Guidewire Group

If you’ve pitched to me over the last 6 months or so and talked about a free business model, you’ve no doubt heard my rant that “free isn’t a business model.”   Most proponents of “free” plan to make their money in advertising, even while failing to understand much at all about the dynamics or economics of an ad-based business.  At best, free is a marketing strategy, although typically not a well understood one.

Very simply put, “free” as it is used in the Web world is a proxy for the currencies of time, attention, permission to observe and to market to.  The Web-based business must, through some means, exchange those currencies for real dollars, because so far as I’m yet able to figure, landlords and employees and hosting services and myriad others still demand cash in exchange for their services.

But don’t get me started.

In fact, maybe you don’t have to.  Maybe, just maybe, some sanity is returning to startup entrepreneurs when it comes to valuing their products and extracting that value from their customers.  In other words:  charging money for them.

In recent weeks, I’ve had a number of discussions with entrepreneurs that suggest the tide is turning on “free.”  No doubt driven by the scarcity of capital and the absolute requirement to drive real revenue quickly, a few startups are actually (gasp!) charging customers who use their valuable applications.

There’s no more dramatic example of this than WatchDox, which offers a highly-secure, yet remarkably simple file-sharing service.  When I met with Adi Ruppin, the company’s VP of marketing and business development as the product was coming to market in July, he offered that WatchDox would go to market with a free-to-paid model where the basic package would be offered at no charge while premium features (storage, file size limits, etc.) would be provided at a cost starting at $14.95/month.  The price of the high-end “business” package would top out at $29.95/month.

Over the summer, WatchDox secured anchor customers in the pharmaceutical, publishing, financial services, and entertainment markets, where WatchDox was replacing solutions from Adobe and EMC.  Clearly, there was value in the product – value that WatchDox didn’t want to leave on the table.

Today, the service is priced differently.  A 14-day free trial gives new users a taste for the service.  The single-user “personal” version now sells for $49.95/month and the multi-user “business” version costs $299.50/month.  And, imagine this:  customers are actually paying for it.  Why?  Because they recognize the value.  And, quite frankly, these customers won’t comfortably trust mission critical, client-interfacing document security to a “free” service that lacks a business model that assures the customer the service will be around for a while.

Ruppin admits that the “product moved up market much faster” than he and his colleagues expected.  But, he adds, “we focus where the money is.”

Sounds like good advice for all those struggling startups whose “free” business model isn’t paying off.