February 25th, 2008
The Economics of Free and the 50/50 Enterprise
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Quick Summary: In today’s attention-scarce economy, where freebies have become the cost of entry, enterprises need to strike the right balance between giving away freebies to get attention and retaining the ability to eventually monetize the attention.
This post was inspired by a thought-provoking post by Piers Fawkes on free versus paid social networks (via Valeria Maltoni). Piers compares his experiences with a not-for-profit (Likemind) and a for-profit (The Purple List) social network and concludes that –
To leverage the opportunities that digital connectivity has fueled a company should be a 50/50 corporation. 50% about being social, 50% about making profit.
In our attention-scarce economy, consumers demand freebies in exchange for their attention. Enterprises give away freebies in the form of free content, or, in some cases, even free products, in the hope that they will get their customers’ attention, build lock-in, and eventually charge for value-added services. In an earlier post, I have called this trade-off the economics of free –
Therefore, Piers’ idea of the 50/50 Enterprise itself is not new. What is new is his insight that unless you decide upfront, and let your customers know upfront, that your enterprise has both free and paid elements, you may not be able to charge for the paid elements.
This insight has some interesting implications for enterprises — this is the reason why blogs, or even books, don’t necessarily lead to paid consulting/ speaking gigs (think of the millions of wannabe management gurus), this is the reason why social contacts are difficult to leverage into business opportunities (think of multi-level marketing), this is the reason why social networks are so difficult to monetize (think of Facebook Beacon).
So, here’s the big idea — in today’s attention-scarce economy, where freebies have become the cost of entry, enterprises need to strike the right balance between giving away freebies to get attention and retaining the ability to eventually monetize the attention.
How to do that is going to be the next billion dollar question.
Almost on cue, I came across Chris Andersen’s brilliant article Free! Why $0.00 Is the Future of Business in Wired.
In the article, Chris Andersen identifies six types of enterprises based on the economics of free –
- Freemium:- Give away a free basic version to 99% of the users; charge 1% of the users for a premium version.
- Advertising:- Give away content and services for free to build user base; charge advertisers on the basis of pay per view/ click/ post/ subscription/ connection.
- Cross-Subsidies:- Give away content, and even products, for free to build lock-in and charge for bundled services.
- Zero Marginal Cost:- Give away things for free, because the cost of distribution is zero, and you basically have no choice.
- Labour Exchanges:- Give away content and services for free in exchange for user information that is useful in improving the service or otherwise.
- Gift Economy: Give away things for free, with a spirit of sharing without a profit motive.
Chris Andersen says that the only real scarcities in the economics of free are reputation and attention.
In summary, the economics of free has a user’s perspective –
Free content -> Free products -> Paid bundled-in services ($$$)
– and an enterprise perspective –
Build reputation -> Build attention -> Monetize attention ($$$)
If you add to it Piers’ insight that enterprises need to tell users upfront that they intend to monetize their attention, you just might have the answer to the billion dollar question of how to make money in the economics of free.
