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The Free Economy: Ever Wonder How to Make Money by Giving Valuable Things Away?

I often scratch my head wondering how companies can continue to give away all their core products for free and expect to build their top and bottom lines. Priced at “free” doesn’t seem to support conventional wisdom, after all, history is full of companies that created their demise by competing on price. Price at “zero” doesn’t sound like a winning strategy to me.

Competing on price has only one direction to go, that’s to zero. Zero is good for the consumer (or maybe not?), but definitely bad for the producer. At the end of the day, if a company does not create a profitable revenue stream, it will cease to exist – plain and simple – unless, of course, you are GM or BoA and have the Tax payers to bail you out – but let’s not go there shall we.

The notion of the “free economy” (giving things away) revolves around the idea that companies aren’t really giving everything away but rather giving enough away to attract a sufficient number of users (the minority) who will pay for the service while subsidizing the rest (the majority) who do not.

Sound crazy? Maybe not. In his book Free Chris Anderson provides good examples as to how “free” models can work beginning with brick-and-mortar examples including Gillette and the famous razor / razor blade model which is basically give the razor away (or make it so cheap that it’s virtually a give away) and make up the difference by selling lots and lots of blades at a very attractive profit margin.

I love this business model and am always looking to apply it. The desk top printer industry is a good example of how this model works. This is how HP and its printer competitors can throw in their ink jet (or is that ink junk?) printers as “free” when you buy their PC because they are relying on the consumable (printer cartridges are equivalent to Gillette’s razor blade) to make money over the long run.

So yes – the razor/razor blade model can work. Can you think of other models that are based on the razor/razor blade? The wireless carriers use a similar rational by heavily subsidizing the phone and making their profit selling voice and data packages. Not a bad strategy.

But wait-that’s not all! There are several other “free” models that have worked and should continue to work. Anderson describe the “gratis/advertising model which I know you are familiar with:

“The minority of customers who pay subsidize the majority who do not. Sometimes that’s two different sets of customers, as in the traditional media model: A few advertisers pay for content so lots of consumers can get it cheap or free.”

Traditional television, radio and to a large extend print media (the majority of revenue is generated through ad dollars – not subscription revenue) base their business models on advertising. And of course the “new-economy” web companies like Facebook, MySpace and Google use the advertising model (o.k. Google has an added spin on their ad revenue model – but it’s still ad revenue).

But is the advertising model really sustainable? How many add dollars are there to go around to support all the “free” sites and content out there? The answer is simply “not enough.” And consumers have become fatigued by all the ad noise out there. We don’t particularly want to see more ads – and in fact we do a pretty good job of just tuning them out.

One of several reasons why the ad model is having problems in providing sufficient revenue for online content businesses. Also what makes it hard is that unlike TV and radio, it’s pretty easy to measure the effectiveness of an ad campaign through “click-throughs” and “pay for click” models. With clear data in hand, advertisers know if a site is producing results for them and are apt to abandon marginal sites for sites that produce results – oh those “picky” advertisers – don’t they know that ignorance is bliss?

I suspect advertising will continue to work but only for sites and media properties with reasonable scale (any one like to take a crack at what “reasonable” scale is?). I also know from work I did during my early StickyJam days (see PATH advertising) that the digital ad model will continue to evolve and become much more personalized.

So my prediction (ah, yes, my amazing forecasting gift) is that the advertising model will continue to flourish especially on larger content sites and advertising methods (widgets) will continue to evolve into a much more personalized and hopefully “inviting” or perhaps better way to say it “invited” sponsor for the consumers.

There are more business free models to explore, but that’s all for now – my “free” time is valuable!

Cheers!

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