.
... “the projections say we’ll profitable later”
This is just a bubble and will pop like all the others.
Rob Hallums
on 02 Sep 09It rings so close to what happened, oh, about 10 years ago – it’s just a different platform with a different bunch of people trying to proclaim to be millionaires, when actually most haven’t a scooby.
It’s a shame, but the app bubble has to burst at some point… and as for saying you’re profitable when you’re still not making money – such a 1990s school of web economics approach.
I have a simple (yet slightly lightweight) theory. What would the dragons have to say about my venture. If I cannot say clearly and honestly: I make £x profit… then I’m not making a profit. No fuzzy lines, no blurring the reality. If I can’t spend it, I haven’t made it.
Eric Santos
on 02 Sep 09Great post Jason! The exactly same thing happens down here in Brazil. Companies get coverage for the most strange reasons, and there´s little (if none) interest in actual success based on profit. It seems that the farther you are from having a clear business model, the greater the chances you have of getting shown on the mainstream media or Techcrunch-like blogs.
@Justin If you haven´t seen it yet, this piece by Paul Graham talks about how easier it is nowadays to reach break even (ramen profitability), so you can “buy time” to keep going. http://www.paulgraham.com/ramenprofitable.html
Leahn
on 02 Sep 09I think I should comment that both Microsoft and Sony sell their consoles (PS3 and X-BOX 360) at subsidied cost and thus lose money at every console sold.
Matthew Geddert
on 02 Sep 09Hear, hear! Though, I think this articles misses one big point: the employees of these companies are successful!
The employees are turning a profit and converting their labor into money that doesn’t need to be paid back if the company fails (unless of course they are an investor/owner employee). As an employee of a ‘Free’ company one gives up some job security (because the business may fail), but in return you get to (often) work on a product that is exciting and new which isn’t encumbered by traditional financial return justifications. A company has many stakeholders. Investors are gambling and taking huge risks and shouldn’t be called ‘successful’ if they aren’t returning a profit. However, the employees who the reporters are talking to are often personally successful.
Happy
on 02 Sep 09Well said and “Here Here!”
Question: why don’t you link up to the Omnisio version of the talk with slides? http://www.omnisio.com/startupschool08/david-heinemeier-hansson-at-startup-school-08 It’s more fun and informative than the you tube version.
Rob
on 02 Sep 09Isn’t this what ultimately caused the tech bubble to burst? Valuation based on future profits many years down the road. In the interim these companies continued to burn thru cash and go public. Sounds like history is repeating itself again, but in a slightly different manifestation.
Good stuff Jason!
R
Jeff G.
on 02 Sep 09Jason great post!!!
Along the same lines I stumbled across a website called techstars.org which sets out to train selected startups on how to pitch to VCs. Then at the end of the class they have a big VC day and they all do their pitches. I checked out some of the startups such as next big sound and everlater. All of these are free… I am thinking how in the world are these startups going to make money?
I think it would be AWESOME if someone did a similar concept, but taught startup how to MAKE IT ON THEIR OWN and be profitable from the get go, sort of what DHH’s talk was all about.
Phil Libin
on 02 Sep 09Jason,
I’m the CEO of Evernote and the guy in the NYT article. Let me clear something up:
I completely agree with your overall assessment of the industry and that the best business model is, as you say, “Come up with a product, charge money for it, make more money than it costs to run it, and you turn a profit!” That’s what we’re doing. In fact, the keep-it-simple business of 37 Signals was one of our main inspirations.
I’m sure you’ll agree that it’s useful to break expenses into two broad categories: variable and fixed. Variable expenses are everything that scales with users. In our case it includes ALL hardware, software, infrastructure, bandwidth, electricity, hosting, storage, etc. as well as the full salary of all Evernote employees that directly service the system – all customer support and network operations. Fixed expenses include everything that doesn’t scale with the number of users: office space, management and engineering salaries, insurance, etc. Variable expenses grow quickly. Fixed expenses grow slowly, if at all.
Evernote is gross-margin profitable. That means that we are making more money every single month than our total variable expenses in that month. We’ve been doing this for the past nine months and the profit margin is widening for exactly the reasons written about in the NYT and GigaOm. The gross margin will be large enough to cover the full fixed overhead next year. These projections don’t rely on advertising, monetizing eyeballs, or any other magical future revenue schemes. Since you already used a restaurant example, let me continue with the analogy: we’re serving tasty food to an ever increasing number of satisfied, loyal customers and making enough money on every meal served to pay back original investment in fixed overhead by next year (those faux-egyptian obelisks didn’t come cheap). That would be pretty good for a brick-and-mortar business, and it’s pretty great online.
I’d be happy to chat about this some more. Maybe it’s a good topic for a panel somewhere.
On a separate and unrelated note, I’m a big fan.
Thanks,
Phil Libin
Kyle Fox
on 02 Sep 09I hate to leave a comment that has as much depth as a comment on Smashing Magazine, but:
Great article. This is the best article I’ve read on SVN in a long time.
David Harper
on 02 Sep 09Phil clearly knows what he’s doing…I recall many years ago during Amazon’s early days, when AMZN wasn’t “profitable” (which typically does requires a definition), and everybody was criticizing him. Bezos said something like, “sure i can turn a profit today. But that would require that i under-invest against the opportunity”...sometimes current profitability is the wrong priority.
shanmann
on 02 Sep 09There is another model called cheapium which is start cheap for a basic application and then charge for premium features.
