Lately, I have been doing a fair amount of informal consulting with different startups and entrepreneurs. The one thing that bothers the shit out of me is some of startup pricing, though. The words “Free” or “Reduced” shouldn’t even be considerations, because you will lose each and every time.
Free is a good thing. Open Source software is free. Social Networking websites are free. There are a lot of free things on the Internet that work fantastically. But they generally have a built in fee-for-service model. Take Skype for example. Skype to Skype calls are free, but to call a ordinary phone it is $30 a year (still an unbelievable bargain). These companies have figured out how to make money, while still using a free service to entice users.
The other thing I hear a lot of is, “We will just charge less than the competitor.” Once again, this is a no win situation. Suppose you cut prices to gain market share. If you are even on your competitor’s radar screen, they will cut their prices to beat yours. Then you lower again. Before you know it, you are making nothing on your product and you have gained 0% market share.
One of my favorite examples of making money from a startup is Firefox. They release their software for free, as we all know, but have made several strategic moves with prime players, such as Google, to make money year after year.
Google is another one. Who would have thought you could make $13 billion from search? Well, combine that search with contextual advertising, and you have a money making machine.
The next time you are pitching your business idea, make sure that the person on the other end of the table has a pretty good idea of how your company is going to make money. Even that catch-all, “web advertising” is a little vague for their tastes. I think the only crew that works with is the one in Silicon Valley. And if you need help brainstorming strategic partnerships, give me a call :0)
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