Ask YC: Help regarding catch 22 situation for choosing startup's revenue model?

[popat]

There are basically 2 options - one is charging the users/customers (for your product/service) and the second is charging the advertisers.

Its kind of catch 22 situation, if you decide to charge customers then your customer growth will be slow, and if you distribute your product/service for free and depend upon the ad revenue then your customer growth will be faster but the revenue growth will be much slower - because "pay-per-click" ad-revenue may not help you a much.

So how do you decide which model is best for you? and which model does angels and VCs prefer the most? OR is there any 3rd option?

[run4yourlives]

I like noodle's comment here, so I won't add anything in that direction.

What I will say though is that paying customers give you a better understanding of the actual value you are providing to them with your product. Shelling out for something isn't something most people take lightly.

On the other hand, advertising is much more subjective, and it will rely not only on what you're doing for your users, but what you're doing for the advertisers in terms of profits. It's a much more delicate balance to maintain.

Just food for thought.

[noodle]

you can do both if your app allows it, by offering a tiered service.

a free plan that restricts functionality and serves ads, and plans that cost money but opens up more of the application and removes (most?) ads.

also worth noting is that google adwords and PPC in general is NOT the be-all-end-all of online ads. you can come up with other options that suit your needs, like a higher quality PPM, referral programs, or special individual sponsorship deals.

[drewcrawford]

I'm going through much the same thought process with my startup. The real question is--when do you need to start making money?

Obviously the easy answer is "as soon as possible", but most startups have a burn time. Our founders have pretty much decided that we can burn until we get popular, and until then we're going to focus on building a great product and pay our expenses out-of-pocket.

The "third option" can be awesome, but finding it depends on what your company does. I can't speak to Mint's revenues, but I do know that I switched banks because Mint found me a better deal. If you can provide value (or money) to your customers, that is pretty much ideal.

Alternatively, the third option could suck. We've bounced around a "third model" internally for some time, and we're not sure if it will actually be valuable or not. We'll probably code it up as we get closer to running out of funding and see if it works. If it doesn't--we'll go a more traditional route.

[byrneseyeview]

First N users get beta accounts. Then they get grandfathered into free accounts, which new users have to pay for.

[mechanical_fish]

This plan makes no sense to me. The whole point of being a free app is that you get viral distribution:

1. Ten users use the app.

2. Ten users each tell ten friends about the neat free app.

3. A hundred users use the app.

4. Repeat over and over

5. ???

6. Profit!

Your proposed plan is more like this:

1. Ten users use the app.

2. Ten users each tell ten friends about the neat free app.

3. One hundred users arrive and find that the app, which they were told was free, actually costs $19.95 now. Eighty of them leave in disappointment. Ten of them sign up anyway. The remaining ten go back to their friends to ask what the deal is, find out about your grandfather clause, and put up angry blog posts about what an evil bait-and-switching moneygrubbing bastard you are. (See: Movable Type, Version 3.0, History of). Then they switch to your competition in a huff.

If you're going to have two tiers, make them different. Give people a choice. Don't try to openly tax people for not being early adopters, or for having last names that don't start with Z, or something. They won't appreciate it.

[byrneseyeview]

"Don't try to openly tax people for not being early adopters"

Putting zero value on loyalty doesn't sound smart to me. The idea is to build some momentum, and then parlay that into some cash flow. Going back to your six-step process, what I suggest is #5.