Cody
on 02 Sep 09I wish more companies would charge for their products if it meant they could provide a minimal level of customer service
Chris Whalley
on 02 Sep 09@Thomas re: would you call the PS3 a success?
The challenge with evaluating the PS3’s success is that (unlike freemium stand-alone products) the PS3 isn’t a stand-alone product… it’s a component of a larger product(Sony gaming platform) that includes the console hardware as well as the peripherals, game software, the online service, the royalties generated from licensing other content (music, ads, etc) and so on. To evaluate the PS3 console hardware by itself, I’d say no, it’s not a success because it losses money. As for the entire Sony gaming platform, I read an article that said they started turning a profit last year, so yeah, I’d consider that a success.
Chris Carter
on 02 Sep 09The consoles that everyone likes to bring up are not a good example of what Jason is talking about – they are a chips n’ salsa product. You don’t go to a Mexican restaurant to get chips n’ salsa, you go to get a burrito (or whatever other dish you fancy). The restaurant doesn’t technically make money on the chips n’ salsa, but they are there to get you in the door.
You can’t have just a console, you need games for it. MS, Sony, Nintendo, they all make a bunch of money on the game licenses that are sold. Since nobody is just going to buy the console without games, they are guaranteed to recoup a good portion of the cost on the games. Combine that with the new market of online services where people spend money on all kinds of chintzy crap, the model actually works pretty well.
See the history of Gillette for a good exploration of how this kind of model works.
Ian Smith
on 02 Sep 09Jason, Your comments are just plain correct.
The Freemium model seems another offensive version of the late 90’s .com nonsense. I remember when I lived in the UK – the darling of the time – Last minute.com – Annual Sales for the year Sept 99 126,000 pounds – market capitalization on the stock market – over 100 million pounds. Of course it didn’t work then and it won’t work now.
Early stage company not making any money is called a product. Early stage company eg 37 Signals making a profit is called a business. It’s that simple. Keep up the good work!
John
on 02 Sep 09What in the FUCK is Evernote spending $79,000 a month on?
Alexis
on 02 Sep 09Phil,
Thank you for explaining the basics of economics. Well said.
Anonymous Coward
on 02 Sep 09@Rob:
It is not what made the bubble burst. It is what built the bubble.
What made the bubble burst was when (predictably) those projections didn’t materialize.
Anonymous Coward
on 02 Sep 09@John:
Faux-egyptian obelisks, apparently :).
Ryan Healy
on 02 Sep 09My brother and I were just talking this morning about how Cricket, the cell phone company, hasn’t turned a profit in 10 years, and probably won’t until about 2011.
Amazon was built the same way. Contrarian investors called it “The River of No Returns.”
Anyway, I agree with you. Good business is ethically turning a profit as quickly as possible—not relying on investors for a decade until you finally do turn a profit.
Ryan
Mizanur Chowdhury
on 02 Sep 09Dear 37signals,
We would love to see few small icon ‘shortcuts’ that would allow us to easily share your posts here on Signal vs. Noise with others, via email, twitter, digg, etc.
I know this is not the most suitable place for suggesting a feature for Signal vs. Noise, but I do hope you guys read it and eventually consider it.
Thanks alot!
Kevin
on 02 Sep 09”$79,000/month and they won’t break even until January 2011. So every day they’re losing money until 2011.”
Just because you’re in debt doesn’t mean you’re losing money.
That’s like saying if your income exceeds your costs, but you still have a mortgage you’re losing money. You’re not losing money, every month you make more than you spend how could you be losing? You won’t be debt free until your mortgage is paid off, but that payment is part of your budgeted month to moth costs. As long as you’re making more than your spending you’re turning a profit, you’re break even point may be far down the road, but your making profit.
Corbett Barr
on 02 Sep 09Please, keep hammering this point home, Jason. You’re dead right about this, and about the whole “lifestyle business” argument. I’m listening now (as a reformed silicon valley + venture capital + freemium entrepreneur), and others will too.
It’s just a matter of time before entrepreneurs realize that the risk+reward profile doesn’t make sense. Trying to start the next Google/Yahoo/Facebook/Youtube or whatever by giving things away and hoping to become a 1 in 10,000+ success is crazy, especially considering what you give up to get there. You may as well play the lottery or go to vegas. I would much rather create a compelling product, charge something reasonable for it (maybe even offer a free version or free trial), turn a profit and maintain control of my business and my lifestyle any day.
Laurie Foley
on 02 Sep 09The internet has accelerated ideas about how quickly many things should happen – including turning a profit. When did businesses EVER think they would be profitable right out of the gate? Or even in less than time measured in years?
I’ll be a champion of freemium here: if Evernote can build a raving base of fans – some of whom want to give them money – AND find a way to be profitable in a timeframe that satisfies their investors (not our opinions), then they are a huge success.
Jeremy Victor
on 02 Sep 09First I have to say Jason great post. Cash flow and profit seem to be lost.
Second, Phil I commend you for stepping in and giving more details of your current situation.
What I found most telling about the post is how critical it was of the media today, not Evernote. I think with both your voices we have the makings of a really good article that all of us wish the NYT would have written to begin with.
Evan
on 02 Sep 09By this logic, I would hate to own facebook. Sometimes it just takes some time to become profitable. It’s not specific to the tech/web industry. Look at Tesla. This has been a part of business for decades. Investors take a risk on a number of startup companies knowing that some will never reach profitability. Big woopy.
