I was looking at Joel Krause's new company JotSpot. Jotspot is a company that offers online wikis, project management a blog and more. Jotspot is a fairly typical web start up in a way. Joel is a former founder of Excite who obviously understands the importance of web collaboration. In fact since founding Jotspot his blog posts have dropped down to nearly nothing. I hope that doesn't mean things aren't going well. Most people tend to use their blogs to promote their companies. He's had the same post up since June 2005 and it's highly relevant to my current post and it notes something about the trend in hardware and software that cuts against the expectations of many VC firms.
Here is JotSpot's pricing page (Which as of this posting is down - So much for outsourcing my wiki to them.) In many ways it's fairly typical of a web startup these days. It has four different pricing levels from free (which includes 100 pages) to an corporate edition which runs $199 per user per quarter. One question I always ask myself is "Why such a convoluted pricing structure?" The answer invariably comes back to the VCs attempting to penetrate the Fortune 500 market in order to REALLY make their money. This is a new mistake in the new economy and here's why.
Here's Joel's original post on why it's a great time to be an entreprenuer (Also judging by the number of spam posts to his comments section I can certainly say the blog is dead - or at least not actively monitored.) Joel notes that the decreasing cost of hardware 1/100th the cost, free infrastructure software (LAMP), search engine marketing (SEM) combined with the access to the global labor market means that launching a start-up is easier than ever. However these same trends also mean that the cost of providing these services such as Jotspot are also significantly lower. Furthermore the marginal cost of adding additional pages to a wiki or additional services is so close to zero so as to be not measurable. This is the real problem with Jotspot's pricing. The initial free wiki has been so limited as to be useless. You should simply offer the same set of features to each user. Limiting the feature set for premium users is often a bad idea as people are not drawn into your product. You could offer the free users the same set of features as you corporate users, because the marginal cost is so low as to be zero.
I also realize that in many ways you are letting users self select their own pricing level - but that's not exactly true. What is very common in many of these VC funded companies is that they are trying to create an artificial scarcity of features in order increase revenue. What many of them don't realize is that Moore's law and forces Joel notes in his post are pushing in the other direction, namely to offer the greatest number of features at the lowest possible price (Ah the power of the free market). So the artificial attempt to segment a web service like Jotspot into varying feature sets and varying degrees of functionality is really a bad idea. Instead of users getting addicted to all your features, you are only offering a sub-set of the full functionality.
Since it doesn't actually cost anymore to offer additional service/functionality/features in a web service, offer you intro users the full feature set helps insure that they will be more likely to continue to use and spread the word on your software. Additionally instead of membership fees (always a dubious thing) you should rely on advertising such as Google Adsense. Despite the low click through rate of Google Adsense, you are better off capturing more eyeballs. While this might sound like an early dot-com business plan, it's important to remember, launching a start-up is much less expensive than it was 10 years ago. Everything is much more cheaper and more powerful. Let's also be realistic about start-up costs. If you are worried about covering a $100/month hosting bill on the entry level - I suggest you get some more money before you start.
So if I were in Joel's shoes, I would make sure that I get as many users as possible and then flip the company to Yahoo or Google. Just don't spend too much money advertising and rely on users word of mouth to help sell your web service. After all Google has never bought a television, radio or print ad - yet they are the world leader in search.
3 comments:
(random aside - Google takes out print, billboard, radio, and TV ads now.)
Your advice to Joe is basically that his company should stop focusing on making money and start focusing on giving away all of his features below cost, hoping to barely subsidize the service with advertising...which basically doesn't work for the SMB market which needs their wikis private (and don't want contextual-scraping ad robots peeking at their company's financial in an effort to show them relevant ads), all in the hope of flipping his company to Google or Yahoo?
That's such masturbatory bubble pap.
Joe runs a business, and a business with a big vision. He's not building to flip and *is* building to make money.
And, quick hint, having a paying customer is how one generally makes money.
Random aside (you mean they take out ads after a successful IPO. That's really a brand supporting measure. You can't say that advertising was key part in Google's success pre-ipo).
I think you are misreading the post. I said that the marginal cost of offering all the features to every customer is largely ZERO. I never suggested giving away all his features below cost. And I agree the SMB market will want privacy for private data. I am not sure how much traction they will have in the marketplace when anyone can set up a wiki on the LAMP stack.
"Joe runs a business, and a business with a big vision. He's not building to flip and *is* building to make money."
Really - you sure? You can never tell especially if someone came knocking.
"And, quick hint, having a paying customer is how one generally makes money."
It's not masturbatory bubble pap. Please read the post. Why would ANYONE get a free 100 page Wiki from Jotspot. They wouldn't as there are better freer products out there. My point is more a marketing one. There's no point in artificially limiting the feature set of a web service software package when the marginal cost on the features is zero. If you take a look at the most successful Web 2.0 services, they don't artificially limit their users.
I mean I understand your point and I am not suggesting Joel abandon the SMB market for Adsense. I just don't artificially limiting the feature set is the best marketing position.
The whole point of building software or web businesses is that the builder get to reap the benefits of 0 marginal cost. It doesn't cost MS anything to produce an additional copy of Windows. It doesn't cost Oracle a thing to create another database. And it doesn't cost Salesforce to provision another account. JotSpot is just doing the same thing that every other software company has ever done.
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