Malcolm Gladwell lit a few fires last week with his (broadly perceived as negative) review of Free: The Future of a Radical Price, Chris Anderson’s new book.
Gladwell is more negative on Anderson’s examples (such as YouTube as successful free offering) and the myopia of what Gladwell calls “technological utopians,” though, than I think he is on what’s being called “freeconomics” (i.e., business models built around free offerings).
As Gladwell points out, “free is just another price.” And we’ve seen for many years prices set low to maximize product/service uptake. The example I tend to cite is Wal*Mart – its management sets food prices so low that the company basically breaks even on it, but by having groceries they change their stores from ones that are visited once every month to stores that are visited once every week. And when customers purchase groceries, they purchase other goods with higher gross margins.
We’re seeing the same thing happen with consumer facing services on the Internet. It’s not news that most of the information offerings online are “free.” Google, Facebook, Twitter, NYTimes, Yahoo!, Mint…the list goes on. Their managers are maximizing both uptake and retention in a hypercompetitive environment where adoption and switching costs are relatively low. Having established giant traffic bases with free offerings, they are able to make money in other ways. Much of it is advertising, but increasingly we’re seeing other avenues where consumers pay for additional services, a model long ago (at least in Internet years!) termed “freemium” – i.e., a free service with paid-for premium options. Facebook, for example, is expected to do ~$550 million in revenue this year, most of that from advertising, but an estimated $75 million from virtual goods [via].
Fred Wilson writes: “Free gets you to a place where you can ask to get paid. But if you don’t start with free on the Internet, most companies will never get paid.” For consumer-facing info services, I think that’s not far off. There will always be services that can charge consumers from the get-go and succeed doing it – e.g., Reputation Defender, a company that charges $10/month to monitor one’s digital presence, something that school and job applicants in particular REALLY care about. And there are cases where the cost of service delivery per user is too high to justify a freemium model and/or the service is truly differentiated and free may devalue it (see Freemium did not work for Phanfare). But even Gladwell ends his piece postulating that Apple might eventually give away its iPhone in order to boost revenue from its app store downloads.
Free is a customer acquisition strategy, and clearly not an end-game. For consumer services, understanding in detail what works as an adjunct to free (e.g., virtual goods, other forms of e-commerce, premium service offerings for “power users,” and yes, advertising) will set companies apart. And frankly, it’s a place for new startups to make money. “Succeeding beyond free” is a pain point, one begging for more turn-key business-to-business services.
As sidebar, game designer Dan Cook recently wrote a lengthy call-to-action to online flash game developers – it’s a huge space (Mochi Media, a single network of online flash games reportedly attracted nearly 100 million users in April) but not being effectively monetized. In his post, Dan lays out a number of ways to “ask for money” from the user (something most games don’t do), all good examples of adjuncts to free and many of which can translate into social networking or other forms of online publishing [hat tip to Jeremy Liew]:
- Time gates - Players can play for some period of time and then they are locked out until they pay. For example, players could play for 45 minutes - 1 hour (effective free trial times in the casual space) and then pay to play longer.
- Content gates - Players play an initial teaser portion of the game for free and then pay to unlock access to additional content. For example, players could pay to unlock all the levels in a game. This is how many shareware titles worked.
- Aesthetic items - Players purchase non-gameplay additions that increase their identity or status. For example, players could pay to give their character a cool outfit that they can show off to their friends.
- Abilities - Sell unique abilities that let players experience the game in a new way. For example, players could purchase new jumping boots that let them fly through levels in a way that lets them re-experience the game all over again.
- Bundles - Virtual items can be bundled together to create additional value. For example, if people love buying food for their virtual pet, let them buy a 10 pack of food for a 30% discount.
- Consumables - Some abilities can expire after a period of time or after a number of uses. For example, you could buy a potion that increases your strength, but you can drink from it 3 times. Also known as “item rentals.”
- Subscriptions - If certain abilities or bonuses are valuable long term, consider charging a reoccurring fee. For example, you could offer extra storage for advanced players, but charge a monthly fee.
- Stackable subscriptions - If certain abilities are additive (such as an experience or currencies multiplier), let players buy multiples of the same thing.
- Rare items - Limit the number of items available so that players feel special when they purchase them.
- Time limited items - Offer some items for short periods of time so that players feel that they lucked out finding the product in time.
- Sale items - Set a standard pricing system for items and then offer some items for sale. This works great with time limited offers. Again, players love to get deals.
- Gifts - Players seek to maintain social bonds by gifting other players with items or abilities.
- Accelerators - Many games have a ‘grind’ that artificially lengthens the game. Players with little time are willing to purchase items that let them reduce or eliminate the time consuming activities in the game.
- Physical goods - T-shirts and other branded items