Mike Rudy
on 02 Sep 09@Ryan Healy It’s not the case of most web startups, but Amazon in particular had to spend a ton of money and time building up its infrastructure. It was the perfect example of when to rely on investors. Are you saying that Amazon doesn’t run a good business?
Is Cricket a bad business?
Is Twitter a bad business? Or has Twitter merely chosen the path to rely on its investors’ dime while it builds up an entrenched userbase to critical mass before unveiling its monetization strategy?
Nothing in this entry or in these comments disproves free or freemium as a valid business path. They certainly aren’t as straightforward as a “sell product” method, but they are still valid. Remember, the consumer isn’t always the customer.
Richard Nyström
on 02 Sep 091 paying customer is more than 1 million users.
dusoft
on 02 Sep 09Hah, you probably haven’t heard about it, but just yesterday an airline company called SkyEurope (SkyEurope.com), a low cost carrier in Europe, declared bankruptcy. This all – after 8 years of losses (and one quarter of profit) and many, many, many media praising the company, their service, lines, passenger numbers etc.
brant collins
on 02 Sep 09Love 37S and started using all your products free, then upgraded later. So at it’s core you are using the freemium model.
JF
on 02 Sep 09For the record, I’m not suggesting that every company should be profitable immediately. Or that a company on the way to profitability should shut its doors now. Or anything like that.
I’m also not suggesting that Evernote is a failure. Evernote may very well turn out to be a big business success – and I wish them and every other business owner nothing but success – but they aren’t a business success yet.
This article wasn’t about the merits of their product (which may be successful on the “their product is great and loved by many” level), it was about their business model. They shouldn’t be held up by the press or other entrepreneurs of an example of how to make a model work when it’s not working for them (yet).
That’s all.
(Also, thanks for chiming in Phil. Nice to hear from you in here.)
Mike
on 02 Sep 09Who the Fu*k are they paying where they cant break even on 80grand a month!
JF
on 02 Sep 09For those who appear to think I’m taking a dump on freemium, I’m not. Our own model could be called freemium – we were one of the first web-apps to go that route in 2004.
I’m simply suggesting that Evernote probably shouldn’t be the “Using ‘Free’ to Turn a Profit” poster child. Maybe one day, but not yet.
Nubizus
on 02 Sep 09You are right, and wrong. 37signals is not example on this in my eyes. 37signals is exception. Rare exception.
You can’t judge only from personal point of view. Yeah, we need to stop making bubbles.
But: There is different companies, with different products and different investment plans.
Example: Some millionaire decides to fund company that will make product range like yours. And he can wait for ROI for a long time. What you think, your customers will not like same functionality for free or symbolic price? I doubt it:))
End then everything will be about the price not about the value (but in some cases low price is real value).
You see, now i am confused. Brrr. Software business is not so simple.
James Todd
on 02 Sep 09So if I sell more newspapers than anyone else, but lose money on each one…
http://www.scholarsandrogues.com/2008/11/11/the-gray-lady-turns-pasty-white-is-the-financial-demise-of-the-times-at-hand/
Oh. BTW, that was before the July article about profits falling 42%.
http://www.reuters.com/article/paiddealsAtoms/idUS7990400720090724
Scott
on 02 Sep 09Jason—I hear what you’re saying, and appreciate your commentary. I agree that the media/start-ups/investors tend to get well ahead of themselves about the free model. But I think you went a bit far here. Your column is based solely on the NY Times headline. If you read the story, The Times doesn’t make any false claims – it’s rather clear, talking about the “freemium” model and finding a start-up that is applying this model and attempting to reach a profit. The headline, while not the best one and certainly not clear since you interpreted it the way you did, I don’t think is wrong. I read it as, “Using Free [In An Effort] To Turn A Profit.” That is obviously wordy, so they just went with “Using Free To Turn A Profit.” It’s talking about the future, and this becomes clear once you read the story.
But I do agree with your overall theme.
Ivete
on 02 Sep 09Great post! I have a business degree, dabble in webstuff, and my day job is an office position at a (profitable right now) web 2.0 company. No surprise here: we charge for our subscription-based product!
I completely agree with you that calling Evernote (which I use and love, by the way) “profitable” is ridiculous if they’re not even projected to profit for over a year. Especially considering that business projections are rarely conservative! While it’s common for a small business to lose money in the first few years, I agree with you that this may be the only industry in which that short-term loss is viewed as a success. If you ask a small boutique owner if she’s successful (much less profitable!) while losing money, she’s sure to say NO!
In my day job I do customer support and I can tell you that at least on a weekly basis, we get an email from someone telling us “you have some nerve to charge for this, everything else online is free, haven’t you heard of ad-based services before?!” There are lots of factors at fault here . . .
Stan Taylor
on 02 Sep 09Actually, investors are indeed to blame for this. This kind of hype allows them to sell out early and make a handsome profit without any concern for whether the company has long-term viability.
ginsu
on 02 Sep 09I like Evernote too, and I’m sure Phil is a good CEO . . . but revenue minus variable costs is contribution margin, not gross margin. Not trying to be an accounting nit, but the difference is especially important to pre-revenue startups.
On the media: it’s only worth criticizing them if we have any expectations of them. Most readers of this blog probably no longer adhere to the old idea of journalists as unbiased advocates for the truth working in the public’s interest. We mostly think these guys are a bunch of folks trying to turn a buck (just like the rest of us). And they make their money writing stuff that sells, which favors fluff and hype over solid financial analysis.
