Online Software Value- Whats better 1,000 paying users or 100,000 non-paying users?

Picture 3I recently read The Accidental Billionaires by Ben Mezrich which is a story about Facebook’s founders.  Being in college at the same time that facebook was getting its start I found this book very interesting.  (I remember our class begging the school board to allow our campus on facebook… true story).

Picture 2

After Microsoft’s 1.6% purchase of Facebook it was valued at $15 Bil.   This is over 100 times its $150 Mil in annual revenues!  Microsoft obviously looked past facebooks revenues and instead placed its true value in its users… which is over 200 million and growing rapidly. This buyout placed a value of $75 for each user of facebook.

So all of this got me thinking…  what is better for an online software- 1,000 paying users (say at a monthly subscription price of $50), or 100,000 non-paying users. If a company offered their online software for free, and it provided a significant value to its users, it would have a good chance of going viral.  Like google aps, flickr, basecamp, or facebook. A viral software would have a much better chance of reaching the 100,000 user mark.

Keeping with the same example,  paying users would provide a nice annual gross revenue of $600,000 for the company.  Value of the business might be placed at around $1.2 Million.

On the other hand, non-paying users would provide nothing in revenue, but if valued at $75/user it could potentially be worth $7.5 Mil.   Okay… $75/user could be way out of line.. after all, were comparing to facebook’s value which is a unique case.  But I think you get my point…  The non-paying user model might be the right way to go.

So my question to all of you…  am I way out of line here?  What are some pros and cons of using the non-paying model? What would be your suggestion. I look forward to our conversation….

  • John R. Sedivy

    My thought is that you are right on the mark. The obvious answer to traditional business thinkers is the paid users, however the new Web model appears to be different. The real value with social media seems to be with having an established group of people (and therefore their attention) rather than the nominal subscription fee. It will definitely be interesting to see how things evolve over time!

  • Anthony Marquette

    For a social network it is vital that the service is provided for free so that it gets a larger amount of members at a much faster rate. Although it would not hurt to charge for a certain service on the site itself in order to collect a profit that can pay for managing the site itself. Also the more members you have the more advertising space on your site is worth so even thought your not getting anything directly from the user they are still making you money by making your advertising space worth more.

  • clet anni

    For software companies like facebook for instance, 100,000 visitor is more preferable than 1,000 paying visitors.
    You certainly must make money from 100,000 non paying visitors through advert clicks and advertisement than 1,000 paying visitors.
    Here is the maths: social networking sites makes money from advertisement and te higher the traffic, the more attractive the site becomes, hence, drawing the attention of advertisers.

  • Darius Soudi

    In my opinion. If you are a startup and you have no other means of earning an income, you need money and need to take a salary from your website. I suggest charging clients and visitors!
    On the other hand, if you have investors and can build a large network of users, with the right exit strategy I suggest you go for the free usage and added value to get regular visits. Only then you can approach sponsors or corporates to advertise on your site. With my background of never having investors money, I can only dream of the second option! Both formulas work but it depends on your circumstances! In my humble opinion!

  • Gavin Tonks

    The question is what income can you derive and what profitability
    I did a project on gambling for a client and based on his income and profitability it would be cheaper to charge people US$0.26 an hour to play the games then to “Gamble”

    The business model is derived from revenue versus expenditure to service the people. So 100 000 people are more attractive to advertisers as your response rate is the same as a mail shot 0.2 to 2% responses.

    If a person is paying for the service they are far more focused on your site and what you are offering so you have a better “target group” I call them fluid majorities as they are defined not by the area in which they start from but the area in which they go to. So the paying can give you US$100 000 profit if you can run the business at a cost plus US$1 ration whereas the other is always free and band width comes at a price so you have to have the resources to retain the client, plus their is no layalty and they will run away to the next best thing at a drop of a hat.

  • carolina arriaga

    Hi I will advise to go with non charging clients, the more traffic you have the more people would want to advertise, blog, pay per clicks, corporations, business on your website, even me.
    I say go for it, you have to be confident that whatever you choose will work.
    Free network attracts more social media.

  • Andre Spivey

    I really like the idea marketing wise, because company’s haven’t really taken advantage of it it. It’s being talked about somewhat. The reason why I like the business is because everything is going customized and marketed nowadays. It’s great way to create an enviroment where the customer takes ownership of your product, it could make the customer, say wow, “This product is meant for me.” I liked your blog to I agree that now it is more of a custom to start your business and adjust to the customers need without being held down by a robust plan. I wouldn’t do away with a plan totally, but it should be more broad and flexible now. Long gone are the Henry Ford assembly line days of mgmt. I definitely look forward to connecting with you. If you need any help during your developing stages and further I wouldn’t mind getting involved at all.

  • leigh

    a mixture of both models is also a great way to go. free version of something drives up the number of users while an enhanced version that has a nominal fee at the same time generates at least some revenue during the development and growth phase.