BookMooch: Lessons in solving the problem of ‘free.’

All this talk of “free” being the future of business sure has people nervous. Small wonder. You got into the startup thing to make money! But the concept of ‘free’ is hip, and aint’ going away anytime soon. This is creating new and very real burdens for young founders — how do you manage and grow a business built on a model of giving things away for nothing? Well, today I got a bunch of tips on how to make ‘free’ pay, from a serial entrepreneur who is doing it.

I attended the monthly High Tech Lunch in Berkeley, California where the guest speaker was John Buckman, the founder of Lyris and later, Magnatune, both of which are still going. John’s current startup, called, founded in August 2006, is an exchange site where readers swap books from their home libraries with one another — for free.

When you sign up with BookMooch, you post your “wish list” of books. Then a member who has one of your desired titles in her library offers to send it to you. The sender pays the postage (so you get it for free, free!), with the implied social contract that you will, in turn, pay to ship a book from your library to fulfill the wish of a fellow BookMooch-er, tomorrow. Walah! Complete reciprocity. The ledgers balance. This is a very cool kind of free.

BookMooch is cool for all kinds of reasons. Check it out. But the real value in John’s talk came when he listed his slew of tips for how an exchange — or really any site — can create value off a free-model (i.e., by building a business someone will want to buy); and even generate revenue off of it (literally, make a ‘free’ model pay!). So here they are:

1) Don’t pay for labor. Get volunteers. If your idea fosters enough passion, you’ll find ’em. BookMooch was built by an all-volunteer army. Obviously this is the best way to keep your costs low.

2) Let users get before they give. Most exchange or free sites makes users give before then can get. John says this is backwards, and slows growth At BookMooch, users get something first. Then they give. The idea here is to foster the emotional buy-in or commitment in your site that would ordinarily be created by the $ticker price. “It might sound odd,” John reported, but in his experience, “people actually don’t like to take something for free … just look at all those Hare Krishnas at airports, no one will take their flowers. Most people would rather pay a nominal fee for the flowers. You’ll find they’ll want to honor your ‘gift’ with some reciprocity of their own.” This might be called a guilt trip. But once BookMooch users have taken a book, they always send one. Which fuels the transaction rate.

3) Fewer rules, more speed: The minute A BookMoocher sends a book s/he earns reputation points and is able to add another book to their wishlist. On most exchange sites, parties have to wait until a transaction is complete to get their “points” and move on to a second trade. By rewarding people right away, Buckman says BookMooch enjoys a faster rate of transactions, and therefore, faster growth. The happier and more active his users are, the more books they add from their home book-shelves to John’s inventory. At 18 months, BookMooch’s catalogue of pledged titles in now 480,000 — the U.S.’s #1 book distributor Ingram Book, has 1 million titles. (But BookMooch has no stocking costs!) BookMooch trades 3,000 books a day, which fosters new inventory additions. So John thinks he’ll reach the 1 million mark in just 9 more months! Such an stock of used books– otherwise lying idle in homes and that, until now, would have been impossible to quantify–is so valuable, John noted, “that Amazon will just have to buy me.”

4) Create a fantasy currency: Like reputation points. (Not such a novel tip, but you’d be surprised how few startups do it because it’s a pain.) Every time you engage in a transaction you earn points. Also try a rewards like a PowerMoocher, to create clout. We all like status, so the lure of it keeps users involved, and trading, and further builds the network.

5) Create a secondary market for your fantasy currency: BookMoochers can use their reputation points to help other “poorer” Moochers acquire a book. And they do it. Who knows why, but they do, which, again, builds the network. (Volume of transactions will be important when Amazon comes to size up a valuation of BookMooch!)

6) Use a toolbar/browser plug-ins to link to “the outside world” — especially your for-Fee competitor. BookMooch has a browser plug-in that will alert you, when you’re on Amazon or Barnes & Noble, if the book you’re searching for is available for free on BookMooch. Similarly, the plug-in will tell you if a book you’re looking for on BookMooch is available on Amazon (the crawler simply looks for books’ ISBNs on those sites). The plug-in saves some users money by diverting them off Amazon. But in the cases where a user can’t wait to “mooch,” this also has the effect of throwing a little revenue Amazon’s way. And guess what? BookMooch gets a cut, which happens to be the site’s ONLY source of revenue. About 1/100 trades generates an Amazon sale. So far, it looks like BookMooch generates about $40,000 in book sales for Amazon every four to eight weeks. But with no costs, whatever BookMooch’s “cut” is, goes straight to the bottom line.

So, BookMooch isn’t making tons of money right now, but if the site continues to add users, transactions and inventory at its current pace this trickle of revenue-share will really swell. Hey, money is money — especially in our new “free” world.