Friday, March 07, 2008

Earning money by giving it free

You hear a lot of it in the software world free unlimited mail, free chat service, free software and so on. You start to wonder who is paying for all the servers that are running this software or who is paying for all the people that developed this service or who is paying for all the marketing that these services are doing (like the ads for ibibo, indiatimes mail, rediff mail on Indian television).

All of this may be free to use as a direct service but if you look more closely you start to wonder is it really free, because all of these companies are earning money is some manner to pay for running their business. Let us take an example of all the Google products. They are all free to use for most of the features that they offer. But Google earns a lot of revenue in the following ways and there are many more
  • It charges the advertisers through the AdWords program to put their ads on every single product that they have. Google supposedly earns 16 dollars per user through advertising and even a 1 dollar increase will increase Google revenues by 400 million dollars.
  • It charges you for more advanced uses of their mailing application through Google apps if you want to setup email on a custom domain. They give you some of it for free to whet your appetite and then they start charging you a nominal charge. All of this is piggy backing on what they are giving for free through Gmail, Google docs and so on.
  • You can buy a Google custom search server to meet all of your search needs.

How can you manage to give something free and still earn money? The answer to this question lies in the number of users out there. Let us say you have a simple website that offers a simple service and this service has a 100 users. Let us assume you have developed everything yourself and manage it yourself since it is a simple service. Your setup cost is about 10 dollars and your monthly cost on maintaining this another 10 dollars. Now that you have a 100 users you can split this cost over the 100 users which works out to 10 cents per user. If you have ads on this service and the ads are appropriate and meaningful you get your users to click you will start to make a profit. You then make a toolbar that offers your service directly off the web browser and you integrate it with the Google toolbar and ask your 100 users to install it each time they use the Google search on it you earn some revenue (that's how firefox earns millions of dollars apparently - each time you search using that nice looking text box on the top right hand corner of the Firefox browser - firefox earns money). As you can see that this simple service that you offered for free started bringing in revenue.

So free does not mean you cannot make money. You have to think differently. You have to think in terms of 10's of 1000's of users using your service. You need to think like a television or radio broadcaster that is selling ads to its users. You need to think about fixed cost being split over 10's of 1000's of users repeatedly using your software regularly and bringing in recurring revenue. When you can grasp all of this you can start to give away things free and earn revenue.

The toughest part is finding the users to use this service and Google is a master at that. Each one of their services has users in the millions. Hence it is not surprising that it is the number 1 company in this space with no one even close to them.

4 comments:

Kiran banda said...

On the same lines, one of the interesting fact that I got to know is that orkut (the creator of orkut, infact)earns dollars each time a scrap that a user of orkut posts or a friend is invited, etc... what an idea, isn't it?

Vidhyashankar K said...

quite a nice post. I never knew so much happened inside just when someone clicks to read a post.

Still, all this comes only with time and effort of some sort, in this case, patient posting.

Abhinav said...

This post answers questions I've had for a long time.

Sudeep D'Souza said...

I was reading this very interesting article on CNN Money today about how money is made through booking domain names and having ads on them. Kevin Ham has made a business worth 300 million dollars from doing this. Read this The man who owns the Internet