Two Opposing Viewpoints On The Best Business Model

In: Business Ideas By: Brian Armstrong

12 Jan 2009

Marcus Frind created a free online dating website called PlentyOfFish.com. It serves up 1.6 billion pages views each month yet Marcus is the only employee, he works about one hour per day, and the website brings in about $10 million per year.

In this excellent Inc Magazine article Marcus sums up his idea of a great business model:

Pick a market in which the competition charges money for its service, build a lean operation with a “dead simple” free website, and pay for it using Google AdSense.

This is basically the ad supported business model which requires lots of page views but can work.

On the other end of the spectrum we have 37Signals who also has a multi-million dollar per year suite of products which people pay monthly subscriptions to use.

Here is founder David Heinemeier Hansson’s view on a great business model which actually charges money instead of relying on ad-revenue:

You have customers, they pay you money for the product or service, and you get profits! It’s almost too simple to work. Of course, 37signals didn’t come up with this idea on its own, either: I’ve heard that over time—hundreds of years actually—this has been how most businesses have made their money. But somehow that notion got lost in the Web world…

Web entrepreneurs would be better off starting their businesses in the way most offline entrepreneurs do: Use a small amount of seed capital to make a good product that appeals to a client base that is willing to pay you for it. Then, over time, use the money you make from your customers to improve the product or to create more products—allowing you to attract more paying customers, which then lets you invest more into the business, and so on.

So which is better – a paid website or a free/ad-supported website?

I think both models make sense. You have to look at how much value your site is really contributing to people’s lives. If you are helping them earn a living or save money, or performing a critical business task – then yes people will probably pay for it and you have a good business model to charge for.

But, on the other hand, if your website is a novelty, entertainment, or more fun for people than it is essential, or if you are trying to beat an incumbent who is already doing the pay model successfully – then maybe you have a good candidate for a free, ad-supported, website.

What do you think?

Tags: ad supported, business model

8 Responses

Troy Malone

January 12th, 2009 at 5:30 pm

Subscriptions are where it’s at if you have a service that is more business oriented and worth paying for. On the consumer level, most things are free. The dating service is a great example. What a great opportunity to aggregate eyeballs.

I personally don’t think that you could do the same thing if you are catering to businesses. They will not tolerate ads in their mission critical applications!

Troy Malone
Pelotonics

Brian Armstrong

January 12th, 2009 at 5:55 pm

Agreed Troy – mission critical makes for good paid servies

Chris - Manager's Sandbox

January 12th, 2009 at 5:39 pm

I think your closing comments sum it nicely: “I think both models make sense. You have to look at how much value your site is really contributing to people’s lives. If you are helping them earn a living or save money, or performing a critical business task – then yes people will probably pay for it and you have a good business model to charge for.

I’m also a bit shocked at how smarmy David Heinemeier Hansson comes across in that quote.

- Chris

Brian Armstrong

January 12th, 2009 at 5:57 pm

Hi Chris – yep I think 37Signals has been accused at times of being arrogant. They are certainly innovators though – so I suppose there is something to be learned from all people even if you don’t want to copy every aspect of them! :)
Thanks for the comment!

Chiko

January 13th, 2009 at 7:29 am

I think a free website is better for the users because it gives them a chance to “sample” the website(product) to see if it’s something they would buy or use. Keeping the cost down for the users is never a bad thing (specially when it’s free). If the product or site is valuable, it will attract lots of people which comes with add offers and revenue.

So if you want to make money, focus on creating something valuable and be willing to give it away for free(for a limited time).

Brian Armstrong

January 13th, 2009 at 4:35 pm

Good point – what do you think about having a free account that is limited somehow (like a trial period of # of things you can use) for paid services?

January 14th, 2009 at 7:49 am

I agree with Chris and you on that last point about both models working successfully.

We can even look at in the software business where you have the paid Microsoft Office Suite and the free Open Office competition. Microsoft will always have the corporate customers who need the stability and support of MS, while general consumers and students can benefit from the no cost Open Office.

Matt Thomas

January 16th, 2009 at 12:12 am

It depends on if the market is willing to pay and what your differential advantage is. If you are taking the marketing position that you are free when everyone else charges, it can certainly lead to a lot of pageviews (and thus, ad revenue).

Both business models make perfect sense. As long as you end up with more money in your pocket than you invested, and as long as the model is sustainable, whose to say that the model isn’t a good one?

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Two Opposing Viewpoints On The Best Business Model

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