Allen Lau contributes his insights to Entrepreneur Online
This post is brought to you by Wattpad Co-Founder and CEO Allen Lau.Wattpad CEO and Co-Founder, Allen Lau, is the newest contributor to the most widely used website by entrepreneurs and leaders in business worldwide, Entrepreneur. You can read his first piece on the power of competitive pricing below, or on Entrepreneur online, here.
3 Ways Offering Something for Free Can Actually Make You Lots of Money
I’ve always viewed zero as a special number. You can add as many zeros as you want in a sequence, and the end result is still zero. You can multiply any number by zero and you get zero. If you divide a number by zero, you get a spirited debate among mathematicians.
The concept of zero has marveled mathematicians and philosophers alike, but businesses can also take something away from its unique properties. That’s because something magical happens when a price falls to zero -- all of a sudden, demand rises to infinity.
For software companies and startups that offer their services over the Internet, zero or “free” should be a central consideration in your business model. It was for me when I founded Wattpad, and it continues to be one of the core reasons we remain so successful today. Here are a few things to zero in on when examining this model.
- Rapid user adoption
When Microsoft announced in August that its new edition of Windows 10 had hit 75 million downloads in its first month, many people reacted with surprise. After all, it took Microsoft six months to hit 100 million downloads for its previous release of Windows 8.
What was so different this time? What made this launch so special? The answer lies in the number zero.
By offering Windows 10 for free, Microsoft was able to capitalize on a wider audience of users and seed early interest for its operating system with developers. Similarly, when businesses offer something for free, they can speed up customer acquisition and build a user base much more rapidly.
Remember that there are many factors that prevent people from adopting a product or service -- price being one of them. By offering something for free, you completely eliminate a common question consumers have when deciding to try a new product -- “Should I pay for this?”
- Organic growth
Besides eliminating friction, eliminating price also removes barriers to adoption based on socio-economic grounds, which in turn sets the stage for organic growth. My company, Wattpad, is a prime example of this.
When we first launched, our goal was to connect the billions of people who seek entertainment and escape through stories. In many parts of the world, access to reading material is limited, so we wanted to create an environment where people could connect, read and write stories, regardless of their background. Offering services for free was central in achieving this.
As the Internet becomes more ubiquitous and smartphone technology decreases in cost, the environment for Wattpad to flourish grows, because we offer our services at price point that compels people to download. We now have over 40 million users visiting our site every month and more than 150 million stories available in over 50 languages.
Even more impressive than this, our users -- because they come from such diverse backgrounds -- have been able to find their unique voice and enact change on our platform. Take for example Wattpad user Tahlie Purvis, a 16-year-old from Canada who is mobilizing writers to depict characters with imperfect body types. The movement, called#FreeYourBody, would not have been possible if our platform weren’t openly available to young adults to download. Because we’re free, we have a much broader user base that can organically shape the direction of our business.
- Other ways to generate revenue
Offering services for free , of course, doesn’t make sense for every business, but for those operating in software or on the Internet, “free” is a very real consideration that should be made. After all, there are as many as 60,000 apps added to Apple’s App Store every month. Price point could very well be the key differentiator between you and a competitor.
That said, it’s crucial for startups to consider ways they can generate revenue if they do choose to offer services for free. One option is advertising.
Chinese ecommerce site Alibaba is known for not charging a transaction or listing fee for their marketplace items and handles billions in transactions. How do they make money? The answer is that revenue comes from Taobao, their consumer-facing shopping website, and 100 percent of it comes from native ads.
Another option startups can consider is the upgrade path, where a business attracts users with free baseline services but offer advanced access or additional perks for a price. This option is popular among music streaming sites, like Pandora or Spotify. Even YouTube recently unveiled a new paid service (YouTube Red) which would give users an ad-free experience and exclusive access to new content. Interestingly, each of these services provides a free option to attract new users, and let’s not forget that YouTube’s recent offering comes years after reaching a defensible scale.
Whatever method you choose to make money, make sure that it doesn’t alienate customers. While offering free services can certainly draw people in, inundating them with pop-ups or requests for upgraded service can keep them from returning to your site.
So to sum up -- offering free services allows startups to differentiate themselves from competitors, rapidly build a user base and create a community that can grow organically. In a world where raising revenue often dictates every decision, sometimes "thinking zero” can actually lead businesses to make millions.
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