I 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).
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….