The most important employers and money generators in the international economy are small and medium businesses. In terms of economic impact, the small, sustainable manufacturers and service providers who sell to limited markets make a big difference. 98% of US businesses have fewer than 20 employees. The Apples, Googles, and Ubers of the world make the headlines, but the real economic powerhouses are the thousands of little businesses that no-one but their customers has ever heard of.
If you follow the startup scene at all, you’ll have noticed that hardly anyone is aiming at small and sustainable. They want the next Google or Facebook. They want to ride the next unicorn to an astronomical payout. But most companies will not be the next Google or Facebook. There’s an inherent contradiction here: most companies will never be huge, and yet thousands of startups every year choose a business model that can only work at scale: free to the user.
The result is that, of course, most of those thousands of businesses will fail. The tiny few that are supported to enormous reach by angel and venture capital will be the odd ones out. That’s how VC economics work — fund dozens of companies, most of which will fail, very few of which will succeed big enough to offset the cost of the failures and make investors fabulously wealthy.
The world needs small businesses that serve niche markets. It needs web services and sites that don’t want to be huge, but that want to be sustainable. For most of these sites and services, business models that suit the unicorns aren’t going to work. The problem with free is that it only works at scale. Businesses with free products have to monetize eventually. They advertise and they sell user data; both methods that are only likely to succeed at scale.
Consider the example of Pinboard, the link bookmarking and archiving service. Pinboard will never be a unicorn. It’s a one-man business providing a service that is worth paying for to a relatively small number of people. Pinboard wouldn’t work as a business if it were free (as Delicious discovered). It provides a useful service for a reasonable price. If Pinboard were free for users, it would be forced to monetize with advertising, to push user growth with growth-hacking techniques that degrade user experience, or to sell user data to other companies. None of these are “user first” approaches — in these business models the users are not the customers; they are the product.
The take-away here is not that there’s anything intrinsically wrong with free services; it’s obviously a successful model for some online businesses. The point is that if you want to create a sustainable business that brings in enough revenue to support you and perhaps a few employees by providing a premium service to a niche market, you should consider charging from the outset. The potential rewards may be smaller, but so are the odds of building something that lasts.