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.