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Making 'freemium' work amid ad death spiral

Advertising revenue will get even harder to come by in 2009. Web 2.0 companies need to consider alternative revenue streams.

I got a lot of questions about a recent post on "freemium" business models asking what Web 2.0 companies dependent on advertising revenue can do to weather the storm.

The short answer: generate revenue from the service you provide.

To clarify: if your company provides an online service that people use consistently and you are dependent on advertising for all of your revenue, you should figure out a way to directly monetize the user base. That is, charge for something that is perceived to be valuable to the user.

This advice is no different for Web 2.0 than it is for open source. If you are a business, you exist to make money. Adoption is not enough in a down economy. You need to get revenue traction in conjunction.

So, how can Web 2.0 or other ad-driven businesses make money?

There are various ways to run subscription businesses. The best way is to get users on annual subscriptions (like non-Web 2.0 Red Hat) where you are able to lock in revenue predictably with some level of churn. More realistically, you can look to monthly (or three-month or whatever) subscriptions like 37signals, where users have enough time to evaluate and stick with or bail out of the service.

37signals' Jason Fried has an excellent post that outlines some monthly recurring revenue strategies.

The subscription approach provides immediate, real dollars, as opposed to advertising, which is variable in too many ways to reliably predict returns.

Pre-paid virtual goods and services
Not every site has an obvious way to include virtual goods, but I would say that every social-networking site certainly does. Social networking is all about maintaining relationships. And the ability to monetize user interactions will be a key revenue stream as the offerings get more sophisticated and normalized.

There are other options. If you are a music site, how about gifting MP3s. If you are a finance or travel site, how about gifting some benefit to participating?

Virtual goods provide one-time fees, which won't be as predictable as subscription revenue. However, anything you can do to generate money is a win these days.

It was never clear that advertising was going to be a great business model, and most Web 2.0 companies used ads as a crutch to get up and running while they figured out other mechanisms to gain revenue. It's time to remember that businesses exist to make money.

There is nothing wrong with experimenting and seeing what sticks.