I’ve been reading with interest lately about Chris Andersen and Freeconomics. His book release and public speaking have raised a lot of debate about whether ‘Free’ is sustainable.
The problem here is that people are thinking of Free as just a marketing tool -eg i’ll give away content/product for free to hold these new pretenders at bay whilst still maintaing my old business model.
The reality is that Free is a business model. This is a subtle but very important difference.
If you want to give away ‘stuff’ for free and generate revenue from a small portion of paying users, then you need to have a cost base that allows you to make profit from this. You need to have expertise and business process in:
1. Acquiring customers for your free ‘stuff’ at very low (zero if possible) cost
2. Getting people to use your free ‘stuff’ so that they attribute value to it
3. Getting people to part with some of the value to you in the form of payment
4. Running your business to make profit whilst supporting all of the above
None of this is easy – many Web 2.0 companies that set out from day one to go down this route failed to make it work.
Its no wonder that large companies with established business models are fighting any transition to this model tooth and nail. The problem for a number of them is that customer expectations have been reset by new companies that can make this model work. This is the central argument of Freeconomics.
The incumbents have no choice now but adapt their business models, and embrace the freemium model. If they don’t they will die. Nowhere can this be seen more than in the media and publishing industries. As with any market transition it is painful and it takes time for value to be re-distributed in a fair manner.
Increasingly though this model is spreading to other industries. I was over in the Valley last week on WebMission 09 with some great Enterprise 2.0 companies, many of whom rely on word of mouth to replace big marketing budgets and web touch sales to replace travelling sales people.
They are fundamentally altering the cost structures and business models in that industry. More importantly, they are altering the customer expectation of how they buy services and what they pay for those services. Most of these companies are profitable, all are revenue generating and growing fast.
So is ‘Free’ dead – absolutely no. It is the other way around – ignore it at your peril.
I shall leave the last word to Chris Andersen:
“I’m not telling the apple to fall – I’m just telling that the apple will fall. That is what the laws of digital economics require. …you either compete with free or use free but fundamentally [it] is about how you make real money…”