Nick Gonzalez from TechCrunch posted about a “great iPhone chat application” by a company called Mundu.
Then he slings this at his 500,000+ readers (many of which are calling bullshit in the comments):
“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.”
This is typical of the sensational tech/media/business press: an obsession with all things free, all things inflated, and all things unsustainable. Sustainability doesn’t mean going back to your investors for another round because you don’t have enough to pay your employees because you don’t have any income because you don’t charge for your products.
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.
“The can’t be screwing around with charging customers” and “Why in the world will they eventually charge $11 for it?” and “Offer a free version and drop an advertisement into the conversation every once in a while” are toxic suggestions. That is unless you want to go broke. And to suggest that software should be free because the marginal production cost is zero is about the most bizarre proclamation I’ve heard in a while.
With a few obvious bigco exceptions, I’d like to see a count of successful and sustainable software companies that are surviving and thriving giving everything away for free. I can point to hundreds of examples of small software companies running in the black by selling their products to their customers. The shareware industry, for example, puts much food on many tables for many families because the software builders price their products and put them on the market. People try it and people buy it. People are happy to pay for things they find valuable.
So don’t think for a second that you’re “screwing around” if you charge customers. What you’re doing is saying “This is our product, we believe it’s valuable, and we think you will too.”
There are few things more satisfying than having people find enough value in your ideas and products to trade their earned money for what you’ve produced. It’s primal and wonderful and every vendor should experience it. It’s great business and it makes your business great.
Adam
on 06 Aug 07“The marginal production cost of software is zero. That’s what the price should be.”
I suppose all of the other costs are zero as well, like the initial R&D investment, maintenance, and support.
It sounds like this guy is what Fake Steve would call a freetard.
Tino
on 06 Aug 07Jason, I can completely agree to your statement. Honoring valuable services is a habit which shouldn’t fade away like we see it these times.
Ryan
on 06 Aug 07I agree that great products warrant the transfer of money. I am completely willing to pay for products that outperform competitors’ products so long as I’m getting something that is comparatively more exceptional.
With that said, the reason so many people don’t want to pay for this product is because there are numerous other iPhone-specific chat apps already out there that ARE free.
So what is the benefit of paying for Mundu? You get a web-based app that allows one to chat over several chat networks. I might be in the minority, here, but I use AIM via iChat and that is all. I don’t use Googlechat, I don’t use Yahoo, I don’t use ICQ. I use AIM. That’s it. I also don’t know anybody who has more than one user account. What’s the point, access? I doubt it, as juggling user accounts is ridiculous and time consuming, and I don’t see the benefit.
So with this in mind, why would anyone want to pay for the use of an app that gives them access to 3 out of 4 things they don’t need?
Anonymous Coward
on 06 Aug 07Even with freeware out there…you pay for quality. RSS feed readers are a good example. There are ton’s of free readers. But NewsFire was software I would buy again.
BTW – I would pay for a good email service. Everyone offer email…but they suck. Either their butt ugly or bloated with features I don’t use. Simplicity and elegance goes a far way.
Dave Stevenson
on 06 Aug 07I’m glad you’ve pointed out this article. When I read this, I was sickened by the authors comments about advertising. He seemed to think that advertising was the solution to all problems. How about thinking first about how annoying a chat application would be if every few lines of chat had an ad? Ugh.
Josh Walsh
on 06 Aug 07This coming from the same company who routinely publishes to their “Dead Pool” of failed online startups.
Living negatively, especially at someone else’s expense, is not the way I want to spend my life. Thanks Jason for staying positive, and taking the time to publicize this.
allan branch
on 06 Aug 07No to mention having to load ads will just slow the whole thing down on an already slow connection.
TechDumpster (Living in First Life)
on 06 Aug 07Excellent post Jason. The problem with so many Web 2.0 companies doing everything for free and supporting it with advertising is that it spoils tech-savvy consumers who think that everything should be free and then become unwilling to shell out for valuable software applications. Keep up the good work at 37signals.
