Spencer Fry

A lot has been buzzing about the freemium business model lately. The idea is to give something away for free, but charge a nominal fee for extended service. It’s a proven model, but not as widely used as you’d think. David Heinemeier Hansson of 37Signals gave an inspiring presentation covering its benefits at last month’s Startup School. Discussions spread around the Internet entrepreneurial scene like wild fire from his talk, but while entrepreneurs hail it as a proven method of becoming profitable, few adopt it.

The freemium model is nothing new. It’s been around for a long time (think Flickr), but rarely gets much attention when the economy is doing well. Back in the first Internet boom, it was all about the numbers (user count and page impressions) and advertising was the major revenue stream. That failed. And in the last few years we’re seeing a resurgence of this old method with companies such as Facebook being valued at $15 billion with nearly $500 million invested with no proven revenue; revenue that doesn’t cover expenses, but with beloved numbers (high user count and high page impressions). (As an aside, I believe in Facebook, and while their numbers dipped in April, I think they’ll continue to grow and eventually churn out a good money making business model.)

However, Facebook is a diamond in the rough and there are far too many web companies out there trying to emulate them by growing their userbase and coming up with a business model later: Twitter comes to mind, but many larger and smaller companies as well. As I said before, there can definitely be success taking this approach, but the success rate is far smaller than simply setting up a freemium service.

If you plan to use the freemium method, you obviously need to design incentives for your free customers to upgrade, but that’s easily thought out in most cases. Simply removing advertisements for your paying customers is the simplest way, but adding additional features is the best way, in my mind. You can give certain benefits to intice people to sign up. For example, at Carbonmade we give additional projects, images, and allow people to upload video if they upgrade to our paying plan.

The freemium model is simple to employ and as your free customer base grows, so will your paying customer base. Even if a small percentage of your free customers upgrade to your paying plan (say, 1%), you’ll begin generating much needed revenue to pay your bills and do very well. Depending on the scale, but if you have 50,000 customers and 1% of them are paying at $15/month, that’s $7,500 in revenue a month, $90,000 a year. And with most Internet businesses, you’ll (hopefully) grow exponentially every month and begin seeing large returns. When coming up with your next business model, think freemium and not simply free.

Inspired by a post I read by noted venture capitalist Albert Wenger and a comment I made on his blog, I thought I’d blog a bit about honesty and openness in business. Albert and I share the same feelings that being honest isn’t only the morale thing to do, but you’ll even recognize more financial value from your business in the long run by being honest rather than from being dishonest and elusive.

The easiest example of this is by being honest and open with your customers. Customers want to be treated like mature adults; they can stomach the occasional problem(s) as long as you’re honest about the problem from the start and layout a clear path to fixing the problem.

An example of this is back in early January of this year, the hard drive on one of our storage servers became corrupt and simultaneously the backups to that server’s backup hard drive failed as well. Uh oh. We didn’t panic — okay, maybe we panicked a little bit — but within hours we not only had a blog post written explaining the situation, but also a page dedicated to the problem we termed Kaboom! with a few extra “I’m sorry” bonuses given in reconciliation to the people that lost their accounts.

We lost several thousand peoples’ data, but with quick, honest, and open communication with our customers, nearly all of them signed back up. We received less than a handful of irate complaints and dozens upon dozens of people thanking us for the way we handled things. Would it have been better if this situation never occurred in the first place? Certainly. But it can also be said that by treating our customers maturely and treating them as adults, we may have even gained more of their trust and loyalty through going through this “tragedy” together. The morale of the story is that we’re all human, and human beings respond best when treated with honesty and respect.

Every few months, I come across a really cool website feature that gives me the “wow” feeling. The most recent one happened to me last week when using Flickr for the first time in over a year – so cool that I even upgraded to Pro. The feature is their image uploader. Here’s a screenshot:

Look how you can watch the progress of your upload. I love how it has two progress bars: one for the individual image and one for the total job. I equally love how it grays out finished images and adds a checkmark saying they’re finished. How cool is all that? I think Flickr is really coming along, although, I’m opposed to their recent video addition along with many other people. At least they restricted it to 90 seconds.

My parents live in Connecticut, which is about two hours from me in New York City. I see them about every three weeks for a night or two. I don’t have a car, so I take the train. I found that I somehow do some of my best work on this train ride. The train is fairly comfortable, but nothing special. Just your standard train. It’s typically packed, so there are tons of people around me and I usually get squeezed in. But with my laptop on my knees and my iPhone’s earbuds in my ears, I type away as ideas flow into my brain like nowhere else I’ve worked.

I really don’t know what it is about this damn train ride, which I loathe, because it’s “boring,” but maybe it’s being surrounded by working people? Maybe it’s the noise? I have no idea, but the train is a godsend to my work and I wish I could replicate the experience elsewhere. Yesterday I pumped out four pages full of concrete, usable ideas in the two hour train ride for something nterface is working on. Choo choo!

