October 20, 2014

The FREE Economy Debate: Battle of the Gurus

Free, the book by Chris AndersonChris Anderson’s new book, Free, is out.  And now the debate over business models such as “freemium” and marketing techniques involving free giveaways, has reached a temporary tsunami.

Anderson’s book FREE: The Future of a Radical Price, is about how you can make money by charging ZERO. He writes:

“People are making lots of money charging nothing. Not nothing for everything, but nothing for enough that we have essentially created an economy as big as a good-sized country around the price of $0.00. How did this happen and where is it going? That’s the central question of this book.”

The premise of the book is that you can give certain things away — charge $0.00 for them — and still make a profit. How? You just charge for other things “around” what you’ve given away.

Take for instance, a book. Anderson gives the example of how an author could write a book and give it away for free, and in so doing develop a larger readership. Then the author could earn from giving lectures about the book, teaching, consulting and other services.

For anyone who’s been in business for a while, this will sound familiar. “Loss leaders” and free giveaways are time-tested approaches to marketing. What MBA student hasn’t read about the Gillette strategy of giving away the razor (more or less) and charging for the razor blades? Anderson even covers it in the book. For small business owners, “free” is nothing new.

Anderson, however, makes it sound like the free of today is something radically new. In fact, he even calls it that in the book. He refers to Twentieth Century Free and distinguishes that from the “new” Twenty-First Century Free. What’s different?

Well if you buy Anderson’s view, what’s different is that the cost of producing and distributing digital goods and services has dropped to near zero. He writes:

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

Hmmm, why does this sound to me similar to the “New Economy” mantra of the DotCom days? Turns out, we didn’t have a new economy after all, as many a failed Dotcom entrepreneur discovered. Once the bubble burst, and we were no longer trading on stock market hype, entrepreneurs were faced with the realities of bringing enough money in the door to pay employees’ salaries and the electricity bill. Projections of future earnings didn’t amount to an ant hill if you didn’t have a sustainable business model in the long run, and cash flow in the short run.

Close to Zero? You be the Judge.

Malcolm Gladwell, in a devastatingly reasoned review of Anderson’s book, eviscerates Anderson’s thinking. Gladwell, himself the author of Tipping Point, uses logic to break down the examples given by Anderson, especially around the idea that digital technology costs are “close to zero.” For instance, he notes that Anderson’s own examples do not support his idea of a new economic model:

“The only problem is that in the middle of laying out what he sees as the new business model of the digital age Anderson is forced to admit that one of his main case studies, YouTube, ‘has so far failed to make any money for Google.’”

Gladwell goes on to point out that even if the cost of bandwidth is “close enough to free to round down” as Anderson asserts, YouTube’s bandwidth costs are still projected by Credit Suisse to be $360 Million in 2009, based on 75 billion downloads by consumers.  Hardly zero.

Gladwell also points out that Anderson, when claiming that costs have been reduced to close-to-zero, is only looking at part of the picture… that he is forgetting to count all costs. For instance, one of the examples used by Anderson goes something like this: What if nuclear power had been put in place instead of coal? Then the cost of your electricity would be almost free.” As Gladwell points out, there’s much more cost to running a utility business than the underlying raw material. There’s huge cost in building and running power plants and in distributing the electricity — costs that are ignored.

On top of that, it seems to me that the examples in the book work best as they relate to digital content businesses and Web businesses. They are not nearly as persuasive when you apply them to other types of businesses, especially those involving hard goods or labor-intensive services.

And then there’s Anderson’s own ambivalence. I’ve read the book completely online. It’s free over at Scribd, but only for a limited time and only, apparently, in the United States. You can’t download it as a PDF. As many others have commented, that leads you to suspect that Anderson is not as convinced of the money-making power of “free” as the book suggests.

Still, “Free” is Valuable

Nonetheless, the book is an easy enjoyable read that has detailed examples to get you thinking of ways to satisfy today’s customer’s desire for “free” and still make money. For instance:

  • He includes a list of 50 business models built upon “free”.
  • He also does a good job of analyzing the “freemium” model and gives good insights into how to make that work.
  • There are some valuable insights on the power of a free price tag, as opposed to charging even a penny.
  • There are numerous examples of real businesses you can draw on for ideas.
  • Perhaps the most valuable part of the book is its emphasis on how giving something away for “free” captures attention of prospective customers. That’s a huge principle in today’s marketing, because we’re all fighting for attention. In order to be able to market, we need to first get someone’s attention, and free is how to do that. That’s especially true when it comes to content producers, such as authors and musicians, and those with web-based products and services.