RJ
on 06 Aug 07I agree, but at the same time, I NEVER buy software on the internet, and I use tons of it. Why? Because someone somewhere will eventually make it free for me. And in the cases where they don’t, it isn’t something I need enough to want to pay for it. There are few applications I simply HAVE to have, and the process of entering my credit card info for some software I’m really not sure if I love or not just doesn’t work for me. I know I’m not in the majority about this, but I have never in my life payed for a piece of shareware, and I can’t really see that I ever will. I’d rather store my “todo” lists on google notebook than ever pay for TaDa list. Until someone comes up with an application as necessary to my life as GMail and no free alternative, I don’t believe I’ll ever pay.
On the other hand, I’m happy to try out just about any crazy web 2.0 app that’s free. As long as the ads don’t get annoying, I’m happy to have them there, and I’ll even take extra time to look and click through them because I know they support my free experience. I know it’s a riskier business model for you-the-software provider, but in a market place rife with free applications, it’s tough to build something so important I’m willing to spend 10 minutes paying for it. Yeah, I think it’s the time more than the money that gets me.
RJ
on 06 Aug 07It’s worth noting that I only click the ads I find genuinely interesting. I’m not advocating click fraud as a way to pay for software – it’s just that I take more time to look at the ads when I appreciate the software I’m getting for free. I spend much more time looking at ads on GMail simply because I love the product and the fact that I don’t pay for it.
Anonymous Coward
on 06 Aug 07I’d rather store my “todo” lists on google notebook than ever pay for TaDa list
Tada is free.
RJ
on 06 Aug 07yeah, it was just an example. I can’t think of a good personal application that does cost money. TaDa wasn’t always free, right? Basecamp isnt’ the sort of thing individuals need.
Business applications are more compelling to me. I’d buy basecamp for my company; I don’t need it for myself.
bsackjohnson
on 06 Aug 07i can’t believe that no one has pointed out that MUNDU for iPhone is free?! i just checked the website. you’d think TechCrunch would do some sort of basic research before starting such a convo.
fcc
on 07 Aug 07Looks like a good app but I still think I’m going to wait until I hear more reviews on the Iphone.
Matt M
on 07 Aug 07I couldn’t agree more. Why the heck do people expect free software? Nobody expects free plumbing work. I don’t see how so many software developers are willing to give away their skill for free. I guess it is the Computer Software academics and their liberal ways.
QUESTION FOR 37 SIG’S: Do you feel your business return was worth the release of RAILS? How has the opening of the code resulting in increased revenue for you?
Geoff
on 07 Aug 07FREE is a great strategy for lead generation. 90% of the sales effort is in the service provider’s attempt to establish themselves as legitimate and then communicate value to the prospective customer. A no-strings-attached Free Trial is great. A feature-trimmed Free Version is great.
Customers have been getting by just fine without you. Why do they need to take time out of their life to listen to a sales pitch, download the app, figure it out, etc? Answer: There must be something compelling in it for them.
The Free Trial/Version is the best way I can think of to create long-lasting customer relationships. If your buyers go through the free trial process, your chance of missing their expectations and taking money from them for something they didn’t want/need drops dramatically. That means you have buyers that 1) love your product and 2) trust you. That produces strong retention and great referrals.
Here’s Netflix CEO Reed Hastings on the idea of a Free Trial:
“[Getting people to adopt requires a] consumer behavior change. It is why our best marketing program ever has been our free trial to let any consumer try Netflix for free. What we find is once they have tried it, they realize, “Oh, I get to keep three movies at home at any point. I don’t have any late fees or due dates.” So then Friday night comes and it actually feels more spontaneous because they can just pick up one of the DVDs from the top of the TV and watch it. But until someone tries it, that’s a bit of an abstract concept. So we have really invested heavily in this free-trial notion. The way you can see that working is nine out of 10 people who try our service for free become paying subscribers.”
JF
on 07 Aug 07Geoff, we totally agree. Giving something away for free is a great idea as long as you have something else to sell them.
michael arrington
on 07 Aug 07Jason, you don’t address the fact that it takes two parties to transact. Simply charging for a piece of software doesn’t bring in revenue. Someone has to actually pay for it. In this case, they have created mobile web chat software. Great. Problem is there are two free products out there already. If the company wants to compete, they either need to create something that is so much better that they can charge for it (they didn’t), or give it away, try to build a huge user base and find another way to make money. A third option is to not get in the business at all.
