In a post written a couple days ago, I took a poke at “free” business models and cited the success of WatchDox launching its  secure file-sharing service with a premium price tag.

In that post, I wrote:

At best, free is a marketing strategy, although typically not a well understood one.

Having said that, I thought it reasonable that I give an example where I think “free” makes a lot of business sense. That example came to me as I was working with Guidewire Group client MyOwnRealEstate.com on its pricing model.

For those of you who missed the company’s product launch at DEMOfall, MyOwnRealEstate is a property management and tenant communications platform offered as a Web-based service.  The product is aimed at the sweet spot of professional rental property owners with 3 to 50 units under management.  For those customers, M.O.R.E. charges a modest per-unit-per-month price that is easily absorbed into the monthly rent.

But what about the million-plus property owners who are renting the other side of their duplex or leasing a second home?  They account for a significant portion of America’s housing stock, but frankly they are the hard-to-find customers who would cost so much to reach that they’d not prove profitable until well into the second or third year of service, a contract term they’d not likely sign on to.

My advice to the company was a seeming contradiction to my “free isn’t a business model” campaign: give them the software for free.  If you own or manage two or fewer rental units, you can use myownrealestate.com at no cost.

The reasoning: While some of these customers might pay – if you could find and market to them, most would not.  However, each of these units touches a few tenants who will be introduced to the product and who may begin to ask about it when they move on to their next rental.  It’s a slow word of mouth campaign, but it is some value exchange.  Moreover, real estate professionals talk and a few champions using the service will begin to lift page rankings and otherwise build awareness of the service within the real estate community.  And, once in a while, little real estate moguls become bigger real estate tycoons, taking their practices and tools along with them.

It’s small stakes, to be sure, but stakes easily given away because the marginal cost of serving these customers is very low and the price of capturing them is extraordinarily high.

Meanwhile, the customers with the incentive and the cash to pay for the service receive the equivalent of a modest discount (first two units manged are free).  It’s a win all the way around.

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.

In a post yesterday, Graeme Thickens reminds the blogeratti that they (I’m not yet sure I should include myself in that category, but I’m certainly guilty, too) “missed the point” in the debate about Alltop, Guy Kawasaki’s new blog aggregation site. While journalists, analysts, and bloggers argued about the value, audience, and innovation in this site, few if any of us talked about how Alltop makes money.

I put that question to Guy, as I always do with new entrepreneurs, when I first talked with him about the site. And I failed to mention it in my initial post. Not surprisingly, the business plan is simple and common: attract a lot of users, then deliver targeted advertising based on the content visitors read. Because of the broad base of topics covered at Alltop, the site has potential to connect a much broader range of advertisers and consumers. That content range allows Alltop to play in very niche markets without the expense of developing niche audiences. In affect, the breadth of coverage at Alltop appeals to the niches within us all.

So, that’s the business plan, “the point” we all forgot to mention. But while we’re on the topic of “the point,” it’s as good a time as any to make the point that “the point” is the reason any of us are at this thing at all. And that point is so often overlooked, particularly in this day of capital-efficient Web 2.0 software and services.

Too often, these new “products” rely on Business Plan 2.0: Do something cool, hope a lot of people like it, figure out if and how it makes money later.

And too often these days, the media – social and otherwise – that cover Web 2.0 “businesses” give them a pass on business model and viability. A media darling trumps a going concern.

While the blogosphere argued about the Alltop’s design, its audience, its founder’s resume, and even the cost to build the site, we failed to talk about its viability as a business.

(And by the way, when did cost become a measure of innovation? By that standard, the U.S. should have the most innovative government in the world and OS/2 should be the dominant operating system.)

It’s no wonder, then, that so many business people outside the echo chamber that the technology media can be, still scratch their heads about the investment and excitement that surrounds Web 2.0. With the exception of a couple phenomenal investments, there is little evidence that there are businesses among the mass of cute logos and I’d-like-to buy-a-vowel names.

It’s high time the social media covering Web 2.0 take up our responsibility to do more than just hype or pan new ideas. We also have to look for the business that lies behind the widget.