Don’t Get Distracted

However, it would have been better if these insights had not been pronounced a “new economic model.” Because as an economic model it runs up against reality.  The consumer’s desire for something for free only can go as far as a business’s ability to make a profit and stay in business. Once the two sides come into conflict, something has to give.

If you buy into this “new economic model” idea too completely, you could end up going down the wrong path in your business.

You may forget to focus enough on doing what businesses should do: make money and thrive. Look aggressively at incorporating free into your marketing strategy, yes. Just never forget that there’s cost involved in running a business, even if it’s your time. And at the end of the day, employees expect their paychecks. Landlords expect their rent. Capturing attention is only valuable if you can capitalize on it in your business, to make money.

As Mark Cuban says — he being no fan of the concept of “free”:

“If you are an entrepreneur and looking at starting a company, its VERY easy to put off the hard part. Which is generating sales for your company and making a profit.”

26 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

26 Reactions

  1. My new business model:

    Pay me what you can, when you can, until you no longer feel indebted to me.

    http://barkingunicorn.wordpress.com/about

    I’m worth twice what I used to charge, so far.

  2. Congrats to Barking Unicorn, but it sounds like Chris Anderson is taking some pretty heavy criticism with his conclusions. I have to agree that Free is a powerful offer, but there is no such thing as a free lunch either. At some point you have to monetize and turn a profit because even YouTube will get flushed if it doesn’t pull its weight.

  3. Right Robert, there’s no such thing as FREE. Anyway, this marketing strategy works for me. But it’s the other way around. The way I understand Mark’s approach is — you give something for free then later they will pay for additional services. Mine is the other way around. You pay for a certain service and get an additional service for free. It seems free to the consumers but actually, they already have paid too for that add-on services.

  4. Very interesting info. We’ve just got to remember that the notion of FREE does not exactly exist.

  5. Rose gives a good example of how free is worked into a strategy. One of the best examples that has been around for years is the idea of Free Sample used by comestic and companies selling products. Same idea is used by software companies with free trials. All of these give just enough away to get a potential customer in the habit of using it which lessens the purchase risk of buying the full size product.

    In services we sometimes make the mistake of giving things away free that has a “one off use” and then think the customer will automatically pay for additional services. Much harder way to make money.

  6. That should have read cosmetic companies and companies selling products.

  7. I love the articles and books that Chris Anderson has done. And I’m eager to read this one. I’ve even read some of the arguments counter to Anderson’s hypotheses (including a great piece some time back in the Harvard Business Review). I appreciate your balanced approach to this review and closing with Mark Cuban’s sage advice…

    Even the companies that tout free as a model, have an underlying profit model. Free is always a strategy, not an end goal and I have a hard time imagining any entrepreneur or business owner worth their salt who doesn’t think about profitable sales.

  8. Anita,

    Great review. You have really gone to the bottom with this free economy debate.

    I wrote the following ending in an email to Chris Anderson in order to get a free review copy that he announced on his site:

    “–Screw that GPA crap! I deserve the book because of…” (Chris Anderson’s standard text)

    “TANSTAAFL” –
    http://www.answers.com/topic/tanstaafl” (My line.)

    Nota Bene: It was Christ Anderson’s standard text I used in the first sentence. Personally, I don’t use that kind of language. ;)

  9. By the way: I didn’t get an answer from Chris Anderson…

    I think that Chris Anderson will get speaking engagements, material for his Long Tail site and Wired, etc. due to this debate around the book.

    Anita Campbell: “Then the author could earn from giving lectures about the book, teaching, consulting and other services.”

    If you really want to have a free book alternative, I recommend you to check out Stefan Engeseth’s book, “The Fall of PR and the Rise of Advertising”. You could download it for free (PDF version) on his site, DetectiveMarketing.com. He gave away 10,000 copies of the book at the Cannes Lions International Advertising Festival.

  10. To borrow a phrase, nothing is free unless everything is free!

  11. One of the keys to creating online business magazines is the research that you do. Whenever you decide to enter a new niche and are working on creating online business magazines, you must absolutely know what is happening within that niche. That is a critical step that many people often forget

  12. Interesting article. The economy also plays a large part in the ‘free’ model.

    Low inflation creates a lot of competitors and options for consumers, which creates more of a need for companies to get the attention of consumers. Also, a booming economy with low inflation lowers costs of products, leading to the products that can be products at almost zero costs.

    A deep recession, like the one we are facing, reverses all these things and the ‘free’ model will disappear within a few years. Products will be in short supply and consumers will not have many options and businesses will not need to give anything away to get the attention of consumers.