So while I agree with the criticism, it’s hard to get outraged about it when the media is what it is today as a result of trying to become profitable: tailor product to customer demand (irrespective of former journalistic standards), which increases revenue, and lower costs by skimping on research, training and fact-checking.
Ironic, innit?
Derek Scruggs
on 02 Sep 09Phil, I don’t think Jason has a beef with your argument per se, it’s just there are many, many companies that are gross margin profitable but never make it to net profitability, or only become marginally so. So how about the NYT holds off on making a big deal about it until you achieve the latter? Until then, there really is no there there.
BTW I speak as someone who uses and loves your product.
But I also speak as someone running a very profitable, growing, bootstrapped, freemium-based business that can’t get the time of day from the likes of TechCrunch, let alone the NYT.
Not that I’m bitter. ;)
Also, I think an important point in this whole conversation is the 37 Signals, like us, relies mostly on business customers, who are generally much more willing to pay for software/saas than consumers. Chris Anderson has a tendency to conflate those two markets, which are radically different in terms of how they perceive and pay for value.
John Gallagher
on 02 Sep 09Jason
I LOVE this post. Fantastic stuff. I just don’t understand why people are STILL jumping on the bandwagon of VC funding. It’s mysterious to me.
Thanks for a post that I’ll come back to again and again.
Derek Scruggs
on 02 Sep 09Also, re: Amazon – I think they are something of a singularity. They needed an enormous amount of capital to get to profitability, and they were able to get it at a deeply discounted cost compared to their competitors, partly because they were seen as the bellwhether of e-commerce and partly because they were able to go public radically early in their history compared to, say, Barnes & Noble.
Though I admire and buy from Amazon, I don’t think there’s really a lot to learn from them from a business perspective. The path they traveled meant they had to either be #1 or go home, kind of like YouTube. Finishing second is tantamount to bankruptcy from an ROI perspective. There’s much more to be learned from, say, Southwest.
Rob
on 02 Sep 09I think it largely depends upon VC funding and the float they are given from that funding.
It is simple for a company like 37s that built the product on the site while they maintained and kept their current customers happy. When you build the company from your savings and don’t have any other income then making that monthly profit is sure as hell a higher priority.
Ricky Irvine
on 02 Sep 09I can’t believe so many people are using “freemium” like it’s a real word.
Natalia Ventre
on 03 Sep 09Some entrepreneurs just want their 15 minutes of fame, if they wanted money, they’d have a real job.
Disgusted
on 03 Sep 09I’m afraid this is how journalism works in today’s world. It is more entertainmaent then anything else, just a fight for eyeballs. And dollars to donuts, somebody got some sort of payoff for profiling Evernote, one way or the other.
MT Heart
on 03 Sep 09IBD recently had a piece about similar ideas of offering something free while charging for related services http://www.investors.com/NewsAndAnalysis/Article.aspx?id=504971
I like the bit about Club Penguin
“Club Penguin’s an online children’s game with a simple premise: Kids enter a snowy world and pretend to be cartoon penguins. The game’s free, Anderson noted, “but if you want to upgrade your igloo with furniture or buy a pet for your penguin (you have to) subscribe.”
The cost: $6 a month. Subscribers number 700,000.”
Cam Collins
on 03 Sep 09I felt the same way Jason did when I read that Evernote was generating $79,000/month, but wouldn’t break even until January 2011. My thought was “How many people are involved in this thing? AND “are salaries too high?”
However I think that Phil Libin chiming in to set some things straight was great! This is why I so enjoy where we are as a society that continues to embrace social media.
Personally Evernote doesn’t inspire me. “Yes” I use their product. But the reason I get so much inspiration from 37Signals and Fog Creek is because of the perceived transparency and the sense (as a reader) that “I can do this too”. Their business models grew organically and were not artificially propelled by large stores of investment capital. As someone that runs a tech company in a very defined vertical market, organic growth is a model I must live by.
Kevin Dugan
on 03 Sep 09This is what led to the dot com boom/bust. Let’s not do that again folks, please?!
Jeff Putz
on 03 Sep 09One of the big problems in the tech press/pundit factory is that it has become a big masturbatory circle jerk. (Credit: Becky Worley of ABC, TechTV and other places said this filling in on the TWiT podcast, one of the worst offenders.) These folks have completely lost their mind and forget that there is life outside the valley.
Andrew
on 03 Sep 09I think you’re missing the point, Jason (and most of the commenters)..
Evernote (desktop app, iphone app, web app, infrastructure) cost something to build. To be a compelling solution, they needed all/most of those pieces in place early, so they paid for it in the early months at a rate that exceeded their income (likely $0 for quite a while before FCS).
So they started off in the hole, and they continue to accrue dev and ops expenses (maybe marketing etc too) to this day and forever in the future. Their revenue started ramping from $0 at some point, and is currently at $79k/mo, which has not yet paid off their front loaded expenses, but by some measure is expected to do so in 15 months.
I don’t see anything about that model that’s unreasonable. 37Signals is not product-profitable on day 0 (or even probably month 6) of a new product. Can’t be. Evernote had a bigger frontload on their multiple platform product than 37S, so it takes longer.
