Monday, 14 April 2008

FREEconomics?

The web is revolutionising the world...
We have so much information at our fingertips, and soo many services, all for FREE...
How do web companies afford to give away soo much for free?
How does this work? Why is this happening?
How is the web changing business and economic models?
And more importantly, how can one kick ass in the "free" world?

In
a brilliant article, Chris Anderson, Editor of Wired Magazine answers these questions and more...

My "free" notes...

The Traditional Free...

Gillete invented "The Cross Subsidy", by giving away razors for free and making money on disposable blades...
They shift the costs from one product to another...Give away the cell phone, sell the monthly plan; make the videogame console cheap and sell expensive games; install fancy coffeemakers in offices at no charge so you can sell managers expensive coffee sachets.

The New Free..

There's a freeky new model emerging based on the fact that the cost of products themselves is falling fast.

Bandwidth, storage and processing power are becoming cheaper and cheaper..."too cheap to meter". The web is all about scale... and the falling prices are bringing the marginal costs of technology, from the point of view of individual consumer consumption closer and closer to zero.

Different models of Free...

Technology is giving companies greater flexibility in how broadly they can define their markets, allowing them more freedom to give away products or services to one set of customers while selling to another set. Every business that touches digital networks feels the effect of falling costs. Practically everything Web technology touches starts down the path to gratis, at least as far as we consumers are concerned.

Between new ways companies have found to subsidize products and the falling cost of doing business in a digital age, the opportunities to adopt a free business model of some sort have never been greater...

· "Freemium"
What's free: Web software and services, some content. Free to whom: users of the basic version.
(think Flickr and the $25-a-year Flickr Pro).
· Advertising
What's free: content, services, software, and more. Free to whom: everyone.
(pay-per-click text ads, pay-per-page-view banner adds)
· Cross-subsidies
What's free: any product that entices you to pay for something else. Free to whom: everyone willing to pay eventually, one way or another.
(give away the cell phone, make money on the plan)
· Zero marginal cost
What's free: things that can be distributed without an appreciable cost to anyone. Free to whom: everyone.
(online distribution of music)
· Labor exchange
What's free: Web sites and services. Free to whom: all users, since the act of using these sites and services actually creates something of value.
(rating stories on Digg, voting on Yahoo Answers, or
using Google's 411 service)
· Gift economy
What's free: the whole enchilada, be it open source software or user-generated content. Free to whom: everyone.
(Wikipedia!)

Ok... But where's the money!?

To follow the money, you have to shift from a basic view of a market as a matching of two parties — buyers and sellers — to a broader sense of an ecosystem with many parties, only some of which exchange cash. The most common of the economies built around free is the three-party system. Here a third party pays to participate in a market created by a free exchange between the first two parties.

In the traditional media model, a publisher provides a product free (or nearly free) to onsumers, and advertisers pay to ride along. Radio is "free to air," and so is much of television. Likewise, newspaper and magazine publishers don't charge readers anything close to the actual cost of creating, printing, and distributing their products. They're not selling papers and magazines to
readers, they're selling readers to advertisers. It's a three-way market.

What about the Economics?!

Look at any traditional Economics text, and it will tell you that Economics is "the social science of choice under scarcity." But in this "free" world of falling costs, money isn't that scarce anymore...

What then? This is where the concept of "externalities" comes in. This concept holds that money is not the only scarcity in the world. Chief among the others are your time and respect, two factors that we've always known about but have only recently been able to measure properly. Thanks to Google, we now have a handy way to convert from reputation (PageRank) to attention (traffic) to money (ads). Anything you can consistently convert to cash is a form of currency itself, and Google plays the role of central banker for these new economies of "attention" and "reputation".

There is, presumably, a limited supply of reputation and attention in the world at any point in time. These are the new scarcities — and the world of free exists mostly to acquire these valuable assets for the sake of a business model to be identified later.

Free shifts the economy from a focus on only that which can be quantified in dollars and cents to a more realistic accounting of all the things we truly value today.

Marketing in the Free World...

Seth Godin says that "The most precious commodity on a momentary basis is attention."

If you want someone's attention, you're going to have to earn it. To pay for it. To do something that makes the person who just gave you this attention feel like a fair bargain was struck. You can do that by creating a remarkable service or product. You can do it by paying them with cash. Or you can do it with free. Free undermines the typical human's proclivity to ignore every offer. Even if it's a penny, we'll ignore it. Buying attention becomes a marketing expense.

Chris Anderson notes that...

From the consumer's perspective, 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...

...Zero is one market and any other price is another. In many cases, that's the difference between a great market and none at all.

Seth adds...

The interesting thing about most products and services is that we won't buy them until we know what they are and what they do. And often the best and only way to do that is to use them. For some products (like music) using them once and owning them are very close to the same thing. Hence, free. You can view that as a problem or you can see it as an opportunity. Up to you.

Marketing is not advertising, not any more. It is often found in the way you make something, talk about it and yes, price it.

1 Comment:

Anonymous said...

excellent !