The Cost of Free â€" 200 to 1

Josh Kopelman at First Round Capital wrote a very interesting post about monetizing consumer internet services with a subscription model. He maintains that going from free to even one cent is such a large step, that most services should remain free and look for advertisers to subsidize their costs and generate revenue.

This is an interesting idea, and I wholeheartedly subscribe to the notion that charging even one cent is extremely difficult when you have a two tier model. At the same time though, I think the advertising game is a dangerous one for most emerging companies. Most web services currently sell standard advertising opportunities for between $1-3 for every 1,000 impressions. This means that a site with an average of 10 page views per customer is generating about 1 – 3 cents per user. So a company needs to scale their service by 200 times to generate the same revenue as a single customer paying just 2 dollars. That’s like going from 100,000 to 2,000,000 users.

The point I am trying to make is, not that advertising is a bad model, but that there are few web businesses that can attract such large volume of users to have it make sense. Depending on the business it might be easier to maintain a smaller user base and monetize them at 200 times or better than what advertising would bring – even if it means sacrificing 150 times more users.

Josh Kopelman cites Free 411 as an example of a service that grew to 5% of the total market by not charging. That’s great from a growth perspective, but the question remains: are they able to monetize that huge volume even remotely as well as the pay-for-use directories?