If Evernote has numbers that suggest they are trending adequately quickly toward expense recovery and investor-profitability (versus cash-flow-profitability, which they say they already are), then they are a great example of a company that can succeed by giving away a useful but limited version of their product and charging for more features.
The significance is that the model can work with expensive-to-build stuff too.
Doug
on 03 Sep 09If you see a company in the news there is one reason for it. Unless it is Enron or an Exon oil spill, or the CEO is doing a perp walk, there is only one reason to get your company in the news, Techcrunch included. THEY ARE LOOKING FOR FUNDING!!! By they I mean Evernote, or Zappos (back a few months ago), or any company in the news. A nice fluff piece gets the attention of investors and they get more cash to burn. Always follow the money.
AWK
on 03 Sep 09It’s basically one step better than the companies back in 2000. A lot of people have learned that an idea is worth nothing and a actual product is necessary.
Well, this seems to be the next part these same people need to learn, that your average company is not successful until you turn a profit. I think most people are thinking in terms of companies like Facebook or Twitter, when they think of any “recent” internet company and Facebook and Twitter are not your average companies.
I think people need to realize that you don’t need to be Facebook or Twitter to be valuable and succesful (ala David’s talk), at the same time, if your company is not Facebook or Twitter, then it really DOES need to be making a profit to be valuable and successful.
Pierre-Yves
on 03 Sep 09All I can say is we need to talk more about this and get real. Thanks Jason I just want to make a quick point, I’m really tired of the “old media / brick and mortar / old folks they all suck” mentality. When you run a business, you have to pay people every 2 weeks, pay rent, pay servers, etc…it’s the same for magazines, theatres, artists, etc….to constantly ditch them because they don’t get “it” is in the end completely counter-productive. we should all be concerned about “old media” going down because we all profit from quality journalism, quality media. And never forget the old saying: only judge after you walked 100 miles in someone’s shoes (trying to translate from french here sorry!)
SD
on 03 Sep 09Profit or Success or both ..decisions depend on many factors and not just one…....
pwb
on 03 Sep 09You had a good article here until you down-played the merits of businesses that knowingly delay profitability to grow big. If everyone followed your advice there’d be no Google, Yahoo, Ebay, PayPal, Facebook, Twitter, etc. It’s also a reasonable strategy to take calculated risks based on non-financial metrics. That’s also as old as business itself.
James
on 03 Sep 09Unlike almost everyone else here, I think you’re overreacting (your clarifications in the comments are more realistic than the original post).
Yes, a business like Evernote that isn’t making money yet isn’t a “success” in the financial sense, but it is a success in that Evernote is doing a great job of promoting its product and bringing in new users. Potential is a good word for this, and why not celebrate potential as success? It’s up to investors to decide whether that potential will turn into profit.
Yes, but this is just how the press works: don’t be naive. Newspapers will always jump on an exciting story and gloss over the details if it sounds cool enough, and especially if it’s related to the latest trend (like ‘freemium’).
@pwb nails it: this post is too one-sided (just like the New York Times piece, ironically), and it’s a shame that everyone’s agreeing with you without stopping to consider whether the issue is more complicated than it first appears to be. Blog posts tend to be simplistic and one-sided, just like newspaper articles ;)
Maybe the bar for success is too low in the press, but who ever expects the press to be realistic?
Garrison
on 03 Sep 09It’s a very well known statistic in the music industry that New Order’s ‘Blue Monday’ is the biggest selling 12” single of all time.
But what they don’t tell you is that it lost money every time someone bought a copy due to the astronomical cost in producing the sleeve ;-)
Dave Driesmans
on 03 Sep 09Think in the end all the hyped fremium models aren’t good for the industry. It creates a bit a cowboy and we-dont-know-what-were-doing image, but as a customer the first thing you want is stability. A software subscription means also an investment for the customer: he puts time in it through data input and a learning curve. It guess it means less companies try out new software. Maybe more indie app companies/developpers should unite under one umbrella or label so they can generate more trust and share costs and (financial) knowledge? Think 37signals is stronger because it offers a range of products and decent updates on the evolution of them.
Michael Sliwinski
on 03 Sep 09I think Evernote is a great business and have a great app, but their up-front costs had to be big – just like Phil said – they have very high fixed costs – especially engineering and management salaries – they have teams for very different apps – Web app, Windows app, Mac app, iPhone app,... etc. It’s like having several apps in one and just one point of sale.
What Jason is trying to say (and I agree 100% with him) is that most of the startups have to figure out way to earn money quickly and profit quickly in order to survive.
My application, Nozbe is a typical bootstrapped startup where I needed to have fixed costs down to minimum in order to profit quickly and be able to re-invest later.
Sure, if I had the money Evernote did (from VC) I’d start with doing all the native apps around Nozbe right from the start, but since this wasn’t the case, I had to embrace the constraints and start with my web app, later invest in developing an iPhone app, later invest in doing a great re-design of Nozbe (Nozbe 2.0) and now I’m investing in a desktop app that will sync with Nozbe.com.
At each stage I have to watch out in order to maintain my fixed costs at a reasonable level and not hire too many engineers so that they eat all my revenues. These are tough calls one has to make.
After all, 37signals is now a 15-man operation and it all happened over time because both Jason and David had to watch out the bottom line and make the decisions NOT to hire so many people right from the start.
My company was a one-man shop, now we are 3 people and 2 more are coming and there are freelancers who also do stuff for us on a per-project basis.
