Josh Kopelman has a great post on pricing models and adoption rates for new internet services, in his blog Redeye VC: The First Penny
Josh expresses beautifully the challenge entrepreneurs face in trying to offer services on a subscription basis (no matter how low). The demand for these services drops precipitously as price increases from $0 to $0.01.
Most entrepreneurs fall into the trap of assuming that there is a consistent elasticity in price – that is, the lower the price of what you’re selling, the higher the demand will be. So you end up with hockey stick looking revenue charts that go up and to the right, all supported by an “it only costs $2 month” business plan.
The truth is, scaling from $5 to $50 million is not the toughest part of a new venture – it’s getting your users to pay you anything at all. The biggest gap in any venture is that between a service that is free and one that costs a penny.
This is why hybrid business models are becoming necessary–advertising, syndication, brokerage fees. Anything before charging the actual users.