Found a cool way to track what people might be saying about your website. Check out Google’s Blog Search. You can search by your company’s name and then click the RSS link on the left hand side to follow it through your RSS reader. I’ve been following Carbonmade for a while now and it allows me to respond and interact with our community.

WOW, getting something out feels so good. We released our first update to Carbonmade in well over a year. It was just a little something, but we all feel great that we got something new out to the world. We added PayPal support (a lot of our customers are overseas), overhauled our entire billing system, re-designed several forms (sign in screen, billing screen, and a few others), updated our Privacy Policy, and a few other things.

Most of the credit goes to Jason for learning the PayPal API from scratch and coding things: a big shoutout to the self-proclaimed eater of oranges! The majority of the changes were behind-the-scenes coding changes as mentioned above, but Dave and I contributed a lot too. What a huge sigh of relief to get something out. I really can’t put it in words how good it feels.

I’m such a huge advocate of rapid iteration for web applications, so this long tenure was killing me. You need to release early and release often to be competitive in this business. Dave often uses the idea of putting something in an “incubator” to allow it to grow and for us to study it. We can see how it’s being used and change things through customer feedback. To be able to do this, though, you need to be constantly iterating. Releasing often also gives you that sense of accomplishment that helps keep you sane. I think we were all going a little batty without a recent release. There’s certainly a lot more we can do, but even something as boring as an overhauled billing system feels satisfying.

I never want to have to go so long without an update again and I don’t think we will. We all agree that we’re going to focus on smaller chunks of work from here on out. Don’t try and perfect your website out of the gate, but let it grow through an incubation process. Find a feature or area you can improve on, spec it out, design it, code it, and release it. As Nike’s famous slogan says: Just do it!

I finally folded and joined LinkedIn. I just had enough inquiries by people if I had a LinkedIn account that I just gave in and signed up today. I’m not really sure what I’m going to use it for — or if I’ll use it at all — but now I can at least answer “yes” when people ask me. I also heard that it had a nice, clean UI and so I wanted to check that out too. So far, I’m impressed.

I filed an extension yesterday to give me extra time to wrap up a few things. I’m coming off a year where I sold my last company in early 2007, so it’s a bit more complicated than normal years. I’ve learned a few things in the process of gathering my taxes for this year that I should have known before. The first thing is to stay organized throughout the year. I made a mistake of not staying on top of things and it’s made the last few weeks a lot more hectic than they should have been. Second thing is to contact your accountant well in advance of April 15th. I dropped the ball here as well and waited until about one month ago when almost everything was booked up. So for this next year, I’m staying a lot more on top of things by generating monthly reports and keeping my accountant in the loop with quarterly updates. By keeping better organized, you won’t see me having to file an extension for 2008 and I’ll probably spend 1/10th the amount of time trying to locate things as I did this year.

I’m not speaking of great entrepreneurs here, but rather the Masters golf tournament. I’ve been following it quite closely this year — as I do every year — as Tiger Woods is someone I look up to and watching him is a treat. His determination, dedication, and focus are unmatched. If you’ve been watching this weekend you’ve seen all three things at work for him. He’s likely going to lose to Trevor Immelman, who is having a superb Sunday, but this doesn’t take away from how Tiger is handling his game today. Tiger has had no luck at all, but fights through it with amazing grit. He’ll likely lose this tournament, but he certainly isn’t giving up. All entrepreneurs should look to Tiger Woods as an inspiration especially when the going gets tough.

As you can see from my workspace post, I work from home. nterface has an office in Chicago, but at this stage of our company’s development it’s not as essential that all three of us work out of the same space (Campfire takes care of that). As soon as we add a fourth or fifth employee, it’ll be a lot more important.

It’s often difficult to stay focused when working from home. There are just so many distractions (TV, Wii, roommate(s), DVDs, music, etc.). So lately, I’ve been working on ways to increase my productivity. The biggest boost to my productivity has been moving my workspace from my bedroom to my living room. This change probably doubled my productivity. Your bedroom is just too much of a relaxing environment: your bed is there.

Another thing I’ve done is to separate my two computers. On one computer (the one in my bedroom) I have the play stuff: my music, my videos, etc., and on my other computer (my work computer), I keep my work files and everything is geared towards work. So when I get on my work computer, it’s all work and no play. My work computer forces me to do work, because there’s nothing else to do on it, but Word, Excel, and a web browser (FireFox 3, of course).

The last thing I’ve done is to start going to my local coffee shop 2-3 times a week. I never really did this in college, even though a lot of people swore by it — I use to go to the library — but now working from my apartment, I’ve found that it’s essential to have a second thinking space. Changing spaces definitely triggers different ideas and thoughts for me.

I’ll add more productivity increasing things I’ve done in a later post.