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Free Economy? Nothing New Say Business Owners

Caveman - buy one get one freeChris Anderson, author of the Long Tail, wrote a thought-provoking article yesterday quantifying the dollars being made around the “free” economy [1]. He pegs it at $300 Billion worldwide.

I’d say it’s much bigger than that.

In fact, in the stream of commerce, all free things are somehow related to money-making ventures.

You can’t separate them, because there are no products or services that are truly free.

No Such Thing as a Free Lunch

Somewhere along the line someone has to pay for everything. (For purposes of this article, we’ll exclude charity and services among family and friends — let’s talk strictly about business here.)

You may not see it at first glance, but look harder. Someone or some entity is footing the bill for that free product or service.

Small business owners know this at a fundamental level. We know that more money has to come in than goes out. You can’t run a business at a deficit for long.

Business Owners Intuitively Understand the Economics of Free

An event I attended yesterday illustrated this point in clear detail. It was a visioning workshop with 18 women business owners planning to grow their businesses to $1 million in annual revenues.

As each owner discussed her business model in turn, I was struck by how many of those business models included offering something for free. Among the free offerings: seminars, free trials, free samples, buy-one get one-free offers, podcasts, free installation, blogs, ebooks and newsletters.

Sometimes it wasn’t necessarily offering something for free, but offering it at lower than the cost to create it. There the offering was designed to generate leads or attract sales of a higher-margin item — a loss leader.

One business was advertiser-supported. It gets its business costs paid by one party in order to provide something at no cost to others. Also discussed several times were the freemium business models … of say, offering a service level for free along with premium paid levels.

And of course, implicit in many business models is that you pay for one thing, and get something else (technical support or installation or delivery) “for free.”

Each business owner  who mentioned a free offering, tended in the next breath to quantify where and how she would recoup the cost of providing that free product or service. In other words, each business owner intuitively understood: everything must be paid for. Somewhere, somehow, she as the business owner had to find the funds in the business to pay for that free offering. Whether the end customer had to pay for that precise item was a separate issue.

Even the workshop moderator, Norma Rist [2], essentially worked for free yesterday — but not really. Although everyone paid a small fee of $15 to attend, that only covered the cost of coffee, orange juice, bagels, cups, plastic knives, napkins and the like. Yes, the moderator gave away her time generously, yet, as a businesswoman certainly had to view it as an investment.

Perhaps it was an investment to attract paying clients to her coaching practice at some future point. Maybe it was to enhance her professional reputation through the word of mouth those business owners in attendance will be spreading. Or perhaps she did it simply to enhance the customer satisfaction of, and build goodwill with, several existing clients who attended.

Free is Not New, Not Innovative

“Free” in the stream of commerce is not new and, by itself, not innovative. The difference is that today we’re just more aware of and better at using “free” as a marketing approach.

Today we give business model concepts catchy names like “freemium [3]” so that they are memorable. We discuss them in public venues like the Web. Twenty years ago such an idea would not have been spread so widely and openly.

We may even create more “free” offers. Why? Customers are more savvy and have come to expect certain things to be delivered “for free.”

We’re also more sophisticated today as a business culture. Business owners today tend to realize that the payback for giving something away for free may come indirectly (say, in developing a reputation as a sought-after expert, or building deep loyalty from customers). Or the payback may be deferred until some later date (say, 12 months from now when your “free social networking” company is acquired by a Fortune 1000 buyer).

You have only to look at the number of millionaires — ahem, billionaires — who got rich from providing services and products “for free.” The Google founders, the Skype founders, the Blogger.com founders, and countless Web 2.0 entrepreneurs come to mind. They didn’t get rich because charities gave them money or because the laws of economics changed. They got rich because they found a way to make money while giving something away for free, whether it’s by selling AdWords, or whether it it is by selling their company for millions of dollars, or some other way.

No, the basic concept of free is not new, just our awareness of it and the extent/ways to which we use it in business.

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.

Tip: you can position an offering to the world as free to the end user. But that’s a matter of your choice of business model and marketing positioning.

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.