What isn’t an option is to enter a market where the price for a commoditized good has already been set at zero and then try to charge for it just because you feel as though software needs to not be free. That’s an idealist talking, not an entrepreneur.
condor
on 07 Aug 07@Micheal. I think you are missing the fact that its not a winner take all proposition. There are many examples of small software vendors building cash businesses around “commoditized” products they charge for and that people buy. I think you’re talking like an MBA instead of a business-owner with monthly overhead; not every company has to be a google, or own the market.
vlod
on 07 Aug 07I don’t get it. If there’s software out there that’s free, and your not providing any additional value, why would I buy your software rather than use the free one? It doesn’t matter if you have overheads.. Simple market forces.. No? Do you really think that people will pay (and so let your company survive) rather than use a free one? Good luck with that.
SteamStreet
on 07 Aug 07The nice thing about thinking about a model where you charge, is that it really forces you to think about the actual value that you’re providing.
“If there’s software out there that’s free, and your not providing any additional value, why would I buy your software rather than use the free one?”
That’s the point… why would you build software in the first place that has no additional value, free or not.
WA
on 07 Aug 07RJ – Google’s & Yahoo!’s free apps are good (I work for the later).
Also – there is a lot of shareware apps, but there somethings that are just priceless. “Anonymous Coward” was right about Newsfire. It’s worth paying. To date – I havn’t found a better to do list than Ta Da list (Remember the Milk has basic usability issues). I’d pay for Tada if 37Signals charged for it – why because it’s more valuable to me to have good tools. Some people like dells that run vista because they cost $300. Good for them. I love my MacBook Pro and will spend on it because it brings me value. I’ll spend on an iPhone because it brings me value even though you can get some junkie free tmobile phone. Are you getting it…it’s about the value it brings. And people pay for that.
Pius Uzamere
on 07 Aug 07Thanks for posting this Jason.
Splashman
on 07 Aug 07Everyone is entitled to their opinion about whether this product or that product is worth the price. I have no problem with someone saying, “I don’t think that app is worth $11—I can get the same or better for free.” Hey, if you can get what you need for free, go for it. I sure would and I sure do.
That’s not what Nutty Nick is saying, though. He’s challenging the basic concept of directly charging customers for a product. The arrogance, condescension and crunchy utopian nuttiness is almost palpable.
Oh, and then there’s that niggling little detail, namely that Mundu is, in fact, free. Mmmmmm. I like my nuts honey-roasted.
David
on 07 Aug 07It’s hard to win the TechCrunch crowd. They go off on startups without business models but then they bitch about having to buy software.
Edwin Khodabakchian
on 07 Aug 07Jason,
The problem in this case is that Apple will most likely offer a chat application very soon. If MUNDO does not reach critical mass between now and then it will be very difficult for them to build a viable business. In this specific case, given the timelines and the lack of defensibility, finding a non-intrusive ad based model is the best to increase their reach.
I think that you are taking Nick’s comment a little out of context.
-Edwin
nexusprime
on 07 Aug 07Perfectly happy to pay for something if it does something I find valuable, and I’m one of the biggest OSS enthusiasts that you will find.
A cross protocol IM client, however, is not one of those things.
(Still enjoying Backpack. Think the invoice reminder emails are great, I had forgotten about it the first time after signing up, the email got me to start using it again :P)
I would be willing to up my monthly for offline (a.l.a Google Gears) support too.
Sebhelyesfarku
on 07 Aug 07Apple should have some IM software on their crippled iPhone at the first place.
Neil Wilson
on 07 Aug 07I know you like to push the ‘charge for it’ model and reconfirm your own structure. However all this $10 per month charging for web applications is starting to have the same effect as good old DOS based application software from the 80s. You are getting fragmentation, duplication and barely superficial integration. And the bill is getting too big.
I wonder how long all these little Rails apps can survive before we get the nasty consolidation phase that forces the price down to a few nickels at best.
