Free – is not a business model

Firstly – I’ll start by saying I think Chris Anderson is an incredibly clever guy. I thought his book ‘The Long Tail’ was and is the future of business. But when it come to ‘free’ he has got it wrong this time. As has Seth Godin and all the other ‘free’ converts.

As Malcolm Gladwell correctly points out, they are forgetting many of the fundamentals in business, by getting caught up in the stale newspaper argument, which in the new digital economy, is the easy and soft target of who will disappear. The irony of this ‘newspaper’ argument is certainly lost in the broader economy. The non digital economies are a lot bigger than newspapers and other beleaguered digital industries.

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So why is it that ‘Free’ is not a business model. Quite simply, any business without a revenue generation model wont exist over time. We only need look at the the dot com bust of the late 1990’s to see this reality. It’s also much too easy to get caught up in the success of Google and others which ‘started free’ to build demand. But many of the subsequent ‘Free’ offers like Youtube, Facebook, Myspace, Flickr may have been successful for the owners, only because they sold to a business with a large chequebook – not because the business itself was financially successful. The Google business model is not too dissimilar to that of Network TV – generate eyeballs, sell advertising….. Nothing new here.

The real question in the so called ‘Freeconomy’ is how many businesses can be supported by the advertising sales model? So why the idea of ‘Free’ is being touted as new is beyond us here at Startupblog.

Here’s what ‘Free’ really is – it’s part of the marketing mix. It’s the 4th P – Promotion. It always has been and always will be. Anything a company gives away for free is a promotional tool to sell something. If these businesses who use the so called ‘free model’ fail to sell something there are only two options for them as time passes:

  1. Go broke & run out of cash
  2. Get bought by large company who values what they have created, albeit ‘non-financial’

Whether it be Proctor & Gamble, giving free shampoo in letter boxes in 1957 or Google giving free search and maps in 2009. It’s part of the mix to attract potential customers, who will be converted into on going revenue. It isn’t free. Free is not a business model, moreover it’s sampling & promotion for associated revenue generating activities. So to call it the future of business as ‘free’ is absolute folly.

Sure Anderson can argue that digital stuff is becoming so cheap it may as well be free – as per the transistor example he uses. But the thing that really costs money is building demand and infrastructure – the kind of stuff that’s really expensive. The other point to consider is the example of some things which previously cost money (a newspaper) is now available free on line, doesn’t mean everything is heading down the free path. Rather it means that certain industries are dying – not that ‘paying’ will be a thing of the past. In fact there are just as many examples of items which were once free, consumers are now being charged for Education, Toll roads, Water, Seeds.

The advice I’m giving here is simple.

No business can survive without revenue. Free, isn’t free, but a promotional expense, the 4th P. If your industry is getting flooded with free – it’s on it’s deathbed – look elsewhere. Industries die all the time when the revenue dries up just like those trying to cope with the current digital conversion. Don’t assume you can build something awesome and give it away with the ability to sell it (the business) or something associated later – chances are you’ll run out of money before that.

The future of business isn’t Free, and the idea isn’t new, it’s part of a complex marketing mix. And if you want to own a startup to thrive, my advice is simple. Have a price which isn’t all zeros.


21 Comments Free – is not a business model

  1. Guy LeCharles Gonzalez

    Great post. Anderson has quite the PT Barnum routine going with FREE, and there are a surprising number of people buying into it. Gladwell absolutely decimated the book’s flimsy premise and I’m seeing a lot of similar reactions, like yours and mine, that agree with him — but I suspect it won’t do much to hinder his book sales or speaking gigs.

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  3. Rags Srinivasan

    You are correct in saying free has a role – only as a marketing tactic. My objections are along those lines and I am against calling free as the business model or “part of the business model”. If Mr. Anderson were to say, “make it free by all means as long as that option delivers the best possible profits among all other available options to you”, then it makes sense. But he seem to be stating free or freemium as the only option.

    I also find problems with his arguments based on marginal cost. Costs do not matter in pricing – you price based on value you add to different customers.

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  7. sahdev thakur

    The rules of economics have not changed: create something of value for people who will pay for it.

    We all like free and free is definite way future in some respect. What we are seeing is people are not ready to pay upfront, until they see that there is something in for them and are willing to share income if they are getting something out of it.

    So will free & sharing be the future business model?

  8. Andre Sammartino

    Rags, costs do matter in pricing. Willingness to pay determines the upper bound on what you can charge and costs the lower bound…

    You need to know your costs so you can work out if this price will be profitable…

    Of course, the unit nature of price and the “lumpiness” of costs is what makes it complicated, uncertain and risky.

    But in the end you will only survive (i.e. be profitable) beyond the short term by finding price point(s) where total revenue exceeds total costs…

  9. Rags Srinivasan

    Andre – yes costs matter only to the extent you mentioned (that is what meant). Knowing your costs and the price the market will bear helps find if a venture is profitable or not. Willingness to pay is not a fixed upper bound , most people do not know the value they get or their WTP is pulled lower than value they get due to low reference price. Hence consumers have a low or high WTP. A marketer’s role is communicating the relevant value proposition to capture consumers’ true WTP.
    My argument on costs was that the fact that MC=0 does not mean price should be $0.
    Besides Mr.Anderson and most people incorrectly compute MC as they tend to ignore opportunity costs.

  10. Sanjay Mehta

    Interesting argument.
    The other way to look at this is the example of the original Sony Walkman.
    Engineers in Sony thought that they should charge perhaps a $1000 for it.
    Akio Morita figured that customers will not pay anything more than $100 and insisted that it be sold for nothing more than $100.

    Relating back here, you may LIKE to charge say, $1 for your content.
    But if there are no takers at that price, and content is all you know to do, what choice do you have? Can you then examine models where you can still do content, and make money in other ways? That is the concept that Andersen proposes, and which is where a lot of industry finds itself.

    It is easy to say that they must charge some amount – people should be willing to pay that amount!

    It is easy to say that if you cannot get paid, yours is a dying industry. Well, what if you don’t know anything else to do, do you starve yourself to death, or see if there is a model that can be constructed still??

    Just a counterpoint.. !

  11. Sachin

    Personally, I think it is perfectly fine for people to take the main point of your idea from some experiments and build on it. It is now always to see a revenue as the first dish on your plate. Facebook changes thr way of revenue generation by including many things instead of just adds.

    Gmail is free for many of us, but for enterprise they charge. Who knows gmail starts a subscription, the same way what did.

    2. facebook start charging thr developers and share revenues like apple for the apps they make. Now this is not an add model… Read More

    3. free is not a business, but definitely it is the source of business. Radio to consumer is free but for them they generate the revenue by ads and many more sources.

    4. Depends on your model. facebook was something which happened, was never planned, but the data it will have must have some values. And the source of data is we -the free user

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  13. Steve

    I’m amazed by how many bloggers are supporting Gladwell here! I read Anderson and didn’t much like his post, read Gladwell and thought it was even dumber.. then was taken aback by how perfectly Godin captured my sentiments.

    “No business can survive without revenue.”

    Talking about attacking a straw man!

    “Here’s what ‘Free’ really is – it’s part of the marketing mix.”

    No. It can also consist of offering a product to those formerly known as “consumers” in return for their services. They’re paying you in attention. Netflix, Amazon, (yes, Google) and numerous other successful companies are bathing in the success of this principle.

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  16. Tim

    But…didn’t you just say you’re giving them stuff for nothing.

    So, you get their attention, then what?

    Steve is right, it’s part of your promotion (sign up to mailing list, freemium, building trust, thought leadership, whatever).

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