Lots of people are writing about the economic secret that is the free pricepoint:
As Anderson himself says, “I’ve got a lot of kids and college isn’t getting any cheaper.” His own strategy, one outlined by Dyson way back when, is to charge little or nothing for his writing and use it to generate lucrative speaking gigs. “You can read a copy of this book online (abundant, commodity information) for free,” he writes (not noting that the free offer expires shortly after the printed book’s publication), “but if you want me to fly to your city and prepare a custom talk on Free as it applies to your business, I’ll be happy to, but you’re going to have to pay me for my (scarce) time.”
But much of the debate is only on a philosophical level by career journalists trying to make extreme claims to get enough publicity to justify overpriced corporate speech fees. Hey, it worked for Tim!
The problem is that even when you look at the canonical examples for the argument for free, they don’t always follow suit.
Is Google “Free”?
During an upgrade test of their Google Apps landing page (attempting to improve conversion rates on the PAID version) Google “accidentally” lost the link to the free version. After that issue got exposure the link came back, but it still shows the limits of free. The free option becomes more obtuse/confusing/obscure to make the paid option more appealing.
Free Can Be a Dangerous Word
Free is only free when you ignore the hidden costs!
McAfee analyzed the first five search results pages of 2,600 popular keywords across five search engines: Google, Yahoo, Live, AOL, and Ask. They analyzed both organic and paid listings and counted the number of links that led to pages that McAfee’s SiteAdvisor tool flagged as dangerous. The study ultimately reviewed more than 413,000 unique URLs.
McAfee’s study also found that certain categories of keywords were more riskier than others. Searches related to “lyrics” and “free” had both the highest average risk and highest maximum risk.
Tragedy of the Commons
Free is good at gaining awareness & distribution and in commoditizing competing products & services. Free also works if you are creating a platform you want others to build off. But it also sets the barrier to entry really low. Either you want to have meaningful value added relationships with paying customers or you don’t. When you mix free and paid too closely the free people provide so much pollution that they destroy value.
- look at the blog comments on any dofollow internet marketing blogs that do not require registration
- look at the free SEO forums that have been polluted to bits, some of which where people sell stuff they don’t have permission to sell
- consider how Google ended supporting their free search API in flavor of promoting a useless one.
- URL shortening services removed a bit of friction and became a huge spam tool
Free often promotes classic cases of the tragedy of the commons.
Many people point at Wikipedia as a sign of the future. But Wikipedia takes content with significant costs, rewrite and/or directly plagiarizes it, and then wrap it in Wikipedia goodness. Unsurprisingly, the book Free re-wrapped a lot of Wikipedia in a hardcover and sold it for $27 (without attribution, naturally). Copyfraud for the win!!!
It is basic hedonistic economics 101: everything should be free except whatever pays ***my*** income. 😉
The Next Big Thing
Free quickly escalates a business up the user adoption curve, but it also leaves the business vulnerable because it is hard to build deep relationships, continue to add value, remove marketplace friction, stop spam, and do it all for free. As a free company gets bloated it creates opportunity for the next big thing:
There will always be a company that replaces you. At some point your BlackSwan competitor will appear and they will kick your ass. Their product will be better or more interesting or just better marketed than yours, and it also will be free. They will be Facebook to your Myspace, or Myspace to your Friendster or Google to your Yahoo. You get the point. Someone out there with a better idea will raise a bunch of money, give it away for free, build scale and charge less to reach the audience. Or will be differentiated enough, and important enough to the audience to maybe even charge more. Who knows. But they will kick your ass and you will be in trouble.
Most People are Short Term Focused & Greedy
Not only does free suck as a sustainable business strategy, but donation based systems rarely work well because most people feel entitled and ignore reality until it smacks them in the face. In the grocery store a few weeks ago I gave $5 for colon cancer research and the cashier was floored and wanted to announce it. Something that a huge portion of people will have problems with is not worth giving $5 for unless we can see the immediate return. Meanwhile the crooked US healthcare system charges you 10x normal rates if you don’t have health insurance. Pay up, now or later!
Activate the mindset on the free pricepoint and entitlement comes about. And the perception of value is lower.
I remember an email I got about 6 months ago about a blog post I offered 18 months or so ago where I gave people free personalized SEO tips. The person commented in the email that most of the people who got the advice never implemented any of it. And why would they respect it? They got it free so they assumed it was worthless. Basic economics I guess.
If it is free people assume it lacks value and that you owe them free support.
At some point after you have enough exposure it makes sense to erect barriers to entry to cleanse the bottom 10% to 20% from your pool of potential customers. Will some of them complain? Absolutely. But in many cases they were not going to have a positive business or social value anyhow. Better to cleanse them out early than waste hours of your life dealing with those types of people.
What is a “User”?
Last week 1 person wrote a blog post about how I lost them as a free user when I required logging in to download our Firefox extensions. This person already had a free user account but did not remember their password and was too lazy to do a password reset. They wrote about “that’s where you lost me as a user” to which Sugarrae responded “And who cares. You’re a USER. Customers are who make him money. Considering you’re too lazy to reset a password and you believe you deserve this free tool as much as you deserve to breathe, you’ll never be worth keeping around from a business standpoint. People like you don’t go places.” Harsh, but true.
But with the lower costs come hidden costs.
Media relying on free means that it needs a lot of exposure to keeps the lights on. This increases noise, hype, misinformation, and investments in culturally constructed ignorance. The fair price for free knowledge will be lots of hidden costs. Most free news won’t be worth the price, but the trend has already been set. And the average person’s view of economics and media are short-sighted and simplistic.
Buy tech stocks. This time it’s different. Houses always go up in value forever.
Follow the crowd. Eye on the buzz. While most ad supported media is suffering, Gawker’s online gossip rag ad revenues are up 35% year on year.
Maybe some forms of structured knowledge like college textbooks and science publishing are due for some type of major disruption. But sifting through the garbage online is not getting easier (unless you are quite sophisticated). Especially when you consider that the tools to do so are aligned with advertisinginterests. Trusting machines that are set up to exploit your personal flaws is a non-trivial cost which you will likely never be able to understand fully or calculate.
Economics to the Rescue
Real relationships still have cost. Once you have an imbalance between supply and demand price is the natural way to sort it out. Make it better than free and charge for it. You can further segment by offering a variety of products & services across the price spectrum and packaging it for different markets.
There are plenty of people out of work with plenty of attention but not enough income to live on. What is holding back many of them is thinking that they have to do everything for free. The web rewards free stuff with recognition, comments, links, emails begging for free personalized consulting, and lots of other noise…but then what?
Maybe rather than debating free there should be a few more articles on how to build small work at home businesses using the web. And maybe a few more on how to transition “free” attention into real profits. That part is just assumed by the career journalists/speakers, but what do they ever sell beyond articles, books, and speeches? Not everyone is going to be able to give $50,000 corporate speaking gigs.
There are lots of legitimate ways to make money using the web, and they rarely get any coverage unless they are hyped or mischaracterized. Tell us how we can make a living shooting videos of our “mean kitty” and debate the philosophy of free. But then again what else should we expect from FREE media?
More: continued here