I think I like my title better. :)
When free makes your product suck
Marco Arment, the founder of Instapaper and former CTO of Tumblr, had some interesting comments on the recent dissent on Twitter, compliments of their new “dickbar” feature. As I read it, I realized that Twitter is turning the corner from a beloved, worry-about-making-money-later company into a just-barely-tolerable advertising machine.
Twitter is entirely free. It depends on selling Promoted Tweets, “Promoted Trends” (oxymoron, anyone?) and Promoted Accounts. I remember when Robert Scoble was begging for a paid account on Twitter. He wanted to pay for a (finally) reliable service. Instead, Twitter has chosen to kill off third party apps and sites that essentially do what theirs do, and connect it’s revenue pipeline to Madison Avenue.
Rather than create value and charge for it, Twitter (and its users) fell victim to the startup mirage that is “free”—aim for world domination growth… then hit them with a dickbar once they’re hooked.
Twitter is still a powerful and useful tool, but it is choosing to monetize by way of degrading its users’ experiences. Kind of like traditional media, and how’s that working out?
Most startups are encouraged to subsidize the growth of their whiz bang, insanely useful product simply to get as many users hooked as possible. While yes, this can be the quickest path to more users, it often leads to expedited failure, missed potential, or pulling a bait and switch on your users.
Common outcome 1: Your startup runs out of money
This is the most likely outcome. If you don’t get enough users to impress investors who are betting on meteoric growth, or make some dough, you’ll run out of it. Good luck and godspeed on that one.
Common outcome 2: Your product gets bought and then turns into a steaming pile of suck
Remember Dodgeball, Delicious, Flickr, StumbleUpon? Their outcomes were all pretty similar. Each was a promising startup that feel short of its potential as a direct result of its acquisition. The only thing accomplished by Dodgeball’s acquisition is that it temporarily chained Dennis Crowley to a desk where he could not create his dream company. He left to create Foursquare and Google had to buy Slide to figure out “social.” Meanwhile, Yahoo will sell Delicious to anyone with $1-2MM. I think the deal may even include a box of Cracker Jacks. And StumbleUpon is on it’s second wind after getting bought back from eBay, after never figuring out what to do with it (surprising?). 
Common outcome 3: Your users get bait and switched
The common approach to building a web startup is to subsidize use to maximize growth. Web applications are increasingly cheap to build and usually involve near-negligible per user variable costs. Therefore, many choose to create the expectation that their service, in its entirety, should be both free and useful, then renege on that promise later. But, as a user of a service I value, charging for it actually reassures me that it will be around as my reliance it grows, building trust and loyalty (e.g. the stuff it takes to build the next Google).
Maybe your product shouldn’t be free
This is a thought exercise, not a hard-and-fast rule. But why not build a startup that offers a better experience when the user pays for it?
There are plenty of great role models for the type of product that both prints money (which investors like) and create real, scalable value for their users. Airbnb is a great one. I was actually astonished to hear how few users the service had when it closed it’s seed round, led by Sequoia. Airbnb is not a cheap service—it gets a piece of the action from the buyer and the seller. Yet if it were free, users would likely value the service less.
Another great example is Github. While it was offered in beta for free, Chris and Tom started getting emails saying “I love GitHub. Can I start paying you guys now?” They’ve got a great business now and are having a lot of fun. I’d recommend watching Tom rub it in at his Startup School talk last year, if you weren’t there or haven’t seen it.
Smugmug is yet another great example in which cost was actually a differentiator in the super crowded photo space. And Animoto similarly built an awesome product for turning photos into music videos. You might even argue that its users, such as Mike Arrington, become even louder evangelists of the product to validate the price they pay for the service. And Dropbox has found astonishing success in focusing all of its attention on creating a valuable service that’s worth your money.
 On occasion, the product and community survives and is properly nurtured. Reddit is a great example of this, having grown to a billion pageview per month site under the ownership of Conde Nast (and also would have been a thriving, awesome company today, independently).
Huge thanks to Ed, Hoisie and Nacho for their feedback on previous drafts of this post.