Hive Blog

The dot-com bubble busting at the onset of the 21st century is an example of poor online business models going bust. It is no secret that we are living in a bubble economy, in fact, the younger generation have not known life without bubbles, and big ones at that. Bubbles are good and fun, until they burst. The dot-com bubble began in the late 90s with that bubble bursting in 2000. It was then that Silicon Valley saw a much higher need for mops – that bubble left a lot of water to soak up. Are we headed for another dot-com crash? Unfortunately, I think the answer is yes.

Just the other day I was looking to print up some new business cards. I was told about a site where I could get them for free. I thought I’d check the site out since what I am looking for in terms of business cards is very straightforward; simple but elegant will do. By the time I had selected the perfect “free” business cards, I realized that I could have gone to my local Staples Copy and Print Centre only to have purchased pretty much the same business cards for what it would cost me to order them online for “free”!

Was this false advertising? No. Will I name them? Not even going to bother. I will say that free does have a few catches. Do I want to be limited to their very strict layout which doesn’t quite fit my definition of elegance? No, add $. Do I want to have their advertising on the back of my card? No, add $. Do I want a heavier weight card? No, I’ll save $ there too. Do I want the more expensive finish? No, I can save $ there too. Do I want to add fridge magnets? How about a business card holder? Business card calendar? Appointment form on the back? Coffee mugs? Hats and T-shirts? $ $ $ No, no, no! Okay, now I just have to pay for the shipping and handling, after all, you can’t expect them to print and ship for free, can you? Next question, would I like to have the business cards sent quickly for an added expense or use the slow shipping and wait about a month for my free cards? Suddenly, these free business cards end up costing a nice dinner for two.

All I can say is, at least they are honest. Honest!? Yes. They promised free and they didn’t say it would be the way I want it to be. Plus, it’s painfully obvious how they make money. They offer a free product and up-sell the customizations they precociously predict customers will want.

Once someone is a customer, it’s much easier to convert them into a paying one even if they are free.

Someone in life has surely said to you, “There’s no such thing as a free lunch”. Likely you’ve also heard the saying, “The most expensive things are often free”. There’s a simple reason for these sayings, they are completely true!

In business, free is always a loss leader. Always! There might be a few independently wealthy people doing something free out of sheer goodwill, but most wealthy people I know don’t stay wealthy by giving things away for free. Loss leaders are meant to entice customers into buying something else that does generate money for the business. Worse, these free loss leaders can end up having unintended consequences that make the receiver of the free product regret they ever touched it.

Online businesses that offer free services often do so by using advertising to support their business. Plenty of Fish is one such business. Google relies rather heavily on this as well. While they may not have their own products for sale, they rely on promoting other peoples’ goods who pay for the service indirectly. How these businesses make money is slightly obvious. Receiving advertising dollars isn’t always the most lucrative business in the world (unless you can keep your expenses very low or your target audience of such high value that advertising to this audience is of high value).

Other online businesses use the up-sell approach, just like my business card scenario. These can even be softer up-sell approaches where what the company is giving away is meant to generate leads and interest in their authentic regular business.

Another set of businesses give away a product and offer support on their free product. Proceed with caution! This is where free can become expensive. You can be certain the free product will need support. The free product is likely designed not to be the friendliest, most workable or worthwhile product it could be without that business’s help. These businesses wouldn’t be in business long if they were so inspired to pump out perfect products. Those poor MayTag repairmen should switch their business model.

Then there are the businesses who offer something for free with the chance hope they’ll be able to figure out how to make money one day. Even worse than this are the businesses that knew all along; they just didn’t tell those who bought into the free product first.

Companies like Digg and Twitter are scrambling to figure out how to make money. Digg decided to run a promotion to help their readers figure out their business model. Guess what was figured out in the end? The most obvious answer is, of course, advertising. Certain spots on Digg are of high value so Digg can milk that puppy! I wonder if Digg’s owners didn’t know that model all along (duh), but wanted to appear to their readers to be altruistic while they were growing like scum on pond.

This could have been a clever ploy by Digg all along. Adding in advertising one day without fanfare on their site could have made a huge base of their readers revolt against them. Many web surfers expect that everything on the Internet should be free – it’s the Internet after all! Is it any wonder why the Internet is filled with loss leaders? Don’t these evil companies know they should be paying to provide free services?

Instead, by running a contest Digg was able to say, “Hey, it’s not our idea! We couldn’t keep going by offering a free service so we ran this contest and the answer was born by the readers of Digg!” A brilliant move! Too bad Digg isn’t profitable just yet even with advertising. Their expenses are still outstripping their advertising revenues. Although, perhaps Digg thought they would be bought out long before they ever had to make any real money.

Sure, some products are born out of pure passion and start off small only to take off like wildfire. These uncommon and albeit, exceptional products, end up becoming outrageously successful, leaving the owners with a paradox of how to extract money from what they were originally doing for free. Nothing lasts forever and free is no exception. Free simply can’t keep being free forever. But don’t be fooled, many businesses do know how they intend to make money, even if those plans aren’t very good.

So why do so many online companies have free products, yet don’t appear to be using them as loss leaders (not even with advertising)? Many of these businesses are trying to promote their product as the next “revolution” for the social web. If they can just get enough eyeballs using their product they will be able to figure out later how to make money from it. Sound familiar? Dot-com anyone?

During the real estate boom, before the housing bubble burst, this could be seen as a reasonable strategy. Simply having enough eyeballs would virtually guarantee some bigger business would come along and buy the business out. YouTube was a huge financial expense, but after being sold, the owners made out like Billy the Kid.

That’s not the reality of the market today. Digg and Twitter have been in talks about selling out. They either don’t make money or they don’t make enough money to be profitable. While they’ve had some good negotiations, I don’t see dry ink on paper just yet.

Even business giants like Google are cutting back and streamlining their business. Taking on more expenses in these times is like punching a few more holes in a leaky ship. Eventually those water pumps will be overrun. Even Google knows this!

Building a business on the hope of being bought out is a poor strategy (or a brilliant one if you are one of the few that do get bought out). It’s a big gamble. Most will fail. My advice, figure out how to turn your free business offering into a loss leader to be self supporting during these trying financial times.

The Titanic was a beautifully magnificent ship, but would you have chosen to take a ride on it if you knew you would literally sink in oceanic history for one such voyage?

I think I need a new mop.