There’s nothing wrong with Evernote – more power to them. Just in a bootstrapped startup environment one cannot invest so much money upfront and has to watch the bottom-line very closely in order to keep rockin’ and rollin’.
I just think that for media 1M users is a better headline even if it’s followed by just $79k/m.
I don’t have 1M users, but I love my app, users and I’m profitable by a large margin so that I can call my “lifestyle business” a “great success” by my own standards… and I’m mature enough to realize that my kind of success won’t make it to the headlines of the New York Times but who cares?
After all, what’s so spectacular about a guy from Poland in Central Europe who is developing a productivity web application that helps people mostly from the USA (across the pond) get stuff done so much that they actually pay for it (some even pre-paid for 3 years in advance!) and he’s passionate about his job and productivity and loves every minute of it… and he’s earning a lot more than a good programmer’s salary in the process?
Yes, I know, average, boring stuff. No media coverage here. :-)
Bilal Ojjeh
on 03 Sep 09Excellent article.
So many people seem to be “Offer it for Free and figure out your business model later”. The media encourages that approach, highlighting success stories like youtube. Your article is great to bring the discussion from cyberspace back down to earth.
Bilal Ojjeh www.twitter.com/bilalojjeh
JF
on 03 Sep 09You had a good article here until you down-played the merits of businesses that knowingly delay profitability to grow big. If everyone followed your advice there’d be no Google, Yahoo, Ebay, PayPal, Facebook, Twitter, etc. It’s also a reasonable strategy to take calculated risks based on non-financial metrics. That’s also as old as business itself.
I didn’t down-play the merits of growing big. Not in the post and not in the comments.
I only said that until a company is actually profitable they aren’t successful. They may have a great product, they may have a lot of customers, they may get a lot of press, but until they’re actually profitable they aren’t a business success.
And I also said that “Using ‘Free’ to Turn a Profit” is a false headline when the subject of the article hasn’t yet turned free into profit. They’ve turned free into revenue, not profit.
Paul
on 03 Sep 09On my example, I can say that the trial version of Basecamp works a bit like freemium. I worked a lot on it and then decided to buy it.
“If there was an airline that flew more passengers than anyone else, but lost money on each one, would we call it a success?”
The console business is a bit freemium – they sale machines below the cost and earn on games…
But generally I agree with you guys.
Ryan Healy
on 03 Sep 09@Mike Rudy – No, I’m not saying Amazon or Cricket are bad companies. I am a customer of both, and my brother works for Cricket. Amazon is probably one of my favorite companies.
In the case of Amazon, I can see why investors wanted to invest. They had a relatively sound business model and a clear way to profit. (Although it took a very long time for Amazon to finally turn a profit.)
After re-reading my comment, I probably could have worded it better. My basic point: The sooner a business can ethically turn a profit, the better.
And really, this is a side issue to Jason’s main point, which was simply that the article in question was misleading.
In the case of Twitter, I would suggest they do not have a good business model. From what I can tell, they did not have a clear way to make money when they started. They’re trying to come up with a model now.
So from an investing point of view, I would not invest in Twitter. There’s a saying, “You can’t eat a conversion rate.” And likewise, you can’t eat page views, hits, tweets, or any other so-called metric of success.
Likewise, until Twitter actually figures out a way to turn a profit, then it’s hard to call Twitter a success or a good model for how to build a business.
For all we know, users may revolt against any kind of pay-per-tweet plan, and we may discover that advertising space on Twitter fails to pay Twitter’s bills.
Time will tell, I guess.
Ryan
David
on 03 Sep 09The definition of success is “How much coverage does my start up get by the tech press” in many of the web 2.0 tech sets mind (oh, is it not cool to say web 2.0 anymore?).
My 2.0 cents.
Billy Gray
on 03 Sep 09I believe we call that “WALMART”
Anonymous Coward
on 03 Sep 09Billy, huh? Wal-Mart may have some loss leaders, but they more than make up for it on other items to the tune of a $13.3 billion profit last year.
Dennis
on 03 Sep 09I think this is exactly what this article was about. I call this Monopoly accounting. You are not profitable until you bring more money in than you spend.
That is so simple. This artificial separation of variable and fixed expenses is gimmick, it is false and misleading. Fire your fixed expenses and see whether you can run the business. You can’t. Why separate them when talking about profitability?
Because you want to present something that its not. Because you are trying to put spin on things. Or you are lying to yourself…
And you know this leads to other things, like uncontrolled investment and unbounded spending and hiring by CEO’s. They start believing their own bullshit…
Not talking directly about Evernote, I don’t know them or their situation (except that they are not profitable) but from experience of seeing things like this develop.
Steve Brewer
on 03 Sep 09You aren’t a rock star until you sell out football stadiums.
YouTube video watched by 20M people – not a rock star.
Internet Famous – not a rock star.
Called a Rock Star company by the media – not a rock star.
Dave Peele
on 03 Sep 09Dead on article, totally on point! Business is simple… build something and charge for it. Anything else is a hand-out and hand-outs don’t pay the bills! If the bills are paid, hand something out. Until then… make some cash!!!
Eran Galperin
on 03 Sep 09Obviously, companies losing money aren’t a success financially yet. However, there are several other metrics that could be quantified as success, depending on the goals the company has and how it is meeting those.
Remember, facebook for a long time was a money burner until they made it profitable (or did they?). It’s hard to ignore Facebook’s success though. Twitter is in a similar position today, as it has not found the right business model yet. Would you argue it’s an amazing success?
