Novel Idea of the Week, Freemium!

Arment’s more traditional take is built largely on the idea that if he puts out a good product, there’s no shame in asking customers to pay for it. And the more they pay, the less he needs to rely on outside investors. Arment said many developers are of the mindset that they need to amass a huge number of eyeballs through free services. But they don’t focus enough on building a solid product that can command loyalty and payment from consumers, and instead try to gain profitability through advertising and turning to outside venture capital.

- Seek Money from Customers, not VCs

I like Instapaper and use it regularly but the article I linked to fails to recognize that Instapaper did in fact amass a huge number of users before Arment committed to it full time and made a business of it. Arment’s monetization efforts have been successful precisely because he was able to amass a large userbase without incurring significant operational expenditures in the process.

Even in spite of Arment’s efforts to generate revenue to boostrap the company, the fact remains that it is hardly a new and novel business model… he is operating a freemium business where the metering mechanism is rate limiting against features.

The subscription concept is novel and I like it but I could not help but think of another time worn concept in the tech world that mimics much of what Arment talks about in terms of being rewarded for the hard work he put into the product and giving people the choice to pay him… shareware.

There is a populist narrative at play here about the downside of VC money and the requirements that are foisted upon a startup when they take venture money, but there is a cost associated with taking the lean startup model to an extreme, namely time.

Companies that go the bootstrap route by choice more often than not find themselves in a position of popularizing a product concept and watching a well financed competitor draft off that and into a leadership position. Great products alone do not make marketplace winners, we intuitively know it is true even if at the same time reject it because it breaks the meritocracy model that Silicon Valley historically has promoted.

A bootstrapped company invariably finds itself making near term decisions to affect the revenue stream at the expense of long term strategic objectives that drive the valuation of the company over time.