Virtual goods are essentially digital items – which I’m sure everyone is familiar with, like the “gifts” on Facebook or buying “weapons” on World of Warcraft. We’re extending this idea to the website building world – and now looking at styles as a virtual good that can be created and sold. The demand for people trying to create a website has risen massively in the past few year and it’s trend that is not slowing down.

For those who may not know, Yola.com is a free platform, focused on enabling SME’s to create their own websites and establish a presence for themselves on the Internet. Our goal is to become the largest destination for enabling small and medium enterprises worldwide to participate and transact on the web. In pursuit of this goal, we decided from the very beginning that we wanted to create a business where the basic services are all free (website hosting, free site building software, free bandwidth, and no advertisements) and we charge our customers for add-ons and other value added services (domain names, premium styles, subscription packages for extra features – coming next month).

The way we think about our business is that the basics of having a website is really commoditized these days (there are a million hosting companies out there, for example). What differentiates us from them? Well, for starters – hosting is absolutely free – why charge for something that doesn’t really cost us much – and I’m not going to delve into the virtues of the free model here, I’ll leave that to Chris Anderson, author of Free!

Where we feel that we can absolutely differentiate our services is by allowing users to customize their websites and instill a sense of individuality and uniqueness. The cost of creating great looking themes and styles for a website built on any CMS (Content Management System) platform often costs hundreds, if not thousands of dollars. Traditional companies that provide CMS, blogging or website building tools have a limited selection – for good reason, the costs are prohibitive – and therefore this is an area with a problem looking for a solution. One of the challenges faced is that there is a point of saturation – some companies with a million users only have 50 styles/themes for their users (20,000 users/style). Everyone’s website starts to look the same – and that’s a big problem. So, how do you then scale the business profitably when you have 10m or 20m users? You cannot possibly building all those styles for free and Yola now has nearly 2.5m users and we’re growing so quickly, that we simply cannot afford to keep creating free styles for our users.

Our virtual goods business model is to launch a premium styles store – filled with expensive designs – but instead of paying hundreds of dollars – users can spend as little as $29.95 (once off) to get access to a better looking style for their website. Right now we have about 18 premium styles and will be adding many, many more in the months to come.

We think that this is a very innovative way of creating a sustainable revenue model for a SaaS business. Jeremy Liew from Lightspeed Ventures wrote a good post for the Wall Street Journal on Virtual Goods recently, and Susan Wu from Charles River Ventures also contributed a good post in Techcrunch, calling Virtual Goods – “The next big business model“. We agree.

Yahoo has finally proved that the old advertising model on free websites will not stand the test of time. Yahoo placed advertising on all the Geocities websites – and clearly, this model failed. At Yola we purposefully do not place any ads on our users’ website – it makes no sense to us, for many reasons, including the fact that our users do not want it in the first place. We offer an advertising-free free website service – plain and simple. The quick observation is that if Yahoo, which is an advertising juggernaut, cannot monetize it’s free website service with advertising – how do we even stand a chance? We’re not even trying to…

That business model is so Web 1.0! Bandwidth costs were high, storage, computing & technology costs were high and you needed large data centers and many engineers to keep the lights on. Geocities built their business model upon an age old premise, that sites are expensive to host and therefore you needed to run advertising on each page in order to monetize pageviews and generate sufficient revenue to cover costs. Enter Web 2.0 – bandwidth is dirt cheap, and so is computing power ( which is available on demand via the cloud, almost like a utility). The economics have changed and advertising on our users websites is no longer the only way to generate revenues. Yahoo build a revenue base for Geocities around advertising, and as advertisers got smarter and understood the value of that inventory – when rates dropped, they did not have alternative income streams to fall back on. In addition Yahoo also sported a desktop based application which was heavyweight and did not work on multiple platforms (unlike Yola – which is entirely browser based). The costs of maintaining this piece of technology (written in Java) for the desktop exceeded the revenues – basically, the business model did not scale and also was not well leveraged. This resulted in a broken business model.

The demands among Web users have changed as well. Web users, and particularly small businesses, don’t just want an online presence (which was Geocities key value proposition), they want a professional-looking site that they can quickly and affordably build and the tools to help themselves and/or their businesses succeed (online marketing, commerce capabilities, etc.) – and that’s what we’re about. Meanwhile Geocities, while once revolutionary in the space, has failed to meet users’ changing needs and as a result, has been shut down.

We believe the model of the future is to create a platform that anyone can use to create their own personal or business website – and then we are able to sell add-on services (domains, templates, etc.) that allow the users to further customize their websites. Hosting & bandwidth is and should always be free to the end user. I look at the Internet as a really big LAN (Local Area Network). Why would you pay to transfer files across a LAN? Also, people can currently get free web pages in a limited sense through various providers, but a page with ads is like a social network site or similar – and not a true, professional web presence. People are sophisticated enough to want real websites, and that is what we offer them. And, when you provide a valuable service, your customers becomes loyal advocates, and you succeed if you have a profitable business model.

My most recent blog post was about freemium business models and how startups should consider moving away from advertising based business models, and focus on charging their customers for add on services (premium services). In order to build a long term sustainable business, you need to understand what value you’re creating as a company, and who would be willing to pay for it and build your revenue streams around that. Advertisers are just not willing to support websites that do not deliver ROI anymore – the game is changing…

For more information check out our FAQ.

Yola is derived from the Hindi word Jhola which means hatch and hatching big ideas is exactly what you do at Yola.

Check out the SynthaSite blog post here, announcing the name change to Yola.