Monday, March 3, 2008

The Best Things in Life are Free

Have you thought about how many free (or near free) products and services you use in a day? Here are just a few examples.

  • Google – nearly all services used by consumers are free – from email to Picasa to GOOG-411.
  • News – you can’t even count the number of websites that give news away for free. Now there is an ongoing rise of *paper*-based newspapers and magazines distributing news for free too.
  • Web-based services – there’s everything from financial services to diet plans available.

For an impressive round-up of free (or near free) products and services in many categories check out this trend report from FREE LOVE.

Chris Anderson sums up this phenomenon of free in his article “Free! Why $0.00 Is the Future of Business” in Wired Magazine and also explains it in an interview with Ad Age. The cost of goods is becoming cheaper, and digital technology is experiencing this on a grand scale. As technology advances and bandwidth, storage, and processing power continue to increase (often for less than last year’s model), the cost of supporting additional users becomes more and more marginal.

Why would you offer something for free? Because money isn’t the only scarcity in an economy. So is attention (as Seth Godin points out). And, in a world where consumers have reached their saturation point, free gets attention. Free allows consumers to skip the cost-benefit analysis in terms of money. You still have to make a worthwhile offer though, because if you waste their attention and time, then consumers will be just as angry as if you had wasted their money.

As marketers, we instinctively understand some of this “value of free” – cross-subsidies, loss leaders or encouraging a first trial or purchase by offering a sample. As we forage into an increasingly digital world and costs move towards zero, we are challenged to explore new business models. My humble opinion is that this seems to work with online business models. Offering a service for free = more users on the site = more advertisers willing to buy in. Or offer a free version of a web-based service and a premium for-pay version that has more features, and the pay supports the free. There are overhead costs for servers, development, etc., but they are spread over thousands or even millions of users. So when you divide it out, the cost to support one more user is negligible.

Offline, this concept of free seems harder to grasp. Tangible freebies are costly to produce and distribute, and lots of marginal costs total to one big cost. The question becomes, how do we not only make up these costs, but *profit* from them? There are some companies that are out there working on this conundrum to offer their products and services for free or near free. For example, here’s how Ryanair offers near free air travel. The pie chart does a great job explaining how Ryanair meets the costs of their flights, but I have some issues with it and especially the explanation below it.

  1. Cut costs – this point makes sense to me. Boarding and disembarking from the tarmac and going to less-popular airports are smart moves to keep expenses down.
  2. Ramp up the ancillary fees – this irritates me. I do not want to be charged for using my credit card or checking my luggage or wanting a drink. And $3.50 for a bottle of water is an obscenity that’s mostly reserved for sporting events and theme parks. A fair question is do they really think that people aren’t going to realize where the profit is coming from and stop drinking the water? After all, they won’t fly out of the country for more than $100 so why in the world would they pay almost $4 for 12 ounces of water?
  3. Offset losses with higher fares – I suppose all airlines do this to some degree, charging a higher price for popular flight days. However, if the consumer is price conscious, and comes to Ryanair looking for a $20 flight, how often are they going to choose to fly on the more expensive days? Just from a mathematical standpoint, if 30% of your airline is ‘expensive’ and the remaining 70% is ‘average’. That high end 30% has to support a portion of average flights twice its size for the airline to profit. Which begs the question of how long do you feel you can pull a fast one on the high end customers?

What are your thoughts? Is $0.00 the future of business? What freebie models do you know that work? Which ones don’t seem to work?

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