Making 'freemium' work amid ad death spiral

I got a lot of questions about a recent post on "freemium" business models asking what Web 2.0 companies dependent on advertising revenue can do to weather the storm.

The short answer: generate revenue from the service you provide.

To clarify: if your company provides an online service that people use consistently and you are dependent on advertising for all of your revenue, you should figure out a way to directly monetize the user base. That is, charge for something that is perceived to be valuable to the user.

This advice is no different for Web 2.0 than it is for open source. If you are a business, you exist to make money. Adoption is not enough in a down economy. You need to get revenue traction in conjunction.

So, how can Web 2.0 or other ad-driven businesses make money?

Subscriptions
There are various ways to run subscription businesses. The best way is to get users on annual subscriptions (like non-Web 2.0 Red Hat) where you are able to lock in revenue predictably with some level of churn. More realistically, you can look to monthly (or three-month or whatever) subscriptions like 37signals, where users have enough time to evaluate and stick with or bail out of the service.

37signals' Jason Fried has an excellent post that outlines some monthly recurring revenue strategies.

The subscription approach provides immediate, real dollars, as opposed to advertising, which is variable in too many ways to reliably predict returns.

Pre-paid virtual goods and services
Not every site has an obvious way to include virtual goods, but I would say that every social-networking site certainly does. Social networking is all about maintaining relationships. And the ability to monetize user interactions will be a key revenue stream as the offerings get more sophisticated and normalized.

There are other options. If you are a music site, how about gifting MP3s. If you are a finance or travel site, how about gifting some benefit to participating?

Virtual goods provide one-time fees, which won't be as predictable as subscription revenue. However, anything you can do to generate money is a win these days.

It was never clear that advertising was going to be a great business model, and most Web 2.0 companies used ads as a crutch to get up and running while they figured out other mechanisms to gain revenue. It's time to remember that businesses exist to make money.

There is nothing wrong with experimenting and seeing what sticks.

[contentcreator--2008]

Advertising has been pushed too much as a way to monetize intellectual property---ad-supported music, video, software, literature, etc. But it is an asymptotically unsupportable model --- think what would happen if all intellectual products were supported by advertising --- all the costs would ultimately have to be borne by advertising for tangible goods. A glut of advertising placement opportunities would drive down achievable revenue, and as the advertising load on tangible goods rose, there would be a stampede to lower-cost "no-ad" brands. The advertising business model is self-limiting.

[bummerhan]

the same problem Google themselves are struggling ---to even get '5 cts' from the price of 'free'

firstly, a digital service is not virtual goods - it's just as real as any brick-n-mortar service. the only problem with digital goods, far too low the unit cost thus easy to expand, plus overly buoyed by the advertising boom (now bubble), web providers have essentially undermined their own software.

for many Web 2.0 'me-too' s, their immaturity stops here - the race for ad-reading eyeballs is done - tragic realization - that they had no real business model (or even value) in the 1st place - their customers are only free-loaders looking for the next freebie.

In the resulting debris, only the real-value businesses like eBay or Amazon, and the more-mature Web 2.0 businesses will survive, and they will be better and even stronger.