    Free Products are Toast
    http://www.pennyjobs.com/pp/public/Articles.aspx?aid=36

  13. Free isn’t a biusiness model, it’s a marketing strategy, and like any other marketing strategy it costs money. Free can create quite a bit of attention, but in the end there has to be products and services that are able to command the revenue needed to cover the costs of free.

  14. Chris Anderson, to his credit, has entertained the debate, the criticisms, and a range of ideas deploring his discussions around the Long Tail and now Free. He is a big boy and can defend himself, but I appreciate his transparency and efforts. Not that anyone here is saying to the contrary.

    At Wired (which he largely guides), he had a piece that commented and discussed the Harvard Business Review article and comments. That article is found here at:
    http://www.longtail.com/the_long_tail/2008/06/excellent-hbr-p.html

    And the original HBR article is found here, but you may only be able to read excerpts/exec summary if you are not a member/subscriber:
    http://hbr.harvardbusiness.org/2008/07/should-you-invest-in-the-long-tail/ar/1

    Both worth a read. But, but, then come back and post some of your learning and comments here so we can have an ever-more lively discussion and learn how to make these ideas work for small biz.

  15. Thanks for the mention Susan.

  16. I am with Malcolm on this. Free is ok, however, only a client who has paid for something is a really qualified customer.
    The guys book tour was probably sponsored in order for him to offer the book free at a pdf.

    Also, he never offered the book free as a real book!

    Dr. Letitia Wright
    The Wright Place TV Show
    http://wrightplacetv.com
    http://www.twitter.com/drwright1

  17. Anita,
    Is anyone who reads this starting to get resentful that they have to {If they choose} give away a lot of their own stuff for free?

    Isn’t your expertise worth something? if everything is fro free, how do you compete/

    Example;

    “My eBook is “freer” than yours?

    Sometimes this free stuff gets really old.

    A loss leader is fine, and giving away an occasional tidbit, or even an occasional bite-sized piece of material is fine too, but when does it stop?

    The Franchise King
    Joel Libava

  18. Well I suspect that nothing is really free and that Chris Anderson is really tapping into the psychology of using the word ‘free’ in his writings. Smart but is it real?

  19. Nothing is free, this appears to be true, in business anyway. But there are so many prime, useful, examples of how free drives business. I feel like many take issue with Anderson’s book and concepts, but miss the point. The lower cost of goods made possible by various technologies and other innovations make it possible to do powerful things with lower risk. That’s the point, i think.

    Zappos offers free shipping, both ways. Yes, it comes with a cost to them, but the new business and referrals they win is quantifiably (is that a word?) greater with the approach than without.

    Many web based services offer free trials. And some keep free subscription options because they know just a few premium subs pay the bills.

    Sweet Tea, just profiled in Inc. magazine, spends 8% of gross sales on Free tea samples and it is the biggest piece of their marketing budget. People simply want to try it, to taste it, to sample it.

    David Meerman Scott, of New Rules of PR, did some pretty amazing things with his book and free chapters. Drove more sales, drove speaking opps. http://davidmeermanscott.com/

    Costco does it. Twitter does. Facebook does. The list goes on. No one, not even Anderson, says FREE forever is the model, just free for a while or for part of your biz. I don’t understand why we are taking issue with free as a model, a strategy, an approach. It works.

    My opinion only: Not just here, but other places, people are getting lost in the semantics and missing the point. Lots of nimble, new, small, established companies are leveraging what Anderson is writing about.

    What I took from Anita’s post here: Use the smart parts, delete the rest. Let’s help one another use it for success.

  20. Interesting concept. Great post.

  21. Just cant stop my self to comment on your blog. Good post.

  22. Anita,
    Your post from last year answers many of the comments made in this one (some from me!). Here’s a brief mention from that excellent post that inspired me last year and again now. Stay true to your cash flow!
    TJ
    p.s. Scroll down all the way in this comment to get to Skype post which illustrates a winning approach.

    From Anita’s 2008 post:
    “Don’t Confuse Marketing with Being in Business

    “Business owners intent on making their businesses viable and successful, know that at the end of the day more money has to come in than goes out. Entrepreneurs have known that since time immemorial — since the first entrepreneur caveman offered that “buy-one-woolly-mammoth-tusk-get one-free” offer and expected more sabre-tooth tiger pelts in return.

    “Wise business owners never forget that there’s a price to be paid for every single thing a small business provides — if you want to stay in business and provide a living for yourself and your employees.”

    Original found here:
    http://smallbiztrends.com/2008/07/free-economy-nothing-new-say-business-owners.html

    Plus this post on Skype really pulls together what Free can be…
    http://smallbiztrends.com/2009/04/skype-free-business-model-drives-revenue.html

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