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| Image Credit: loop_oh |
One of the questions that I am asked on a fairly regular basis goes something like this, “how do these free services stay in business?” That question is often followed up with a question like this, “how do I know that the service will keep running?” Here are my answers to those questions.
How do these free services stay in business?
There are three basic ways that web-based companies fund their free services. The first two are fairly obvious, advertising and selling premium upgrades from a basic level of free service.
The third way is through venture capital investments. The idea there is a venture capital firm invests in the service in the hopes of turning a profit down the road. The investor sees a profit when the company sells out to a larger company (see Posterous selling out to Twitter for a recent example), the company starts turning a profit through premium service sales, the company starts turning a profit through ad revenue, the company offers an IPO (rare in education market) or a combination of all four options. See companies like MasteryConnect and Edmodo for examples of companies offering free services that have received large investments from venture capital firms. Click here for the MasteryConnect story and click here for the Edmodo investment story.
How do I know that the service will keep running?
The short answer is, I don’t. But I do feel comfortable hazarding a guess based on the business model that a start-up is using. My feeling is that companies like MasteryConnect and Edmodo who have received millions in venture capital probably aren’t going to squander it so quickly that they will be shutting down quickly. The concern there is selling out to a larger company that does or doesn’t keep the service running.
Companies relying purely on ad revenue need to have a massive number of pageviews to be profitable. That’s not to say that it cannot be done, it’s just hard for a start-up to make it that way unless they experience viral growth.
Disclosure: MasteryConnect does advertise on this blog.
