The Power of Free - For Entrepreneurs: What it takes to build an $11B startup

The Power of Free - For Entrepreneurs: What it takes to build an $11B startup

In the world of entrepreneurship, there is a powerful technique that can be the key to customer acquisition - giving away a free product or service. This strategy, known as the "free" or "freemium" business model, can be incredibly effective if done right. The trick is to ensure that the free product or service being offered is of high value to the customer. This not only leads to high customer satisfaction but also increases the likelihood that they will spread the word about your product or service, resulting in viral effects.

Unfortunately, many entrepreneurs and executives fall into the trap of stopping short of offering valuable features in their free products. They focus on extracting the maximum dollar out of every customer, which leads to slow and expensive customer acquisition and a small market share. The smart crowd, on the other hand, understands the power of offering a free product or service. They recognize that in a typical business, the biggest expense is sales and marketing. By offering something for free, they can acquire customers at a low cost and then monetize them in a different way.

A great example of the power of the free strategy is the acquisition of SpringSource by VMWare. Although VMWare overpaid for SpringSource based on revenue multiples, the real value of SpringSource was its large base of developers committed to the free Open Source framework, Spring. This large customer base became proponents for the company and showcased the importance of market leadership. Even if a company gains market leadership by giving away a product or service for free, it is worth a significant premium over niche players with higher revenue.

Another important aspect of the free strategy is the shift in the expense of customer acquisition to the product development group. This means that the product needs to be top-notch and provide high value to the customers. One way to ensure this is by implementing a scoring system that allows customers to track their progress and compare themselves to their competitors. Human beings are naturally competitive, so when they see a low score, they are motivated to improve and seek out resources or companies that can help them do so.

Building a successful startup requires a combination of speed and quality. Parker Conrad, CEO and Co-Founder of Rippling, emphasizes that there shouldn't be a trade-off between the two. It is possible to move fast and still deliver a high-quality product. In fact, projects that move slowly often end up being both slow and bad. Conrad believes in having urgency in fixing underlying issues and building a high-quality product. This mindset may make him appear unreasonable at times, but it forces people to challenge their assumptions about what is possible.

To make a compound startup work, Conrad suggests finding someone within the company to be the founder of that specific product. This person is often someone who has founded a company before and has the experience and expertise needed to drive the product's success. By having someone dedicated to each product within the company, Rippling is able to focus on multiple projects simultaneously and achieve exponential growth.

In conclusion, the power of offering something for free in entrepreneurship cannot be underestimated. It can be a highly effective strategy for customer acquisition, as long as the free product or service is of high value to the customer. By shifting the expense of customer acquisition to the product development group and prioritizing speed and quality, entrepreneurs can build successful startups that have the potential to reach billions of dollars in value. Here are three actionable pieces of advice for entrepreneurs:

1. Don't be afraid to offer something for free: Providing a valuable free product or service can be a smart way to acquire customers at a low cost and gain market leadership.

2. Prioritize speed and quality: It is possible to move quickly and still deliver a high-quality product. Having urgency in fixing underlying issues and challenging assumptions can lead to success.

3. Focus on compound startups: Identifying someone within the company to be the founder of each specific product can allow for simultaneous growth and exponential success.

By incorporating these strategies and understanding the power of free, entrepreneurs can set themselves up for success in the competitive business world.