Free: Not a Business Model?

Josh Kopelman of First Round Capital writes a great blog entry entitled "The Penny Gap", explaining why it's easier to scale from $5 million to $50 million than it is to get your users to pay you anything at all.

Anne Zelenka writes a great follow-up entitled "Free: a Tactic, not a Business Model". She suggests that once a company has found a way to make money, it has found a business model. However, free is a great tactic towards getting paid in other ways, such as advertising.

I'll go a step further. I think there's a business opportunity in attracting leads with free products or services, as long as the "free" products doesn't cost more than advertising. For example, free stock photography sites are likely generating qualified leads for a lower cost than Google Adwords can.
It's just pure statistics:

• say you bid $ 1 - 3 on the phrase "stock photography"



• you'll pay $1,000 - 3,000 for 1,000 clicks.



• you might get 1 - 5% of those people creating a free membership on your e-commerce site.



• That's a pool of 10 - 50 people that you've paid $1,000 to $3,000 for.



• Cost per member: from a low of $20/member to a high of $300/member.

These numbers are for illustrative purposes only, but you can quickly see how valuable a free site is IF it has a large membership list and some key sponsors or a specific industry to target. Thus, key questions to ask if you're using free as a business tactic is - how valuable is the audience you're attracting, to whom is that audience valuable to, and how much do you know about your audience? Remember, most businesses aren't MySpace and Facebook, so you're going to have to be very specific if you choose this as your tactic!