Users never pay you for your app. Yet you still make money. How?

If you’ve hung around startup-land long enough, you’ve heard the term “freemium”, which describes a product pricing model where you offer a feature-limited version of your product that has no time limit. Generally, free plans are offered in the hopes that some percentage of users will convert to paid users because either they’ll get far into using the product and decide that they need some feature that’s only available in the paid plans, or they’ll hit some sort of usage limit that you set, in which case they upgrade to paid for more of something that you offer. Conversions generally aren’t that great (as users will go out of their way to not give you money if you’re giving them something for free, such as religiously managing the contents of their 2GB free on Dropbox, or deleting less important photos from a photo sharing service that only lets you see your last 200 photos). However, some small percentage of those users do convert, and you also get good mindshare out of it if you’re big enough, because free users will be aware of your product and may recommend a paid plan to others… therefore your marketing reach is greater. Also, you can officially deputize your free users and make them affiliates, which gives them incentive to promote your product to people who they know, in exchange for a cut of your profits from the sales that they bring in.

If you aren’t running a SAAS app, but rather creating a downloadable app that people can install on their own servers/hosting, a different way to make money emerges. I’ve long been aware of companies out there who offer a completely free, downloadable software product that has paid support (so if you never need support, you’ll never pay, but if you do, you’ll pay a good bit).

Until recently, I thought that these were pretty much the only ways to run a software business that offered a product that’s free (for a limited time, or forever) and still make money at the end of the day. I was wrong.

I came across another model the other day, where a self-hosted app that appeals to a wide market is sold (let’s say shopping cart software, because that can potentially be used by anyone who wants to sell products online). The product is offered completely free to anyone who wants to download it. That makes it spread far and wide quickly, if the app is stable and has a good reputation. You build a community around that app, and add the ability to use third-party modules to add features to your app. Then, once your community/app users has grown to a sizable amount, you charge third parties a lot of money (I’ve seen $18,000-$30,000 so far) for the ability to integrate with your app and/or have their modules preinstalled when a user downloads your app. You’re basically using a free app to build a valuable platform that other companies will pay a lot of money to have access to. You don’t have to sell too many things at $30,000 to make real money, and it’s a way to make money that hides in plain sight. Next time you see this particular model in action, you’ll know exactly what’s going on.