16 Temmuz 2019 Salı

The summary of "Free"

Dear Friends,

I would like to make the summary of one of the NYT Best Seller book today. The name of the book is "Free". It was written by Chris Anderson. The brief message in the book is "the different business models around giving aways of the products or services (in other words; offering your products free to the public) to retain existing customers or build new customer bases".

If we were asked about a free business model, most probably we would answer it is impossible. However, in the book, there are several examples of different business models where you can make profit despite your offerings are free. Even, it would be more profitable if you give things away than you charge for it.  

I am sure we are all familiar with free business models. Although it leads us to a paradox of charging nothing but making huge profits, we see them everywhere. We will question and investigate how this happens. 

Before starting, we need to understand the impact of the word free on the consumers' minds. Free is a word with an extraordinary ability to reset consumer psychology, create new markets, break old ones and make almost all products attractive. Plus, Free does not mean profitless. It just meant that the route from product to revenue is indirect. If you are really interested in consumer buying psychology, you also need to read Predictably Irrational which was written by Dan Ariely.  

As I told you before, we are well familiar with free business models. Now, we can show different kinds of them.

Free-1: Direct cross-subsidies

For example, Wal-Mart offers a buy one get on free deal on DVDs. It is certain that it is loss for the merchant. However, since the customer is attracted by the deal, the shop wants to sell profitable goods to the consumers as they enter the shop. Therefore, the companies try to keep some products or services free, to make the other product offerings more attractive. 

Free-2: The Three Party Market

There is an exchange of value between the supplier and the consumer. The supplier is ready to give this value to the consumer where a third party subsidizes it. For example, the free mobile apps are very often used by the consumers to get information, play games or track health data and so on. The publisher doesn't charge anything to the consumer, since the advertisers are in the apps to show their products to the consumers. The publisher is paid by the advertiser and the consumer is happy to see the ads if they are not charged any fee for the app. 

Free-3: Freemium 

Freemium business models can vary from trial to full or free version to premium version. The consumers are using the basic functions and if they are happy they open the premium version with fee. Or, they are using the product with all services but for a limited period of time to try it and see whether it suits their needs or not. In the digital business the web sites are following 5% rule. 5% rule means that 5% of the subscribers are paid customer and they cover the cost of the entire service. Thus the company can proceed its operations for the rest 95%. It means out of 20 customers, 1 is a paid customer where 19 of them are not paid. 

Free-4: Nonmonetary Markets

There are some models where the people are ready to give away products or services where they don't expect any payment. Just think about Wikipedia. The authors are writing or contributing to the articles where they don't expect any monetary value from the owners. Or, you are somehow allowing the pirates to distribute you product by which you can promote your service broader. Think about the piracy on the music. Since the music can be downloaded from different pirate sources it is very difficult to control the piracy on your product. However, thanks to pirates, your music reaches everywhere and ultimately you receive new offers to organize concerts.  

Apart from the business models depicted above, free might be a dangerous way to attract people. Free might mean a diminished quality if it used to cost money before and now doesn't. However, if something never cost money, the people doesn't think that the good is inferior. Just take the mayonnaise next to the burger as an example. You don't think it has diminished quality because it used to be always free. But, you may think there is a problem in the taste of a bagel where someone  offers it free. 

The humans are intrinsically afraid of loss. If you shop a jacket online, you may afraid that the jacket will not be at your size. But, if the shop offers you a free courier service and pay back guarantee, you will be pushed to shop online because there is no risk of loss. Moreover, if something cost you nothing you automatically decide on the free option where there is no risk of loss. Because we think there is no downside of free. 

The companies should also anticipate what would be abundant in the future. If you think that something will be abundant, you need to offer this free to your clients where you need to build your new model on scarcity. As many of us know, there is a famous Moore's Law whereby he asserts that the number of transistors on a microchip doubles about every two year though the cost of the computers is halved. According to the law, some of the technical services will be abundant in the coming few years so the profit out of these services will shrink. Therefore, the main investment should be on a scarcity where the people will be willing to buy. Think about Yahoo vs Google. In the beginning of 2004, Yahoo was far the largest e-mail provider with almost 125 million subscribers. Yahoo was selling premium service if the customer wants to use a storage capacity above 10 mb. However, since Google anticipated the decline in the storage costs they have offered free storage up to 1 Gb in 2004 for Gmail. This was so attractive for the Yahoo e-mail owners and they started to move Gmail. You can see the graph as follows.

Yahoo vs Google Email Services

Today Google offers nearly a hundred products, from photo editing software to word processors and spreadsheets, and almost all of them are free of charge. Google makes money with advertising on some of the core products. Google CEO estimates that the potential market for online advertising is USD 800 billion which is quite huge. 

The book contains more examples about the free business models. Therefore, kindly check the book and read it carefully for better understanding. I hope this essay was helpful for you. 

Thank you.

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