The new business model: Give it away free

Here is an interestingreview of a new book by Wired editor Chris Anderson entitled Free: The Future of a Radical Price:

It’s called “freemium.”

That term, first popularized by venture capitalist Fred Wilson, describes a business model that combines free with premium and is based on the underlying assumption that the most effective price is free. Anderson says that companies can use the powerful marketing tool of “free” to garner the largest possible audience, and then convert a portion to additional premium services for which companies would charge a fee, or “premium.” From there, one figures out his optimal free-to-paid ratio. “You give away 75% to 90% of your goods and sell the rest,” Anderson said.

Applying the freemium model to mobile phones, you would get the cell phone but pay for the minutes. For the music industry, you would give away your music for free, people would sample it, some would pay for the mp3, and some would attend the concert — the premium part of the equation. . . .

Anderson’s rationale for why the model will work
Anderson explains the reason this model will work is because people are psychologically drawn to free, and offering content or services over the Internet has no “real” costs associated with it.

According to Anderson, the Internet is the first deflationary industrial economy we’ve ever created. He says that digital is the first to progressively fall 50% every year — and has been for 50 years. Once the Internet took the constrained processing from Moore’s law, a rule stating that the number of transistors on a chip doubles every 24 months, and added storage and bandwidth — both of which fall faster — Anderson says we created a medium that basically says everything can be available in a free form.

As a result, Anderson says media companies have infinite competition, and the marginal cost of production and distribution is zero. “Whatever the cost is today, it’s going to be 50% as much as a year from now, and fall 50% every year forever because of Moore’s law.”

Sooner or later, everyone will compete with free, Anderson says. “Free is not a choice,” he said. “If you don’t do it for free, someone else will. The question is, is yours worth paying for?

What do you think about this business model? Setting aside the techno-utopianism, what might be some applications? (A publisher offering free downloads of titles, but then charging a premium for printing them out? Giving away Volt cars, but charging $40,000 for the batteries?) Give suggestions both real and whimsical.

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

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  • Nathan
  • Nathan
  • http://www.toddstadler.com/ tODD

    I think this business model works … at least in certain cases. But at the core, it can only work for products that are truly good — that is, that people actually want. A number of products out there seem to make money through some level of deception, promising you something and then giving you less than that. These products would never work with a “freemium” model, because once people discover the truth about the product, they regret that they have paid. Indeed, once word gets out about the product, it’s in trouble.

    Successful “freemium” strategies work the opposite way. People get it for free, are so happy with the product they pay (for whatever reason; say, to upgrade or get even more of something), and when word gets out about the product, it gets even more purchasers.

    In my case, this happened with a few simple, yet oddly addicting, video games (Peggle and Snood, if you must know; useful ways to pass the time when my son was born and we couldn’t get out much). They gave away copies that were limited in some way (number of levels, or number of games you could play), and I got to like the games so much that, when I bumped up against those limits, I gladly paid for more.

    But I think that the impetus for “freemium” plans is mainly limited to things that would otherwise be illegally distributed on the Internet. If that’s possible, you pretty much have to accept the fact that some people are going to steal your product, no matter what. All it takes is one person to purchase it legitimately (or get it otherwise), and then post it to any number of pirate Web sites. Giving the product away for free won’t affect cheapskates like that. But it will enable word-of-mouth and allow people to sample your product — and some of that will result in more sales than keeping things locked up, in the “if you want to try it, you have to buy it” model.

  • http://www.toddstadler.com/ tODD

    I think this business model works … at least in certain cases. But at the core, it can only work for products that are truly good — that is, that people actually want. A number of products out there seem to make money through some level of deception, promising you something and then giving you less than that. These products would never work with a “freemium” model, because once people discover the truth about the product, they regret that they have paid. Indeed, once word gets out about the product, it’s in trouble.

    Successful “freemium” strategies work the opposite way. People get it for free, are so happy with the product they pay (for whatever reason; say, to upgrade or get even more of something), and when word gets out about the product, it gets even more purchasers.

    In my case, this happened with a few simple, yet oddly addicting, video games (Peggle and Snood, if you must know; useful ways to pass the time when my son was born and we couldn’t get out much). They gave away copies that were limited in some way (number of levels, or number of games you could play), and I got to like the games so much that, when I bumped up against those limits, I gladly paid for more.

    But I think that the impetus for “freemium” plans is mainly limited to things that would otherwise be illegally distributed on the Internet. If that’s possible, you pretty much have to accept the fact that some people are going to steal your product, no matter what. All it takes is one person to purchase it legitimately (or get it otherwise), and then post it to any number of pirate Web sites. Giving the product away for free won’t affect cheapskates like that. But it will enable word-of-mouth and allow people to sample your product — and some of that will result in more sales than keeping things locked up, in the “if you want to try it, you have to buy it” model.

  • MarkB

    I think computer printers would closely fit this model, at least the low end ones. You can typically buy a multi function printer for under $50 most of the time. I know I bought a printer/scanner/copier for $39 at Walmart a couple of years ago. The way the printer company makes money is by selling the print cartridges.

  • MarkB

    I think computer printers would closely fit this model, at least the low end ones. You can typically buy a multi function printer for under $50 most of the time. I know I bought a printer/scanner/copier for $39 at Walmart a couple of years ago. The way the printer company makes money is by selling the print cartridges.

  • Steve

    Well, this will end within the next 5 years

    All the people that state it’s working, it’s not for the other 9

    Musicians are losing money on the indie level faster than ever

    I have never in my life seen so many poor musicians. Musicians and bands tend to be poor at business in the first place and tend to focus on the “art”

    I bet you this will not last. It’s a poor model in the long run

    This whole philosophy of supply and demand of a market so saturated so let’s give it away is going to work in reverse

    It’s a 10: 1 ratio. 1 good story for another 9 bands who can’t pay for the van, the cables, the microphones, the gas, the travel

    I have never in 25 years of working with bands seen so many poor bands that are complaining about money, never. This is why you are starting to see Donation buttons on web sites

    No one, I mean no one, has done extensive research on this on the indie local and regional level for bands, it’s purely blogs of a few bands

    Typical of the net

  • Steve

    Well, this will end within the next 5 years

    All the people that state it’s working, it’s not for the other 9

    Musicians are losing money on the indie level faster than ever

    I have never in my life seen so many poor musicians. Musicians and bands tend to be poor at business in the first place and tend to focus on the “art”

    I bet you this will not last. It’s a poor model in the long run

    This whole philosophy of supply and demand of a market so saturated so let’s give it away is going to work in reverse

    It’s a 10: 1 ratio. 1 good story for another 9 bands who can’t pay for the van, the cables, the microphones, the gas, the travel

    I have never in 25 years of working with bands seen so many poor bands that are complaining about money, never. This is why you are starting to see Donation buttons on web sites

    No one, I mean no one, has done extensive research on this on the indie local and regional level for bands, it’s purely blogs of a few bands

    Typical of the net


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