Classic Web 2.0 Business Model

What are the business models? This is the million dollar question (literally) on everyone’s mind – especially VCs – concerning many of the companies being generated as a result of the burgeoning Web 2.0 movement. Fred Wilson, a VC (in NYC) recently had a post on his site discussing his favorite web business model. He described this model as follows:

Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.

Fred did not have a name for this classic web business model and asked if anyone had a name for it. I have not heard of a particular name associated with this model as yet, but I view this model as classic example of the “foot-in-the-door” technique employed by the door-to-door salesmen of old. Wikipedia has an entry with a bit more info:

Foot-in-the-door technique is a persuasion method. In it, the persuader does something small in order to catch the target’s interest, before moving on to what he really wants. This may be a small, insignificant offer which the receiving party cannot logically refuse. After the receiving party has accepted the offer, the offeror proposes another, but more significant offer. Because the receiving party has already accepted the smaller offer from the offeror in the past, he will be more inclined to accept the second offer than from someone he had just met. A related trick is the Bait and switch.

On the web, things are not so different. I find out about Skype through some viral marketing mechanism such as an email signature. Then I go to Skype’s website and use their free calling service. After being wildly impressed with the free service, I will now feel comfortable with the company and, accordingly, will be more inclined to purchase a value-added, premium service – or so the story goes.

Given that the business model Fred discussed is simply an extension of this classic “foot in the door” sales technique, maybe you could call it a “Digital Foot-in-the-Door” model. Anyone have any thoughts?

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  • Anonymous

    Aren’t there enough buzzwords already. I’m just catching up! I was looking it up because my friend was trying explain the “business models.” I think while you are making a buzzword, don’t forget the acronym that must follow DFIND.

  • Hooman

    HA HA HA. I agree their are a ton of buzzwords. But sometimes it is helpful/fun to define amorphous concepts. If you refer to Fred’s blog, you will notice that he has coined this model. It is now called “freemium.” So much for chilling out on the buzzwords.

  • David Boxenhorn

    A good buzzword is like a good ad, it helps buyer and seller alike.

    May I suggest: “Sample Our Service”?

  • Hooman

    David, thanks for the comment! Did you happen to see Fred Wilson’s blog? Apparently the term that won the battle was “Freemium.” Go figure…

  • David Boxenhorn

    I just went over and looked. I think “Freemium” works only in the context of that thread: it’s totally opaque anywhere else. “Free2Fee” works for me, but it doesn’t capture what I think is really unique about this strategy, which is that you can use the free service forever. (My suggestion above doesn’t convey this either.) How about: “Free-tier”?