At a time when mighty Facebook is said to be scrambling for debt financing to help pay for all the computers it needs to accommodate its explosive growth, the wisdom of not charging for the service you provide is coming sharply into question.
Facebook is the massive social media network that claims nearly 200 million members and could have a market capitalization of $15 billion if it was publicly traded. And yet, it reportedly earns a meagre $300 million from the ads it serves up to its many members who are no longer just spotty-faced teens but also serious businesses that are levering value and revenue from the Facebook platform.
These realities brought to mind the seemingly mind-numbingly obvious, but evidently not universally subscribed to, bits of pithy advice shared at an Ottawa Network panel on bootstrapping a few weeks back. Shopify founder Toby Lutka shared his unhappy experience with initially offering his product, a widget that allows anyone to immediately and easily add an online store to their website, for free, with his company’s revenues coming from a tiny share of the sales his users rang up.
Trouble was, very few of the 1,000 users he swiftly attracted were generating much in the way of sales. Yet he was incurring real, per-user costs hosting their stores and supporting them. Something had to change.
“If you have a product and you need to monetize it, charge for it,” Lutka said, presenting a concept that was radical both for its staggering obviousness and for the fact that so many web business models are based on something far more fleeting and ephemeral.
Shopify grand-fathered its existing users and introduced three pricing tiers beginning at $24 per month. With more than 4,000 stores, you don’t need a calculator to figure out the company is doing much better.
From my perspective, Shopify was driven to a natural conclusion: the market will generally value your services at the price you set for them. Lutka got rid of the lurkers who were costing him but delivering little or no value and replaced them with serious e-commerce operators who demonstrated their seriousness by putting real money down every month. And he kept it very affordable. “Twenty-four dollars is a more annoying version of free,” he said.
What would happen if Facebook charged even a couple of bucks a month for its services? It would lose members at a wholesale rate, consolidate around a base of those that get real value from the site and would be willing to pay for it, and begin earning real revenue. It would be a far different beast, but it most certainly would no longer be a beast that needs to go cap in hand to service its free-loading users.