Business Strategy

Charge For Your Service or Make it Free?

Written by James Garvin for Gaebler Ventures

Digital information along with the internet has forever changed consumer expectation of how we pay (or don't pay) for digital goods and services. Whether your business is internet based or not, deciding whether to charge for a product or service could be the biggest decision for your business.

We all know, free products drive the greatest demand with indirect revenues such as advertising, but paid products can yield business owners direct revenues.

Physical goods do not and will not ever have a dilemma of offering the product for free or for a fee, but for digital information and digital services, the dilemma is a challenge that many companies and start-ups struggle with and can be the deciding factor in your success or failure.

Adobe, the file maker company that created PDF documents allows readers and viewers of PDF documents to read/view the document for free and charges the creators of .PDF documents who valued the protection that PDF files provided. Had Adobe charged viewers to open a PDF document, they most certainly would not have been successful. Would you pay each time you had to open a PDF? Adobe's PDF is a classic example of how you charge one side of your customer base, but don't charge the other side of the customer base.

No one industry has faced a bigger challenge with coping with the digital pricing revolution than the newspaper industry. As more consumers get their news online, newspapers have struggled with declining print subscriptions and deteriorating online advertising resulting in many newspapers struggling to cope with consumer demand of free. One solution that many analysts suggest is to charge for content, but many newspapers, rather than trying to drive online revenues are deterring it, by charging super-premium prices to access online content as a way to incentivize customers to subscribe to their print edition. For some, this strategy is working as more subscribers re-subscribe to the print edition and forego checking their local news online.

Email is another example of free vs. paid. When email accounts were first created, consumers were paying a monthly fee for the service. Paid email services quickly evaporated as free email services became the norm as companies realized they could quickly increase their user base with a free service and subsidize the cost of the service through advertising. Of course with advertising, the more eyeballs you have using your service, the greater revenues you can generate through advertising.

Deciding to charge for your product or service is not an easy one and as more consumers become accustomed to free, the ability to charge consumers for digital information is becoming much more difficult. Today more than ever, consumers expect many digital goods and services to be free. If you decide to charge for your service, you run the risk of not acquiring enough customers to sustain a profitable company, but if you make it free, you run the risk of being dependent on advertising and other indirect revenue to subsidize your free service.

A more popular solution to this dilemma is the "freemium" model where you offer a simplified version of your service for free while charging for more personalized or access to more feature rich services. This allows consumers who value your premium services to pay for them while still allowing customers to extract value from your free services. With a freemium model, you want to price discriminate the customer, not your service. Free customers can be worth a lot as they provide word of mouth marketing, but ultimately your goal is to convert enough free users to paying ones.

James Garvin began his education studying biotechnology. In recent years he has turned his interest in technology to helping two internet startup companies. The first business was an online personal financial network and the second was an e-marketing platform created to help entrepreneurs demo their web sites. Currently a student at University of California Davis, James is spending his summer incubating two new online businesses and writing about his entrepreneur experiences.

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