So it is not all upside. One of the reasons that FOSS came about was to deal with the problems of not being able to get your tools to do what you want. Having used Basecamp, et al I know what they meant.
Free stuff is best in business, but only if you can get people to pay for it.
Sanat Gersappa
on 07 Aug 07Why does this have to get philosophical?
If you can sell it, sell it?
If you can sell something else by giving this one free, do it.
If not, give it away (if that gives you a kick) or examine whether you should be doing something more worthwhile.
Adrian
on 07 Aug 07My entire web development workflow is shareware Textmate+CSSEdit+Transmit beat any commercial package and ANY free alternatives on any platform.
If its worth the money, people will pay for it. I would even pay for Adium if they charged for it, been tempted to donate but the devs act like jerks in the forum so it puts me off.
mpw
on 07 Aug 07could you name the examples of shareware apps that are not bigco, make decent profit, and selling to the customers, not companies?
Anonymous Coward
on 07 Aug 07mpw, here are some I use, pay for, and I know are making real money for the developers:
Transmit, Adium, Coda, TextMate, LaunchBar, TextPander, Knox.
Darren
on 07 Aug 07Maybe we need an iPhone version of Campire ;)
topfunky
on 07 Aug 07The problem is that people measure the success of an application by the number of people using it, not by the revenue it generates (or whether the authors can afford to maintain it).
Ismo Ruotsalainen
on 07 Aug 07I dont get how production cost of software can be zero!
Somebody, explain for stupid :)
Nick
on 07 Aug 07Good post Jason—agree with your sentiments entirely.
BTW, just noticed as I am reading this post that the OpenId bar is not showing up in Highrise on IE6 on Windows (backpack is fine).
Aditya
on 07 Aug 07Great read!
So if you are providing a valuable service like basecamp, then its reasonable to charge. But if you are providing a platform for fun like facebook, then it doesn’t make sense to charge. But how about when you are providing a social platform which provides tremendous value. Would you charge the users? Also, what if the major percentage of the users are students? How would you tackle such situations?
Brad Ummer
on 07 Aug 07I wonder if Mr. Gonzalez would agree that anyone should be able to copy any of his professional writings and use them for their own purposes (republish them, post them on their own website, etc.) without owing him any royalty? Obviously since the “marginal production cost of [writing] is zero”, he has no right to charge for additional copies. Especially when you consider that there are other “free” writers out there that readers could choose as alternatives.
Allen Stern
on 07 Aug 07Great writeup – I too believe that free is not always right. I posted about this today: http://www.centernetworks.com/if-charging-is-wrong-i-dont-want-to-be-right
Alex Bunardzic
on 07 Aug 07One thing I can reveal to you here is that it’s damn near impossible to compete with free. I’ve been through the process where we’ve built a product that was needed, useful and desirable, only to discover that some company of the likes of google made our business model unfeasible once they’ve launched a similar product that was completely free.
You cannot easily offer a product and ask people to pay for it if there is a similar product available with a price tag that reads ‘zero dollars’. That’s just plain common sense. Scolding someone for expecting free-of-charge products in the market that saturated with free products is not very logical.
We are all also very vulnerable to someone offering a similar product to ours for free. It can happen any time, while we’re sleeping, while we’re working, and so on. One never knows when it’s going to hit. Being smug and conceited about the quality of our products and thinking that these products are irreplaceable is not a very mature approach to business.
At this point, it is becoming apparent that any software that addresses issues around the computing infrastructure is expected to be free. No one in their right mind is going to continue to pay for compilers, text editors, servers, database management systems, email management, version control and project control/management software. All these products have been fully commoditized and are now freely offered by the community to the community.
The next thing that’s going to start happening is that business-specific software is going to enter the free arena. It is going to get progressively tougher to expect the customers to pay for software, period.
DHH
on 07 Aug 07Alex, allow me to paraphrase your argument: “My for-pay product failed because of competition from a free product. Therefore, all for-pay products will fail against competition from free products”.
What a load of non sequitur bull.
The software world is full of pay-products that are doing exceptionally well in the face of free competition. Billions of dollars are being earned in categories that have both free and pay entrants. And it’s been like that for decades.
