Chris Anderson’s book “Free: How Today’s Smartest Businesses Profit by Giving Something for Nothing” explores the history of free business models, showing its not a new concept created by the internet, and articulates a number of free business models which are used today.
An example of some of the content includes an explanation of each identified Free model:
Free 1: Direct Cross-Subsidies
Free 2: The Three-Party Market
Free 3: Freemium
Free 4: Nonmonetary Markets
What i like about this book is it explores the mindset how people react to free, one of the chapters is “The cost of zero cost” and Chris explains free and “behavioral economics” by drawing on work from Dan Ariely in “Predictably Irational”.
Basically zero is not another price point, its an emotional hot button, two experiments were conducted where two competing product were priced at 15cents and 1cent and participants asked to choose; 73percent chose the 15cent product and 27percent the 1 cent product. But when they dropped the price by 1 cent, and the products were now priced 14cents and $0 the customers reversed their preference.
So it doesn’t matter what the value of the product is, when its free we can we disregard the other choice, additionally people who may not have bothered paying at all sign up simply because its free when its free, we waste.
At work we recently changed our website setup price from $2000 setup to $0 (with $99 monthlies), the team accepted this and it was easy to see that by dropping our setup costs we could get more people onto the subscription. But it wasn’t until we started talking about releasing a new product that was actually ‘free setup and free monthlies’ and you pay for the premium edition did the team start to get worried. Some of the questions were, “but whats stopping clients using the software and never upgrading” and “that means we have users which are paying absolutely nothing”. Its an uncomfortable change for many people to go to the Free business model, where you relinquish control and embrace that users will wast the service simply because its free. But the payoffs can be great, by giving it away, if your product is good enough that you capture the audience and get mass adoption; you can now worry about how you monetize the use.
Want examples of profitable businesses that use free? Want to know more about how you can do it for your business? Go buy the book, I thought it was a really interesting read, it kept me thinking to the end, and now the next big thing I ship will be “Free”.
Rating: Loved it 5 Stars
Recommended to me by: Matthew Gay from REA Group
Title: Free How today’s smartest businesses profit by giving something for nothing
Turns traditional economics upside down ‘Guardian’