I just finished reading Free: The Future of a Radical Price,
the new book by Chris Anderson. I have been looking forward to reading
it since I first heard about it more than a year ago, and I was not
disappointed.
The single most useful thing for me in this book
was the way he identifies four key ways a business can use free
successfully. Many companies want to have a free offering because it
seems like so much, especially on the internet, is being given away.
The idea is that you build a community of users NOW, and figure out the
business model LATER. Sometimes, this can work well, but usually it is
better to have a few ideas of how free now will convert into paid
later.
These businesses could benefit from considering each of these four broad categories and determining whether there's a way to
1. Direct Cross Subsidy
I give away one product in hopes of getting you to pay for others–such
as giving away razors to encourage purchase of razor blades
2. Three Party Market
I give away something in order to attract an audience that another
group is willing to pay for–such as the traditional ad-driven media
business model. I call this model "Beemium" because a Business pays a premium, while the consumer or individual gets it for free.
3. Freemium
I offer a free service, which most customers take, and a premium
service, which a few take. The premium fees make up for the cost of
providing the free service, and the free service serves to drive
awareness fo the product. Fred Wilson of Union Square Ventures and
author of the terrific blog AVC is widely credited with coining the word "Freemium".
4. Non-monetary Markets
Participants in the market give freely, or barter, or pirate products,
without money exchanging hands. Examples include Wikipedia, Freecycle
and peer-to-peer music sharing. Most of these businesses are
altruistic in nature–a means of building community or serving others
rather than a money-making endeavor.
The first three types of
business model can be lucrative ways of harnessing free. The fourth
can enjoy tremendous popular support and growth, but not necessarily
profits. I think that the challenge for many companies is figuring out first of all whether there is an opportunity to use "free" to grow their business–and second to understand whether market conditions will require that their product (or some component of their offering) has to be free. Understanding the difference between the obligation and the opportunity relating to free is critical–and determining whether either is relevant for your business can be tricky.
More on Free soon…in the meantime–if you've read it, I'd love to hear your thoughts!