From Oracle in databases to TextMate in editors, even the infrastructure categories have very strong commercial players. And free software usually has it a lot easier in those categories that are supposedly “commodities”.
But sure, competition will always be out there. Some times in the form of free entry that’s either good enough or even better. Some times in the form of way more expensive software that still manages to dominate to brilliance, tradition, or what have you.
Throwing your arms up in the air and succumbing to the “while we’re sleeping” paranoid doesn’t seem to be a likely road to success.
steve
on 07 Aug 07@everybody:
Consensus seems to be
(1) free is not necessarily better; (2) but marginal cost of production ain't no pricing trigger; (3) writers who don't check their facts are annoying (mundu is shareware - and there's an expiration date on it); (4) people who say interesting things (e.g., topfunky) get less attention than people who are annoying or (separately) who agree with us (e.g., Geoff).As Battelle might say… innaresting.
You guys are having a lot of fun with this fire dance, and I don’t want to interfere much. But isn’t price usually a decent indicator of quality? When prospects are constrained for time or something vital besides money (e.g., “I haven’t got the time,” “I only have one life to live,” etc), they’re more likely to buy when the price is higher than when it’s lower. And that which is most precious is often also most expensive (e.g., art). Call it behavioral coolhunting, or whatever, if you’re into labels and tags and whatnot.
This is just in my experience, but I find prospects looking for higher price tags in health care and when businesses are selling reliability to other businesses (i.e., whatever they’re selling and whatever they’re buying just has to work).
Then of course there’s the concern that customers actually have to use something for it to be valuable to them. If you’re interested in behavioral economics at all, you might like this at micromotives or this by Paul Graham. In the real world, turns out sometimes putting a price on stuff can help turn what we buy into what we really use.
Apparently, Geodesic is making enough money off the Windows and Palm versions of their Mundu mobile messenger to float a free Beta of their iPhone version. I wonder what their research and development costs for a Mac port were? Anyway. Good for them.
And topfunky, I couldn’t agree with you more… what we measure is what we manage, what we think about, and ultimately what matters when we talk about success. But I have no idea what we should be measuring to predict a shareware messenger’s success, besides knowing that R&D costs and popularity ain’t it. Maybe usage in minutes/user?
What do you guys think?
Alex Bunardzic
on 08 Aug 07DHH wrote:
Yes, that is correct. However, most of these pay-products could be traced back to two categories:
1. Corporate buying decisions (driven by the ‘you get what you pay for’ and ‘we can’t afford to go with free because, hey, where’s the support?’
2. Extreme niche platforms (TextMate for Mac)
In the case of #1, Oracle will always be chosen in the corporate world over MySQL, simply because of the knee-jerk conditioned pain of having to hemorrhage millions of dollars in order to do business. Large corporations have been conditioned and painstakingly trained by the vendors to operate that way.
But in the mainstream world of the free market initiative, there is very little incentive to pay for a product if there is a free alternative. I’d like to meet an idiot who would shell out money for a compiler, for example. There is so much goodies out there for free, that it simply makes absolutely no sense to pay for the compiler. Or for an RDBMS for that matter.
I think the only viable model going forward would be the 37signal’s model - charge for the services, not for the products. You know, the cafeteria style - you pick and choose to your heart’s content, and you’re free to change your mind as you go.
Mark
on 08 Aug 07Creating a mass market product/service is hard work, it can take years of work. The problem with giving it away free is that in the mean time while you wait for mass market share you starve. If you can start making money imediately by selling the product/services the money can fund continuous improvement, which is what makes all the difference in making great products/services.
Richard Corsale
on 09 Aug 07What he means is, relative to expenses like support and distribution the initial development cost is usually moot. in the case of this startup thats certainly true.
http://www.firstmonday.org/issues/issue6_12/ilan/index.html
—Richard Corsale
Walker Hamilton
on 13 Aug 07It’s a back & forth!
http://www.techcrunch.com/2007/08/13/37signals-drives-another-company-to-the-deadpool/
I think everyone’s going a little overboard.
This discussion is closed.