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Archive for February 28th, 2008

Does Free Really Have Value?

Posted by Bob Warfield on February 28, 2008

Giving things away on the Internet for free and figuring out how to make money later has been a time-honored tradition.  The wisdom of it is chiseled in granite, and those who would dispute it are the heretics of our day.  Yet, I am vaguely uncomfortable with it’s efficacy.

Seth Godin wrote another of his 600 (his number) posts about the goodness of free.  He equates free to being a way to pay for someone’s attention, because they sure won’t give it to you for free in this day and age:

If you want someone’s attention, I’m afraid you’re going to have to earn it. To pay for it. To do something that makes the person who just gave you this attention feel like a fair bargain was struck.

If I give you my attention, I want to get something of value for it.  But is “free” still a value when almost everything is free?  I’m concerned that free has become undifferentiated and that it now has a lot less value than we think.  It is the last refuge when you’ve no idea whether you have a good idea or can sell it, so you loudly proclaim it’s free and wait for the huddled masses to assemble at your doorstep.  Except, it’s not enough any more.  They may check in, but free doesn’t get it by itself.  Whatever you are offering, the world has come to equate the value of free less and less.  The ultimate example is the music industry.  The digital age made the cost to manufacture music via copying free.  Hence many began to feel that it wasn’t really stealing.  How can taking something that’s free be stealing, after all?  Free didn’t work there.  Now, many will be quick to argue that the media people created their own problem by not embracing free, and that’s true.  But it’s hard to escape the idea that free also reduced the perception of value too.

Dharmesh Shah’s article on Why Startups Fail struck me as a strangely syncopated variation on this melody.  He argues that it is through lack of capital or commitment.  That seems to me a strange cart before the horse juxtaposition.  Don’t they fail for having poor execution or a bad idea?  Yet Shah seems to feel that with enough capital and or commitment, the startups can keep on trying until they get the right idea or execution starts working.  In a sense, if capital was free and commitment easy, everyone could succeed with a startup.  Except, I don’t believe that.  Do you?  Aren’t there some who would never get there no matter how long they tried? 

In the end, we must not lose sight that most people are relative thinkers.  Free relative to $500 is valuable, but not because its free, but because it saves us $500.  If everything is free, where is the relative to compare it to and derive value?  Free is most valuable when its early.  If you’re the fourth or fifth free offering in a space, think hard about what you get for that.  Even if you’re the first, free may be a long haul.  Take MySQL.  The Sun acquisition was ultimately a nice conclusion, but they struggled long to get there, and ultimately only got to $60M a year.  One in ten thousand customers were paying them anything.  Is that really what you want to get from the power of free?

Fred Wilson likes writing about Free.  Free is a great way to make moneyIn Defense of Free.  The latter has the most telling quote right up front, from Stewart Brand:  Information wants to be free.  We’re back to the digital music thing again.  Because it costs nothing to produce, it ought to be free.  We want it to be free, and we feel we’re being taken advantage of if it’s not free.  Outrage leads to taking liberties.  Is this a good basis to build a business on?  Sometimes, but it feels like starting out from a position of disadvantage.

How is your company using free?  Is it an appology, because information wants to be free and it costs you little or nothing to deliver your product?  Is it paying the user for their attention?  I find I like Seth Godin’s payment for attention approach much better.  I want to pay the user, not acquiesce to their view of my value.  That feels like starting out from a position of strength.

The other great quote from Fred’s In Defense of Free is, “that a paid model can actually be beneficial, is really interesting and needs to be better understood.”  This goes back to the observation that people are relative thinkers.  Relativity can be directionless.  When everyone is charging, go free.  Did you get value because you’re free, or because you are different than the rest, and therefore interesting?  It’s both.  So if everyone is free, consider charging.  It will make you different.  It will enable you to increase your differences too.

I like what I call the “Near SaaS” model.  It isn’t free, but it isn’t at SaaS prices either.  One of the best examples I know is SmugMug.  Their proposition is simple and credible:

We’re going to charge you a little bit, because it allows us to offer you a better service.  Since you want the best, that’ll be okay and we both win.

SmugMug is much more profitable.  They provide the better service.  And they’re different.  Being different is extremely valuable.  When you consider it, the web brings two things.  It’s much easier to make things free and its much easier to have a lot of choices.  Being different is how you succeed when there are too many choices.

Free may not always be the best answer.  Think about being different.

Posted in Marketing, strategy | 3 Comments » Prooves the SaaS Point

Posted by Bob Warfield on February 28, 2008

SFDC is up big in the markets this morning on great quarterly results.  Importantly for SaaS skeptics, profitability is also way up.  Equally as important is management’s commitment to continued improvements.  They’re projecting over a billion dollars in revenues and 32-33 cents a share in profitability, up from not quite $750M and 15 cents this year.  In other words, profitability is expected to increase even faster than revenues.  Salesforce will evidently be more efficient going forward. 

I’ve said for a long time that it’s cheaper to acquire SaaS customers than perpetual customers, and that the only reason companies like Salesforce aren’t more profitable is that they’re throttling expenses to maximize growth.  With Salesforce coming up on the $1B mark, there will be less need to spend so much.  Growth has flattened a bit, although its still excellent, and as they’re coming up to the $1B mark, the brand, and more importantly, SaaS itself, is well established.  Time to dial back on the aggressive spending a bit and show how the business can shine for shareholders.

Various pundits have speculated on whether SaaS is recession proof.  I’m not sure anything is truly recession proof, but a recession certainly favors SaaS over the traditional On-premises model.  Why?  Because the risks are lower for SaaS, the up front costs are lower, and it’s just plain easier.  When you’re facing a recession with budget cuts, that matters a lot more than getting best of breed or starting some new boil-the-ocean IT project.

The next shoe to drop will be the acquisition game.  As Salesforce makes its shares more valuable through increased profitability and continued growth, they create a valuable currency that gives them an unfair acquisition advantage.  Simply put, if their stock is more valuable than what they acquire, they newly acquired profits and revenues will be more highly valued too.  This creates the sort of virtuous cycle that has kept Oracle going lately, and is an important tool in the growth arsenal as a company reaches that stage where it has an unfairly valuable currency with which to acquire.

There are certainly lots of great targets out there, but Salesforce will need to be careful to look at companies that can be folded in with a minimum of trauma.  Avoid products that have high installation costs, for example.  Increasing Salesforce’s market cap will also be important to warding off the bigger fish, such as Oracle, that may want to acquire them.

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