There is a very large industry that is built around losing money on product sales and success metric is more units sold – and that is the video game industry. Each console sold is money lost, but the business model relies on licenses for game development and profit share with developers. And it works very well.
Elena Benito-Ruiz
on 03 Sep 09Great post and better comments, but I think the comparison is somewhat wrong. There are two things, related but different, being discussed here: the freemium model, or free – only, and the profit issue.
Weird nobody re-read the rant and noticed the ill silogism.
The solution to turn a profit is not charging either, or at least not only. You can’t either sell that. Charging is part of the process but there must be sth else to turn a profit. And an example is precisely your comparison to other businesses and industries:
Restaurants, airliners and stores are NOT based upon the free model, they are NOT using FREE to turn a profit. Those restaurants, airlines and stores you mention exist in the real life (good example that one, about the Michelin restaurants or any other sort of restaurant -McDonalds doesn’t count), airliners are now facing the worst era ever, losses, etc, low-cost and staggering-cost, both. And yet they earn prizes, such as Vueling, etc. They are getting customers and yet they are losing money now, or narrowing their already shaky benefit range. But they are not giving anything for FREE either. So they are “using ‘not-free’ to turn a profit” and they are not getting it.
I understand the reason behind your post, and I agree to some extent with some ideas shared here, but there’s sth that is telling me we can’t just equate success only to make profit= €. Of course a company that makes profit can be considered as successful , especially if based upon the free-model (close to sci-fi, but there’s nothing impossible). But I understand when companies, stores, businesses that are not breaking even are considered successful as well. If they are not going bankrupt or closing down, and still serving a purpose to thousands of clients, and struggling somehow (or is it now you care about the means to get there) and using any means to still serve the purpose while trying to make profit. Don’t know if we can assure that all companies in that situation are just ‘waiting’ for a profit, as it’s hinted at the post or at some comments…I’m sure many are struggling day by day to make it happen.
Of course there are some people (mainly at startups) who get the funding and think they are going to make profit just by the sake of it, and live an unreal life while riding the free wave.
But anyway, what I’m trying to say is that the comparison is ill and it can be reversed just to prove that even using not-free won’t even help you to turn a profit.
There are more factors in the scenario. Let’s not make the same reductionistic mistake: “forget about charging, profit will eventually show up with followers, communities, etc” = “charge and profit will come” (and you may realize that none happened)...
doane
on 03 Sep 09I know it’s not computer software but we gave away a free PDF download of our stationery pattern “paper software” in the first six months of Doane Paper’s existence from our web site. After we gauged user feedback we then started producing a physical product that we charged money for. DP is operating in the black from selling our physical products and we still offer the free down-loadable PDF from our website.
DaveinHackensack
on 03 Sep 09How much of this media coverage of money-losing companies is a result of the connections the VCs have with established media?
matt
on 03 Sep 09Great post. It seems like a lot of the profitable web goliaths figured out what became their current money-making capacity only after their initial endeavors floundered (or eventually became less desirable – thanks to others offering similar/better services, etc.). During that time, they may have maintained a customer base and web presence (without yielding much moolah), but at the time they were also concocting ways to bring profits back (perhaps desperately). While they were reconfiguring and restructuring the business model, they offered up many of their services for free to keep a foot in the door, and later figured out how to finally cash in (again) on advertising, subscriptions, premium upgrades, etc.
Maybe I’m wrong, but I believe many upstart web companies viewed the phenomenon (after the cash flow returned to some of these perceived freebie companies) as a viable model, but forgot about the initial failures and flops…or rather, redefined that period as a time for “laying the groundwork” or “planting of seeds.” This became some kind of pseudo-business model for upstart web companies.
There are exceptions, sure, and plenty of companies plan on only making a buck after an estimated, prolonged market insertion, but I have my doubts that the “make it free now, figure out how to turn a buck later” model gave birth to many of the best, successful web entities out there. I think it was just a misinterpretation of what some of the high-traffic, big web leaders were doing/experiencing.
Come out swinging, that’s my philosophy.
Narendra
on 03 Sep 09“Our own model could be called freemium – we were one of the first web-apps to go that route in 2004.”
Jason, in the spirit of accuracy, don’t rewrite Web history. The freemium model was around before the bust in 2001 on content sites like WSJ and ESPN.
Beginning in 2002, successful businesses with web-apps like Webshots, Yahoo Mail, Hotmail, and others were employing freemium models as successful businesses and revenue streams.
Marcos
on 03 Sep 09Hmmm… Is the bar too low or are letting over-optomistic projections of future growth/sales stand unchallenged too much?
How many state/local government/pention plan funding analysis were too optomistic when it comes to forecasting two to five years out?
Bill S.
on 03 Sep 09Even the concept of “profitable” has been turned into an accounting trick.
If I LOSE $1 million a year for 5 years I’ve lost $5 million. I have to earn back that $5 million before I have really made money.
I’d like to see a study on how many so called “profitable” tech companies have earned back the amounts they lost in their early years. Instead they want you to forget about that.
Patrick Dennis
on 03 Sep 09Deja Vous
This reminds me of the dot-com days.
Brandon Mills
on 03 Sep 09What about Youtube? They lose money on every single video served. Success? (If I was a founder, I’d say so)
Anonymous Coward
on 03 Sep 09YouTube? Internet sensation but business failure for everyone other than the founders. Google continues to lose money serving up YouTube videos.
c3
on 03 Sep 09Well, Incest does lower the braincell count , dont it.?
