Turning a Profit When Your Product is Free
Turning a Profit When Your Product is Free
Senior lecturer and entrepreneur Jeffrey Bussgang looks at the delicate balance between community-building and monetization in the startup landscape.
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18 Aug 2015   Christian Camerota

A good way to build a large user base is to offer something valuable for free.

That’s been the strategy so far behind Codecademy. In just a few short years since its inception in 2011, the company has grown into one of the world’s largest online learning platforms, with more than 24 million users. Not only does it teach a skill set (coding) that is increasingly in demand in the job market, but its users are so loyal and engaged that they have provided the bulk of the learning content themselves at no cost. Codecademy’s community, a collection of technological altruists, is its most valuable asset.

However, the company is now at a crossroads. It has grown so big and so popular that it must consider monetizing certain aspects of its business to ensure sustained quality and to continue to bolster its content offerings.

Jeffrey Bussgang (MBA 1995) is a senior lecturer of business administration in the Entrepreneurial Management Unit at Harvard Business School and a general partner at Flybridge Capital. He closely studies the startup space and draws from his experience as a venture capitalist and former entrepreneur to teach a course called Launching Technology Ventures in the MBA program’s elective curriculum. Bussgang recently published a case on Codecademy’s success to date, as well as the challenges it faces relative to future growth.

He discusses that case and the startup space more broadly below.

It seems more companies today are pursuing a double bottom line of being both mission-driven and profitable. Can Codecademy stay true to its mission of always being free and still turn a profit?

Jeff Bussgang: I have some experience as a “double bottom-line” entrepreneur from cofounding Upromise, an online loyalty program designed to help families save money for college. That experience convinced me of the power of for-profit, mission-driven companies as a force for change. Because they are for profit, they can attract amazing talent and command huge resources. Because they are mission-driven, they inspire loyal employees to work hard in pursuit of the mission. If done correctly, it's a win-win.

Codecademy is a mission-driven company first, where the founders are passionate about providing educational opportunities to the masses. I believe they can honor their mission by providing a huge library of educational content for free and still build a strong business model through add-on products and services that they may charge for.

How do online companies walk the line between community-building and monetization strategies? Should one or the other come first?

JB: Community-building and monetization can be in harmony if a subset of the community finds value in the company's services. Personally, I am a fan of building the community first and focusing on monetization much later, just as the Codecademy team has done.

“COMMUNITY-BUILDING AND MONETIZATION CAN BE IN HARMONY IF A SUBSET OF THE COMMUNITY FINDS VALUE IN THE COMPANY'S SERVICES.”

As an example, one of our portfolio companies at Flybridge, MongoDB, has done that extremely well. They are an open source database software company, which by definition means everyone has access to their database. They’ve become one of the top four most popular databases in the world, as millions of companies have downloaded their free database and incorporated it into their technology infrastructure. Only recently has the company focused on monetization.

What lessons does Codecademy offer for companies trying to differentiate themselves in a crowded online marketplace?

JB: The Codecademy team focused on a superior product experience for their customers. This focus on product experience and design is a critical element for companies trying to differentiate themselves. It all starts with engaging the user.

How important is internationalization to tech development?

JB: There are over 3 billion Internet users today (up from 300 million just 15 years ago). Less than ten percent of them are from the United States. That is to say yes, internationalization is very, very important.

The speed with which Codeacademy gained users after its launch was remarkable. It seems to suggest a real unmet need in educational systems. How integral will coding skills will be going forward, and what role should government play in attending to those needs?

JB: Analytical skills and comfort with technology are universal requirements for 21st century jobs. Coding skills are relevant for a large subset of those jobs. It's not just those that can actually code— building mobile apps and websites—who are in great demand, but also those that are comfortable manipulating technology. Just as nurses and health technicians complement physicians to deliver quality health care, there are a range of business analyst jobs that complement coders to deliver quality software and technology-based services.

Since state governments run public schools, community colleges, and public universities, they desperately need to evolve their curriculum to match the demands of the modern workplace. A greater comfort and facility with technology is a key requirement that often appears to be lacking today.

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