There's no such thing as a Free Lunch

Today I want to talk about Free.

Last week we saw big buzz around SmartRecruiters recent round of funding for their Free ATS. Along with the late 2011 acquisitions of some niche players by the big guys, the venture community backing HR software is another sign that the industry is hot, happening, and poised for big change and growth.

But before getting caught up in the hype, let’s be clear: Free is not idealism; it's a pricing strategy. One that has proven very effective for many companies when trying to gain traction in an existing market place when product features are hard to differentiate.

Free pricing strategies are also how many go out of business if they can’t figure out what people will really pay for.

SmartRecruiters' strategy is to try and gain a lot of customers in the tricky very-small-business sector, where independent recruiters and boutique firms are already a hard sell for per-seat licenses in the existing ATSs, and currently spend a lot of time and money buying one-off background checks, job-postings, etc. from service providers.

I do think recruiters will want to buy those services as part of their talent generation and ATS to increase their own efficiency. And offering the free ATS is a creative way to collect commissions by connecting services to purchasers who, individually, aren't a significant enough source of revenues for the service providers to target them effectively. But will those commissions be enough to cover the cost of building, maintaining, hosting, and supporting an applicant tracking system? By the way, none of those activities are free.

I've been around the software block a couple times, and seen as many companies thrive as fail when using and offering "free" software. So it's going to be an interesting model to watch as we see whether "Free ATS, Paid Services" is sustainable for SmartRecruiters and if it provides enough of a return for the investors. And what kind of impact it could have on changing pricing models for the more complicated needs of bigger agencies and companies.

Every vendor in the HR space has built a business on understanding the importance of improving recruiting and hiring. In one way or another, you can distill all our mission and vision statements down to getting people to work (at jobs that are financed by the money people are paying for goods and services, natch). It's a noble thing we get to participate in, but it's also worth remembering that we don't get to do it if our companies and their investors can't make money.