How are many of the Web2.0 companies (hoping of) making money out of their products? Quick and honest answer is : 'Nobody knows for sure, including the companies'. And predominantly there is only one business model: a free service and place ads on the pages.
Social media is becoming more and more attractive to Web users. However, the majority of social media services do not have a clear business model. Typically an innovative idea gives birth to a service, which people can use free of charge. The most common way to create revenue is via advertisements: Google ads appear in many services. In the long run, however, social media has to adopt alternative means for making money.
Why most web2.0 services are free?
I think, despite the hype in the media, many web2.0 companies (excluding a few) are NOT looked as providing any VALUE to its users. Most of them do not appear to solve a problem' or create a 'service' that users MIGHT need, if not essentially needed at the moment. Evidently there is no conceivable market for revenue. So most of them base their revenue on 'ads' placed on webpages. More users checkout what the site is about, more will be the revenue. I don't think, any reasonable entrepreneur is looking for these visitors to get sticky on their websites. They, most probably, already know the TRUE value of their service. If they had believed that it is TRULY VALUABLE to users, I guess they would have charged the service based on some kind of subscription model or pay per use. Why not?
The Litmus Test
I think that every Web2.0 business (I am already excluding enthusiasts' Web2.0 websites without any business models) should ask the question on what is the VALUE they are bringing to the community. The litmus test will be asking themselves, if they would pay for the service? If they do see VALUE in their service, answer would be a definite YES.
You might cite 10s of Web2.0 products that are completely FREE but provide a good value and they all generate revenue on Ads (for example most Google products are FREE), you are missing the point. (Google sells Ads and serve them to users) They are many products created that are purely dependent on 'number of page views' and there are only a few products that are built to charge for the service. You can choose whatever you want.
Most News Channels are FREE. But NONE of the movie channels are. You pick your market. If I have to pick between YouTube and BaseCamp, I would pick BaseCamp as my Business model. If YouTube start charging how many will use it? You might already know answer to this question when it comes BaseCamp.
If you provide A VALUABLE SERVICE (atleast you believe so), why not charge for it?
Update: Received a few emails explaining whey this FREE model might work for some of them. Just summarizing the view points here:
- If Service is Free, there will be more users tend to try it out and Application gets popular quicker. Once it reaches a critical mass, it can offer Value Added Services at a fee.
- There is no web application that can not be cloned in a fair amount of time. So even if you created a brand new service and charge a premium for the innovation, pretty soon copy cats with similar services offer FREE service and you will run out of your business, if not forced to offer it for FREE. So why not start free.
- In today's market, FREE not necessarily mean 'no or less value'. Particularly on the Web, 'FREE' has no qualitative meaning. It is always taken for granted.
- It is easy for Entrepreneurs to signup for Google Ads/similar provider than getting the first paid customer. Its FREE even for them to signup.
- Though number of users is not proportional to amount of revenue generated out of ads, Marketing teams from Large organizations favor more user base than a Quality Service with lesser user base. So MASS wins for advertising. In contrary, small businesess focus on niche groups.