The greatest paradox of ‘Free’ is that it is both a well acquainted and a deeply mysterious concept. Well acquainted, as for centuries we have experienced how free affects consumer behaviour and mysterious because despite being based on zero cost it stands as one of the most profit making business model. Google, one of the biggest companies of the world follows the business model of free online content. According to Professor Kartik Hosanagar of Wharton, the power of free lies in the simple fact that the demand one gets at a price of zero is multiple times higher than the demand one gets at a very low price. Now let’s understand how the magic of free works.
Free generates direct profit –
The biggest marketing tool of the business is giving away one thing to create demand for another. This is what O.R. Woodward, the owner of Genesee Pure Food Company did back in 1904 to create market for Jell-O (jelly). Consumers were confused whether jelly is a dessert or a salad dressing, hence no demand. To stir the market, the company launched a door-to-door distribution of free cookbooks containing numerous recipes of making fancy desserts with jelly in little time. As a result, two years down the line jelly’s annual sales hit a million dollars.
Free compensates for the other paid products –
Various super-markets highly advertise free offers to entice the customer, in hope to sell them other products at a profit. For Instance Wal-Mart offers buy-one-get-one-free deal on t-shirts with intent to sell a refrigerator or LCD Television at higher profit margin to cover its cost.
Free provides upper hand over market competition –
Free provides companies with competitive advantage. To enter every household irrespective of existing players, Gillette launched its disposable blades as freebie with almost all the possible household items like coffee, tea, spices etc. The main idea behind it was to sell the customers a fine shaving experience and create a demand for its priced product, much in advance. As a result, consumer got converted from a free user to a payer.
Free tries to eliminate the barrier of consumer psychology –
Every human decision is accompanies by the fear of loss. Incurring or escaping the loss is what labels a decision as good or bad. Free, on the other hand, liberates the human mind of the metal energy of deciding whether a product is worth its cost or not. As there is no possibility of loss when one goes for a free item, it increases the bandwidth of its users. For instance a buyer enters a supermarket to buy a pack handkerchief of a specific size, made out of a particular fabric. But before the person reaches the respective shelf; he/she gets distracted by packs of free handkerchief. The person ends up buying the free pack of handkerchief simply because it is free.
Free information empowers the consumer –
21st century is witness to the game changing capacity of free as it has transformed from ‘economics of atoms’ to ‘economics of bits’. Now Free is no more a gimmick to attract target group, rather an extraordinary game plan where goods and services are offered at near zero cost. The world of free softwares, free web mail services, free content etc. are some of the popular examples for the same. These free softwares and web services helps the companies in acquainting the users with the new technology their company has come up with and hence tempt the user for its premium products which are paid. But the model of free content works differently. Free content provide by companies work on the hybrid model, where the focus is to attract advertisers by capturing grater clicks for its site. On the other hand, free content by an individual helps the person in building his/her reputation as a blogger/ writer which can further help him/her in fetching a better job or more readers for his/her next book.
Free provides companies with free labor –
At times you would have encountered certain sites which require the user to solve few captchas. The reason behind the use of captchas is to block spam material. On the other hand this human pattern matching skill is used by various spammers to gain access to various websites. Spammers use the free labor of the thousands of people for the same. Also every time a user searches for something online, it helps companies in building their ad-targeting strategy. Also it provides the companies with the information regarding consumer behaviour and preferences.
Different Business Models which revolve around the concept of Free –
As a consequence of this ever-changing phenomenon various sorts of free business models have emerged. Chris Anderson, Editor-in-Chief of Wired magazine, wrote a terrific book on the concept of ‘Free’ in which he rightly categorises various free ventures under four broad heads.
1. Cross Subsidy Business Model – It implies the model in which an offer over a product or service allures the customer to pay for another product or service such as free parking in malls or free condiments in restaurants. The companies which follow this business model are:
- IBM and HP – provides free software to sell its hardware.
- Apple – provides free services for its high cost laden products.
- Amazon – provides free shipment over the order of certain amount.
2. Ad-supported Business Model – It is also known as third-party model as content is provided free to the consumers by producers in return advertisers pay to gain visibility among the readers. The companies which function on this model are:
- Social Networking sites – provides free access to share user information with advertisers.
- Travel companies – provide free travel services and in return get a cut on hotel reservations.
- LinkedIn – provides free listing of resume but charges the companies for power search.
3. Freemium Business Model – Freemium, the term coined by Fred Wilson, a venture capitalist. It provides the user with two variants of a product, out of which the basic version is provided for free and the premium version comes with a cost. It works on the age old model of free trial. It includes:
- Software companies – providing a trial run for free and charging for the complete software.
- Various apps – offers the user both free and premium products.
- Skype – provides free computer-to-computer calls and charges for computer-to-phone calls.
4. Non Monetary Market – It is one model where free has no hidden cost. It involves the producers with no expectation of payment. The incentive behind this model ranges from reputation, social good, awareness, expression, fun, etc. It comprises of:
- Free online courses provided by various universities.
- Free content provided by certain bloggers and writers.
- Free clothes/ products given to various NGOs instead of dumping. (It is also done in name of corporate social responsibility).
- Free grants to build museums.
Negative Implications of Free –
- Free doesn’t always work in the favour of the seller. At times consumers correlate free with decrease in quality.
- Free does bring financial advantage in various respects but at the same time it incurs social and environmental cost, i.e. generation of waste. Many of you would be acquainted with the free exchange/ return policy of Jabong or Myntra etc. To send back stuff you really didn’t require at first place leads to (social) waste of labor of workers and delivery persons and generation of (environmental) waste caused by carbon emitted in the name of shipment. Also the amount of waste generated in various parties and conferences where food is offered for free to the attendees.
- Lack of authenticity, especially in case of free content. Lack of authority to validate the free content can be misleading for innocent readers, leading to hazardous consequences. The free access to building bombs to sharing tweaked information to stir-up anti-social sentiments leading to riots, are few of the instances of dangers which irresponsible free content bring along.
- Free creates a level playing field among amateurs and professionals. Especially with more people creating free content, it has generated higher competition for the ones who are working for money (journalist and editors). The publishing industry stands solely eaten up by the vicious model of free. With this content too is losing on quality and professional outlook.
- The greatest evil of free is indirect encouragement to piracy. The entertainment industry, software industry, apparel industry and high end brands are the biggest victim of the same.
- The model of free is discouraging innovation. Since everything is more or less free, implies lack of incentive for innovation. Free also makes direct attack on intellectual property rights.
- Free is leading to zero privacy. With various social networking sites becoming slave to advertisers resulting in doling out personal information of it users for making money.
Competing with free has become one of the biggest challenge for the leading business players. The only way out is to move upstream, to offer custom solutions to more complicated issues which require human touch and to come up with more refine products to outdo the free products. Hence the era of free calls for extraordinary and innovative products as paid products, making ordinary free.