26 February 2024

Skype’s Surprising Revenue-Boosting Strategy

By Ronald Smith

Hey, ever wonder what comes to mind when you think of Skype? Well, most people would probably say free phone calls.

Back in 2005, when eBay bought Skype for a staggering $2.6 Billion, some folks thought Meg Whitman, former CEO of eBay, had lost it. They couldn’t understand why eBay would want to own a company like Skype that offered free voice calls. It just didn’t seem to make any sense, you know?

But guess what? Skype actually knows what they’re doing when it comes to their business. They’ve come up with a brilliant plan to offer both free and paid services, and let me tell you, it’s making them some serious moolah. Check out this neat chart from a press briefing they held on March 31, 2009:

Skype's Surprising Revenue-Boosting Strategy

Let’s talk about a pretty cool business model that involves giving stuff away for free. Now, don’t get me wrong, giving things away for free doesn’t really make money on its own. But when you combine it with a super awesome way to convince people to pay for extra services, then you’ve got yourself a business model that can make some serious dough. And I mean serious, like $551 Million in 2008 kind of serious. Check out this fancy chart that shows how Skype’s revenue has been growing since 2005:

Skype's Surprising Revenue-Boosting Strategy

Well, it took Skype quite a while to figure out their plan.
They had some early hiccups and got sidetracked with silly free services like Personal Skypecasts. The last time I gave that a try, it was filled with spam and broadcasts that were just full of silence, with the occasional mumbled word. They ended up quietly shutting down Skypecasts last September.

Then they started playing around with a feature that let you send money through Skype. But that didn’t really make sense when your parent company also owns PayPal. Having a money service was just a distraction from what Skype is really good at. So, they had to shut it down too.

Hey there, let me tell you what’s going on with Skype. They’ve made some changes to their main focus, which is all about communication. Check out their spiffy new version 4.0 with its bigger screen and awesome audio/visual quality. They’ve really leveled up the game for video calls because they see it as a huge part of their future. Oh, and guess what? You can use Skype on your iPhone and BlackBerry too – they’re working on it as we speak!

But that’s not all. Skype is also teaming up with other companies to provide services that business folks like. One example is partnering with a virtual PBX provider – fancy, huh?

Now here’s the really important part. They’ve decided to keep the basic service completely free. Why? Well, that way they can keep growing their user base by a whopping 350,000 customers every single day. And once they’ve got that big base, they can start offering some cool new paid services to those users. Makes sense, right?

Skype thrives because it spreads like a wildfire. People love to persuade their friends to download Skype so they can enjoy the perks of making free calls – a habit that’s hard to break. And once you have all your buddies on the network, you don’t really need to use SkypeOut as often.

If Skype is smart, they’ll make their fee-based services more and more attractive over time. That way, it becomes a no-brainer for some new users to choose the paid services.

Around 35% of Skype’s users are businesses, most likely small ones. This is important because business users are more likely to pay for extra features rather than just using the free version.

The cost for Skype to add new free users and get a certain percentage to upgrade should be much lower than the cost for other telecom providers to get new customers. I can only see good things coming from this business model.

The reason I spent so much time talking about Skype today is because I believe there are two important lessons here for your own business:

(1) Stick to a clear strategy that focuses on what you do best. Don’t get distracted and go off course.