As the woes of the global economy have forced entrepreneurs and investors who had previously been fans of the “everything should be free” ad-based business model to reconsider their beliefs, there seems to be a growing infatuation with paid services again.
Having run a number of paid online services over the years, I can attest to the simplicity and elegance of this business model. There’s nothing quite like waking up in the morning, checking your sales stats and learning that the adage “money never sleeps” is true.
Last week, I discussed Twitter’s difficulty in developing a business model and pointed out that the addition of paid services would probably be the ideal business model for Twitter to pursue at the present time.
Yet a guest post on TechCrunch this past weekend that suggested Twitter could take advantage of popular Twitter users like Britney Spears to develop a model in which users pay to follow another user’s “Twitter stream” convinced me that a bit of more detail is needed in the discussion of the paid services business model.
The reality is that launching a successful online business that is built on a paid services model is not exactly child’s play. You cannot charge for everything and anything.
The difference between a service that costs $0 to use and a service that costs 1 cent to use is tremendous in the eyes of a consumer and entrepreneurs need to have some appreciation that building something users will pay for can be just as challenging as building a successful ad-supported business.
Here are three important common sense pointers for those considering charging for their services:
You have to offer something that’s worth paying for. While you think this would go without saying, you’d be surprised at how many entrepreneurs I’ve met who seem to give little thought to whether or not they have created a service that is valuable enough to be worth paying for.
The reality is that while there are many things that people may be willing to pay for, there are more things that they aren’t willing to pay for. Assessing the real value of any service is important. Will your service save its users time and money? Are you providing a service that is otherwise not available for free? Answering these questions is a must before launching a paid service.
The price has to be right. While pricing a service is just as much art as it is science, the bottom line is that if you charge too much, you price yourself out of the market. Ironically, if you charge too little and throw into question the value of your service, you may lose a considerable amount of sales.
Bottom line: I’ve seen more than a few paid services with a lot of potential that have not succeeded because the pricing was off so anyone thinking of launching a paid service should focus on trying to get this right.
You have to provide support. When somebody pays you for something, they usually expect that some level of support will be provided when things don’t work properly, when they have a question, etc. For entrepreneurs who have never charged end users for anything, the responsibilities of answering directly to the customer are unusual.
You need to be committed to providing support promptly and in a friendly manner. Trust me – sometimes it isn’t easy. Customers can be very demanding (if not downright rude) and some of them are a bit slow. But they are your customers and remembering that they put money in your pocket is important.
Additionally, providing a commercially reasonable level of support can change the economics of your business. Every time you have to answer a customer email or every refund you have to issue takes time and time is money. Thus, streamlining how you provide support and implementing clear support policies can be an important contributor to maintaining a healthy bottom line.
At the end of the day, I’m glad that more internet entrepreneurs (especially those in the “Web 2.0” space) are giving thought to the possibility that “charging for stuff” isn’t such a bad business model after all.
Perhaps the biggest advantage it offers young startups is the ability to better correlate the scaling of the growth in expenses to the growth of revenue.
Yet the notion that Twitter is missing out on a huge opportunity by not enabling its most popular users to charge for access to their “Twitter streams” highlights the fact that some people are going overboard.
Charging for services online is a proven business model but it’s not a panacea for every ad-supported business that was unable to find enough support. Not every ad-supported business can make the transition successfully and not every ad-supported business should try to.
The amount of money consumers will spend on paid services is finite and in tough economic times, the bar for paid services is set a higher as consumers cut back on unnecessary expenditures.
Those who choose to pursue this business model need to keep all of these things in mind.