Make Bank … by Giving It Away

Free the future of a radical price

Book Review
Free: The Future of a Radical Price.
By Chris Anderson
Hyperion books, 2009.  274 pages.

NPR reported this morning that Microsoft will soon offer free web based versions of some of its software programs, including word processing and spreadsheets.

Why would Microsoft  give anything away free? After all, about 80 percent of business uses Microsoft Office.

Their decision has as much to do with mindshare as much as market share, says NPR commentator  Mario Armstrong.

More people are using Google Docs, a free online application, for collaborative word processing. The software exists not in your computer, but on the internet.

MS needs to show it can be an online presence, Armstrong says.  If people get used to free alternatives and MS does not have a complementary service, people will forget about MS:  MS could become unnecessary.

OK, but how does Google make money with online free apps?  They are still trying to figure that out.

But companies are making money with Free. Chris Anderson lists 50 ways they do that in Free: The Future of a Radical Price.

While the last century’s Free was a powerful marketing method, this century’s Free is an entirely new economic model, Anderson says.  The new form of Free is not a gimmick, not just a trick to shift money from one pocket to another. Instead, it’s driven by an extraordinary ability of bits and bytes to lower the costs of goods and services close to zero.

The most disruptive way to enter a market is to vaporize the economics of existing business models, Anderson says. Charge nothing for a product that the incumbents depend on for their profits (e.g., a web browser, photo imaging software). The world will beat a path to your door. And then you can sell them something else.

The Firefox browser continues to gain on Microsoft’s IE (it now has about 30 percent of the market). Mozilla, the nonprofit company that makes it, funds the browser’s development almost entirely with a cut of Google’s ad revenues. When people use Firefox for search, they get Google’s search results page. Mozilla’s staff is fewer than a hundred people, yet it’s running circles around Microsoft’s browser team, Anderson says. It’s another business built on Free, no tie-in to a commercial operating system required.

Free is easier for newcomers than for incumbents because the incumbents haven a revenue stream that they’re in danger of cannibalizing. They also have a lot more users, and the costs of serving millions of customers can be astronomical.

Anderson describes how Free has changed the world of advertising. The old broadcast model was: Annoy the 90 percent of your audience that’s not interested in your product to reach the 10 percent who might be.  The Google model is just the opposite: Use software to show your ad only to the people for whom it’s most relevant. Annoy just the 10 percent of the audience who isn’t interested to reach the 90 percent who might be.  Google has redefined advertising—connecting products with expressed desires.

Anderson cautions that Free is not a magic bullet. Giving away what you do will not make you rich by itself. You have to think creatively about how to convert into cash the reputation and attention you can get from Free.

But remember that people will pay to save time. People will pay to lower risk. People will pay for things the love. People will pay for status. People will pay if you make them (once they’re hooked). Free opens doors and reaches new consumers, Anderson says. With today’s economies of scale, you can make plenty of money by charging just a small fraction of them.

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2 Responses to Make Bank … by Giving It Away

  1. Andrew says:

    Interesting post. Here’s an article I read by Chris Anderson on Wired.com on the same topic: http://www.wired.com/techbiz/it/magazine/16-03/ff_free

    Also reminds me of Wikinomics by Don Tapscott.

    I think free is making more and more sense. The obvious question then is, “ok, so how DO I make money,” especially considering the 1 Percent Rule–“1 percent of users support all the rest.”

    • paul says:

      Hi Andrew. This book is apparently an outgrowth of that article and subsequent thought. I’m not an economist, but I too enjoy reading books like The Long Tail and Wikinomics, because the writing is clear and powerful.

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