Why Free Is Bad: Businesses Should Be Happy To Pay For Key Services

Guest author Mike McDerment is co-founder and CEO of cloud-based small business accounting provider FreshBooks.

Late last year Google Apps for Business eliminated its free version (see Google Dares Businesses To Switch To Microsoft Office). You might think this is a bad thing for small business owners. Everything free is good, right?

Wrong.

There are big downsides to getting things for free that are poorly understood and rarely considered, and upsides to paying for the things that really matter — especially for small businesses.

First, let’s look at some downsides to free:

1. Free things are never really free. When we don’t fork over dollars for products or services, we think of them as free. But we always give up something. When it comes to online services, that something is usually personal data or content you’ve created — think Facebook and Instagram, whose privacy policies obscure the line between what you own vs. what they own. For consumers, that might be an acceptable bargain. But for small businesses that trade may be unacceptable.

2. Free services don’t serve you. Free services can't provide great customer service. You know this to be true if you’ve ever sent an email to a free service to get help. Imagine relying on one of those free services to run your business!. What happens when you need help, and you need it now?

3. Free services for small businesses don’t last. Free services for small businesses come and go. Google Apps used to be free, now it isn’t. Free services don’t last for the small businesses because the market is so challenging to reach and serve. My guess is that understanding the market challenges is the key to why Google Apps for Business going paid is a good thing for small businesses.

Why Serving Small Businesses Is So Hard

According to the census bureau, there are 30 million small businesses in the U.S. That sounds like a massive market, but it’s less than a tenth of the U.S. population of 311 million. If you’re going to try to reach small businesses with mass advertising, fewer than 1 in 10 audience members will likely be a small business owner, making the process woefully inefficient.

Worse, unlike enterprise customers, small business owners are incredibly hard to find — literally. With the rise of telecommuting and home-based businesses, a growing percentage of small businesses have no “front door” for salespeople to find. So it costs even more to reach them.

Third, when you do find them, small business owners are demanding. They are busy doing real work, so they expect their “stuff to work” too. They also tend to have heavier usage patterns than consumers and when they need help, they need it right away.

Finally. compared to enterprises, small businesses are much more likely go out of business.

Why Paid Is Good = Innovation & Service

But why should small businesses care about their vendors' problems? Why is it a good thing for them that Google Apps For Business went paid? How are small businesses going to benefit by paying for something they used to get for free?

The answer: innovation and the arrival of services tailored to meet their needs. Just think of how many things small business owners run on Word and Excel and you get a sense of how under-served this market really is.

Reaching the small business market is an expensive and risky proposition. As we’ve just seen with Google, "free" just doesn’t work in a market full of clients who use your service heavily while demanding great customer support. Great service people cost money. Need proof? Google now provides 24/7 phone support for its paying business customers.

Google Apps for Business going paid makes serving the small business market more attractive - for everyone. As long as all Google Apps were free, smart entrepreneurs and competitors were inclined to avoid investing in innovation for small businesses for fear Google could step in and wipe them out with a free service.

How "Free" Stifles Competition

In the dot com era, companies were terrified to do anything that Microsoft might be interested in, and venture capitalists would stop a hundred businesses before they could start with one simple question: “Why won’t Microsoft do this?”

Similarly Google has scared people out of doing things, because thanks to the significant advantage created by its search business, the company can afford to lose money on other activities, starving the competition and limiting innovation.

Fact is, Google can always return to the free model, but it’s a good signal that it has started to charge for things. Wall Street will be happy, and small business owners should be too. That's because I expect Google’s paid model to give entrepreneurs the confidence to step in and start innovating more for the small-business market.

This innovation will encourage services tailored for the long-underserved small businesses of the world. Sure, those services won’t be free, but they will be affordable, just as Google Apps remains affordable at $50/year.

Just as important, these new services won't come with all the downsides of "free." In exchange for services they need, businesses will trade dollars, not their data or their content.

I'm hoping this signals the start of a new era, one where for the first time ever, competition, innovation and choice are healthy in the small business market.

The good news is that it won’t just be businesses that benefit. We will all benefit because small businesses are the engine that drives the U.S. economy - when we give them the tools they need to succeed, we fuel that engine to take us all into a brighter, richer future.

 

Image courtesy of Shutterstock.