Founders Fund seed investment program, Dave McClure knows the importance of a proven revenue model. In a recent blog post he makes the assertion that "subscription models are the new black," despite the fact that startup monetization has focussed heavily on cost-per-click advertising. He writes, "This Don't-Be-Evil-AdWords-Click-Happiness..It's made us a bunch of lazy, ad-happy, Web-Tards with crappy ROI...We have largely WASTED an entire web decade of time, energy & venture capital on extremely inefficient revenue models." While we might not have chosen this exact phrasing, we cannot agree with McClure more.As an entrepreneur, blogger and the investor in charge of the
Nowhere is freemium model failure more obvious than in the streaming music space. Even with millions of users and licensing deals with major labels, Imeem was acquired by MySpace last year and quickly dismantled. The cost of licensing content to unpaying users was enough to put the company into serious debt. The company's subscription service just wasn't enough to offset the cost of the freemium business. Meanwhile, myriad music sites have come and gone, but Rhapsody's subscription-only service has managed to survive. Having learned from its predecessors, it's rumored that Spotify will only launch in the US with a subscription model, despite its free European offerings.
Says McClure, "There is a role for freemium, but unless you missed the TPS report the FREE part is only a loss-leader for the MEE-YUM part -- it's a test-drive before you buy something. If your users are just kicking the tires then you need to kick them to the curb eventually."
McClure is right. It's been a long time since eyeballs have automatically equated to dollars. If you've got a product that even a small number of users will pay for on a regular basis, establish that paid user base as soon as you possibly can.