By Cliff Ennico
Cliff Ennico
(www.succeedinginyourbusiness.com), a leading expert on small business law and
taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax
and Legal Answer Book” and 15 other books.
Note: The below is part of the original article that is most relevant for Israeli startups.
... I’m
currently working with several clients who are developing applications for the
iPhone®, the iPad®, and smartphones running Google’s Android® software. The applications are all over the place (one
client offered to develop a Cliff Ennico “app” in lieu of paying a fee, but I
turned them down), but all of these clients have one thing in common: their business plans do not require the
customer to pay a fee for downloading the app.
The
idea is a simple one: by giving the
product away for free, they will attract lots of customers. By attracting lots of customers, they will
attract advertisers who will pay to reach those customers. They will also attract market research firms
who will pay tons of money to access data about those customers.
I
call this the “mass media model” because it originated in the 1920s with radio
(access to the airwaves is free), and became fully developed in the 1950s with
the advent of television and other forms of mass communications.
The
problem with this model, however, is that it assumes you will be able to
generate enough advertising, and enough data purchases, to cover the cost of
developing the app, operating expenses, payroll, and so forth. There are a number of reasons why today’s
software developers should consider charging a modest sum, or perhaps a
subscription fee, for their products.
Here are three arguments for doing so:
(1) With over 700,000 apps available for the iPhone®
and iPad® alone, the number of advertisers with sufficient resources to
advertise on all, or even most of them, is dwindling by the day.
(2) The Federal Trade Commission (FTC) and other
government agencies are cracking down – hard – on Internet companies that sell
their customers’ data in violation of their privacy policies, and users are
becoming more concerned about where their personal information is going, making
it tougher for developers to generate revenue from data sales.
(3) Once something is perceived as “free,” you
will have a tough time charging money for it later on (millions of people carry
their entire lives on board airplanes rather than pay recently-imposed baggage
fees).
When
you pay a price for something, you tend to treat it with more respect, and to
take it more seriously. Maybe it’s just
me, but I find the consumer reviews on AngiesList.com – which charges users for
posting reviews -- better written, more detailed and more helpful than those on
either Yelp.com or Amazon.com, which don’t charge reviewers. If you’re binge drinking on a Saturday night
and are tempted to post a negative review of the bar that threw you out the
door, you will think twice about doing so if you are required to pay a fee for
the privilege.
Instead
of a “mass media” model, Web companies and “app” developers should be looking
at a “newspaper” or “magazine” model:
charge the customer a small, recurring fee that will cover your basic
operating expenses, and then make your profit on advertising, data sales, and
so forth. By doing so they will not only
generate a more reliable revenue stream, but they will be creating a perception
of value that will give them a competitive advantage in the long run.
