@indieaustin tweeted a great article by Chris Anderson in Wired Magazine: Free! Why $0.00 Is the Future of Business.
Because of the the effect of the unitary cost of technology halving every 18 months, there comes a point where the closer you get to zero, the sooner you can actually round down to zero. As Anderson states:
What (Caltech professor Carver) Mead understood is that a psychological switch should flip as things head toward zero. Even though they may never become entirely free, as the price drops there is great advantage to be had in treating them as if they were free.
However, this is not so for consumers. Anderson again:
From the consumer’s perspective, though, there is a huge difference between cheap and free. Give a product away and it can go viral. Charge a single cent for it and you’re in an entirely different business, one of clawing and scratching for every customer. The psychology of “free” is powerful indeed, as any marketer will tell you.
That’s huge. I have personally experienced this dozens of times, when I downloaded free chapters, or free E-books, and then actually ended up buying the full book, or the larger more comprehensive second book the author of the initial free book wrote.
There’s a name for this type of free, according to the article: Cross-Subsidies. This is where something is a loss leader, such as razors, and you make money on the blades. Or if you actually allow street vendors in Brazil to burn and sell your CDs, and keep all the money, while you get the promotional benefit as a band and sell sold-out shows, as Anderson noted about Brazilian band Banda Calypso have done with much success.
Here’s the taxonomy of free, according to Anderson:
- Freemium. Users of the free content or free software, the basic versions. 1 per cent of the paying users support 99 per cent of the non-paying users, because it costs the company next to nothing to support the 99 per cent.
- Advertising. This is the typical model of TV, radio, publications, Yahoo, Google, etc.
- Cross-subsidies. The idea of the loss-leader, such as the Banda Calypso example.
- Zero marginal cost. The distribution model of digital products, where there is no cost involved in its continued reproduction. Think digital music in peer-to-peer networks, where the music industry is losing the battle and bands are deciding to join ‘em instead of beat ‘em.
- Labor Exchange. Where using the services of a website such as Digg or voting on Yahoo Answers, for example, provides value in and of itself by making it a better product.
- The Gift Economy. Sometimes money is not the main motivator. Think Wikipedia, a labor of love of thousands of individuals who just want to educate the world.
So how do you actually make money in a world where everything is free? As economics teaches, anything of which there is a scarcity is something you can make money on. Computational power and Internet resources are not scarce. What is scare, according to Anderson, are time and respect. As anderson states:
The “attention economy” and “reputation economy”
What does that mean? If we can help somebody’s reputation (page rank, etc.), and help people gain attention, such as traffic which leads to money (ads), then we’ve got a business. This is something that Chris Johnson over at GenuineChris has done successfully in order to leave the mortgage industry rat-race and become a freelancer. In this case free as in freedom.