Should I make my service free?

For the past year I have been developing a VERY niche based review/community site, in the healthcare field. I did as much h/w as possible in searching for competitors, and there were zero direct competitors at the time.
A few months ago, a competitor launched who has been working on the project for 5 years, as opposed to my one year. Their product is MUCH better than mine, in a million different ways.

I've read all the "competition is good" posts, but in this specific niche, which I am VERY familiar with, the industry is only going to adopt ONE site like this, and it will be their site, no doubt.

I still have a great product which fills a much needed niche with strong demand, but I am wondering about how to position myself competitively now. I sell advertising space on my site to healthcare providers, as a directory listing.

At this point, I am considering offering the service 100% free, even for providers who create an advanced listing and have all kinds of features to help their business. I know this will seriously dampen the moral of my competitor, and leave them guessing, but I'm wondering if this is a bad strategy?

There are other ways I could monetize the site later on, and monetization isn't my main priority. Anyone have a similar situation before?

There are a bunch of questions in there, I'm going to tackle them one at a time.

Best product wins.

While this is generally understood to be the case, its not actually true. Microsoft ruled supreme through the 90s and 00s NOT because they had the best product but because they had the best marketing teams (except for advertising who were too busy being politically correct) who setup the best resellers and arranged the best contracts and helped everyone else (like me) to make money from their stuff and backed it up with the best support.

You don't have to have the best product to win, you just have to have what the market wants and be able to get your site over the critical point in the adoption curve. This is a marketing war not just a product/features war:

For this you have several key barriers to overcome:

• Your users need to find you
• It needs to be simple to use and get what they want
• Your users need to see value in you
• Your users need to keep coming back.
• You need to keep them engaged once they are there.

Free or Paid to direct users My feel is that you should make it free to the users on the site, I would remove the barriers to them by not making them even login for the first few visits, just get what they need and follow it up later. Maybe a Facebook signup option for creating an account but nothing more.

Free or Paid to Advertiers.

I think premium placement on key landing pages can always be changed for if you have an appropirate volume of highly qualifed people. That means if they are very likely to become customers advertisers will pay ... the rest of the site leave make it free or if you can control the volumes then you get your first X per month free, you pay if you want more.

Alternative monitization models If your a community site then you are likely to be building a profile of the users of the site. Facebook, LinkedIn, Stack Exchange, Google+, IfTTT all do this now ... they collect demographic or profile data which can then be utilised to make money. In facebooks case they select very targeted advertising, Linked In monitise the connections between people, IfTTT watch the flow of information and will likely sell it as aggragate trends to people who care, Stack Exchange do a mix of advertising based on tags and Careers 2.0 which utilises the users profiles and extends the concept massively.

My recommendation.

If you can afford to wait and you don't need to monitise today I would:

Focus on the users and get feedback using something like UserVoice or Zen Desk or whatever to iterate fast and aim to get new features back in the users hands on a weekly basis.

This will make the people who suggested the feature more likely to come back and more likely to tell others "thats my feature".

I would have a thankyou page for the users so their name is visable to all.

Focus on PR and getting known, you now have a limited time to get yourself known as the default option ... the race is on, the more that know and try the closer to "critial mass" you get. Make it easy for others to refer you through the usual channels like facebook, linked in, twitter etc.

Attend industry specific trade show and key events online or in the real world, people meeting you face to face is still one of the better methods for getting their attention long enough to communicate your message. You will also get a lot more feedback from people directly here.

Find key players, encourage them to play arrange face to face meeting with key players in the industry, offer free accounts for all their staff, point out how this will help them (you will need to refine your pitch for each one) and offer to train their staff on how to use it. This, especially for non-technical people in the health care sector is their largest barrier to entry.
This can also lead to "paid walled gardens per company " which a company can pay for their staff to have their own "area" that no one else can see ... have a look at Yammer for an example of what twitter should have done (or should still do).

Finally Its not the best product that wins, get yourself over the tipping point. Your greatest strength is that your users will opt for the easiest to use/familiar over the most useful or highest feature set. Even if you have to personally drag enough of them through inital fear barrier you will get more users than someone sitting back expecting people to show up and work it out.

There are lots of monitization models which will show up along the way, have a strategy to collect enough useful data so you can utilise the user base you have and the oppurtunities will show themselves.

Free? My recommendation is No.

Because free = no value.

If you were to pay $300 for all the answers you're about to get (from me and others) ... you would naturally pay more attention to them... right? (Yes.. it's called human nature).

Marketing and mind share is a battle of what perceptions people have about your site .. not what it really is (or how good the website is). To win, you will need to get people hooked, and fast. Sometimes the only way to do that is to pay big bucks for advertising.

Build your user base... as you say, you can monetize it later.

Here's a lesson I learned the hard way..."You're teaching your customers how to buy from you every time they buy from you". If you offer you're product at $0 ... what will your customers think it's worth?

I actually think if you offer your service for free, your competitor will laugh. In one of my businesses we're 4 times more expensive than the competition and out sell them 3:1. Even when my competition reduces their price to get market share... it's makes their job harder to provide a service and it devalues their company... they're just nailing their own coffin shut.

Work on what you can do to get users on your site. Not advertisers... once you have the users... advertisers will be knocking at the door. (just don't get complacent).

Awesome answer from Robin and I offer the following only as a supplement. Based on your assessment that

1. Attitude : What is this defeatist attitude? If you have already decided that the market is going to choose your competitor-- then hang it up. Walk away. Don't waste any more people's time. But frankly that is stupid. You don't know. You may have fear. But you get to choose how you will respond. You can choose to make a better company, a better solutions, a better service. The product is only one small part of that -- and you control all the levels to do that. Change your language -- it is not an issue of "if" -- but "when they choose you"
2. Marketing for the Win : As you have learned by reading many of the questions and answers on this site, the company that wins in the marketplace is often not the company with the better "product" but that one with the better message to connect with the customers.

   In most situations the customer is the person who pays the bills. It sounds as though you don't need someone paying the bills right now-- and that you believe that if you can monetize later. So, make the service free to build and own the space. What a great situation to be in. Now you can focus all of your energy on aggregating the users to come to your site.

3. Critical Feature : Your competitor may or may not have a better platform -- but is there a singular feature that you can highlight where you have an advantage? Maybe the ease of use of your mobile version? Maybe the privacy feature? Something that will draw the users to choose you first-- where your superior attention to meeting their needs will keep them from looking elsewhere.
4. Advocates : In a niche market there is a small community. In a small community the testimonials and involvement of "community leaders" is critical. Identify the top ten people in the niche community who -- if they choose your platform -- would make yours the default "place to be" Do what ever it takes to earn their involvement. What ever: equity, free ads for life, board position, change the software to prioritize their desired features. Go into an active recruit/engage/sale process.