Aviv Hadar
on 04 Sep 09I really, honestly, openly and genuinely, could not agree more with entire piece Jason.
We are small digital startup focused dead-center in the technology space, and continue to focus immense efforts on… dare I say it… actually being profitable.
Of course, at our core is usability, development, design and true innovation… However, there’s no reason why a disruptive piece of software can’t be sold to its users. If the product is good enough, people will pay for it.
Bottom line.
Janette Toral
on 04 Sep 09I agree with you that being profitable is important as what is the use of having so many page views and users if they don’t pay the bills and get what you need.
Using free to turn a profit is possible but it should be realized first before it can be considered as a success.
Chris Nagele
on 04 Sep 09Well said Jason. I’ve always had the feeling that people in our industry need to stop reading the latest blogs or books and pick up a good read from Drucker, Sloan, Carnegie, Mackay, and so on.
The free model is new and unique, but it doesn’t change the fundamental rules of business.
Francis
on 04 Sep 09I read the article..
I don’t see anything wrong with it the way Jason painted it on his blog post.
It’s a story of a company who just started, don’t tell me Jason made profit on the first day they opened basecamp they have the same business model free until you want more.
It’s really weird how Jason always hit on new words used by the press as if he hates it because he was not the one who started it.
The Times article was a press coverage for a company who want’s to have more user by being on the press, it was not an article about making money.
Anonymous Coward
on 04 Sep 09Free is a suspect business model, I agree, but the idea that Evernote is not successful because they don’t expect to be in the black until 2011 is highly suspect.
They’re not “losing money every day” (at $78k/month in revenue), they’re making money every day or they would never break even. All kinds of businesses require an investment that’s paid back over time, Evernote is well on its way to being one of the few businesses that achieves this. How can this be characterized as a unsuccessful?
Rob Linton
on 04 Sep 09Oops… that was me above.
Anonymous Coward
on 04 Sep 09Rob: Evernote may very well be a business success one day, but today they’re not. Once they break even, and are actually profitable – covering all costs, fixed and variable – then their business is working for them. Until then, they are under water. They are in the red. It’s simple. Nothing fancy about it.
Berserk
on 04 Sep 09@Rob: If they bring in $78k/month and spend (say) $100k/month (on fixed and variable costs – just because a cost is fixed doesn’t mean it’s not a cost).. do they, or do they not lose money every day? To be fair, they are making money every day – but they burn it faster than they print it.
(If their revenue were higher than cost they would already have broken even.)
Giles Bowkett
on 04 Sep 09You must be the change you wish to see. This “problem” is no problem at all for me. I don’t read the New York Times or TechCrunch because I know they’re both awful when it comes to tech industry coverage. I do read Signal vs. Noise because I know that it’s worth my time. Or at least it usually is. I’m sorry to say this but it isn’t a case of the bar for success in our industry being too low at all. It’s something much simpler: you’re neglecting your own information hygiene. Polluting your mind with bullshit leads to angry ranting. (Trust me, I know!) The solution is to avoid bullshit.
The New York Times is never going to learn. TechCrunch is never going to learn. There’s a reason Ruby on Rails came from 37 Signals and not from anywhere near Silicon Valley. Arguing with the NYT or TC is a completely pointless waste of time. They’ve made their choices and their choices were foolish. Tune them out and move on. Otherwise people are going to add Signal vs. Noise to the list of tech blogs that talk about irrelevant Silicon Valley bullshit that just doesn’t matter.
Carl B
on 05 Sep 09I’d also like to mention that 79.000 per month is probably more profit then GM is currently making, and more than AIG and Lehmann were making in the last year, I mean just to be fair. So the debate is religous is it not?
I like the Ruby Business Model above all the others because it makes programmer happiness the top priority, putting the fun back into programming. This cannot be underestimated, because happy programmers will produce more good stuff in less time. And that is something I think we all deeply care about.
Google is a very unique story. What they did is truely a Web business model and they made it work remarkably well. They are the envy of every other Software business today. There is considerable debate going on if and how the classical old school software vendors are going to get into the Cloud and how they will do Software as a Service and if they can be successfull at it. I would note that google is being sued in France for making google maps free…
I also want to just say thanks for Ruby on Rails and all the great work that went into it. Keep going…
Anonymous Coward
on 05 Sep 09Yes, and everybody considers GM, AIG and Lehmann to be the most successful companies of the last couple of years.
(The $79k is revenue, not profit, but for the GM’s of the world that is probably what they are losing per second..)
Arik Jones
on 07 Sep 09@Berserk “they are making money every day – but they burn it faster than they print it.”
Just because you’re “making” money doesn’t mean you’re profiting. The true essence of making money is to actually profit, to produce income that exceeds the amount of your expenses.
Neville Franks
on 09 Sep 09From what I can see Evernote has obtained $US15.5M in Venture Capital so far. The expectations of the folks behind this funding must be pretty high. I wonder when they expect to see a return on their investments and how do they expect to get it. A buyout? Also how does this funding account in the “turning a profit” question?
Neville Franks
battery
on 09 Sep 09I am agree with you and every body must think about profit to be occured from the given milestones.Be free to turn a profit is possible but it should be realized first before it can be considered as a success.Anyways its nice post.
This discussion is closed.