Do you use Google search? Of course, you do! Ok, so how much do you pay for it? Zilch, you say? I agree. Did you ever notice how many products and services you are using in your daily life which come at no or almost no cost? Did you ever wonder how this is possible? Of course, the concept of cross-subsidy and bundling free products with other items has been there for a long time. But they all have some hidden costs associated with them. Contrary to that in this new economy there are so many products and services that actually come for free at least so for the consumers – no strings attached. In this article we are going to explore this economy of ‘free’ or ‘Freeconomics’ if we can call it so.
Moving Beyond Economics:
Traditional economics considers only buyers and sellers interacting in an exchange relationship in the marketplace and hence ‘free’ seems to be an unviable concept. But in real markets more than two parties interact while only some of them exchange cash. The most common example of this is media business – where publishers provide the products for free (or almost free!) to the consumers and advertisers pay to ride along. For example – your newspaper company is not charging you for the creation of all those useful and useless content, printing and distribution of newspapers; in fact they are not in the business of selling newspapers – they are selling readers to advertisers. Web is helping industries of all sorts to adopt a similar business model. And advertising is not the only source of income – there are other methods like ‘value-added’ subscription, upgrade to premium version, direct e-commerce, selling information and many more.
How does it make sense?
Google which has converted free search into billion dollar business can be considered as a big success of marketing ‘free’. Recently, this concept of ‘free’ has been popularized by two of the most popular Marketing Gurus of the world – Chris Anderson and Seth Godin. Now, let’s see why marketers do this? Future business is one of key reasons why marketers give away things for free. Consumer psychology theory says: consumers feel guilty when they get something for free. They try to reciprocate or buy the guilt by purchasing something or spreading good word-of-mouth. Sometimes consumers help the companies even without being fully aware. The loyalty cards being used by consumers are meant for capturing consumer data to better target marketing offering and thus making more profit. In the online world the huge customer data obtained through Orkut or Facebook is worth the investment. Recent research shows that a zero priced item are over-valued compared to its dirt-cheap counterpart. Open source developers usually learn this the hard way: distribution plummets as soon as they start charging even a penny for their software. Simply put given the choice between a free, low-end product and a dirt cheap, similar one, we’ll pick the free one. But that does not help marketers. Here comes the concept of Freemium. The key of Freemium is to have the consumer rationalize that the free version won’t satisfy his needs completely; and then proceed with the sale of the premium version. A typical online site follows the 1 percent rule – where 1 percent of the users pay for the premium products or services and support all the rest.
Taxonomy of ‘Freeconomics’:
|Type of Free||What’s free?||Free for whom?||Example|
|Advertising||Content, services, software and what not!||Everyone||‘Free-to-air’ radio and TV channels|
|Cross-subsidies||Anything where one ‘free’ product is bundled with another||Everyone||Mobile manufacturers giving you connection for free. Cost of connection is included in the price of the mobile phone.|
|Zero marginal cost||For things where reproduction and distribution comes at no cost||Again, everyone||Online music|
|Freemium||Web software, services and some content||Users of the basic version||Basic Flickr account for free and extra charges for the premium account|
|Labor exchange||Web sites and services||All users – specially registered users||Rating stories on Digg and voting on Yahoo Answers – helps making the information more useful and hence improves the service|
|Gift economy||From open source software to user-generated content||Everyone||Wikipedia and Linux|
The Road Ahead:
The gift-economy is actually replacing the monetary-economy in many spheres. The huge amount of user generated contents on web, TV and radio shows that money is not the only motivator. Sometimes self-expression can be a bigger motivation. And who else can be a better example of this than the Wikipedia team! With improvements in technology the marginal costs of manufacturing and distribution is going down rapidly and more so in case of digital economy powered by ever deflating costs of storage, processing power, and bandwidth. So, giving products or services for free (or almost free!) is not as stupid as traditional wisdom suggests. In fact, it will increasingly become a profitable idea in the new economy if the strategy and implementation is executed rightly. So, in this increasingly ‘free’ market – what is there for you? For the generation-X marketers – buyers are no longer your only source of revenue – think beyond the box and the broader you can think the better. More importantly bid adieu to cost-based-pricing and welcome value-based-pricing and while doing that keep consumer psychology as a key determinant. And here consumers are the not necessarily the traditional end consumers using your product but can very well be the advertisers who pays you for putting their ads on site. Pricing should depend on what consumers ‘think’ as the value of the product and not how much you have spent to produce and market the product. Provide value and reap rich returns. Don’t overcharge but at the same time never keep money on the table. For the consumers – ‘free’ is not that bad or irrational at all. So, enjoy the ‘free lunch’! 😀
Marketing Science, The Wall Street Journal, Knowledge@Wharton