Just three minutes walking down Baker Street in London I saw signs of free offer eveywhere (see pictures). Is free the future? Or just a reflection of the current economy? It has been 4-5 years since Chris Anderson, the author of The Long Tail, first brought up the idea of the free economy. Technology is offering consumers better deals and enabling innovative business models that are reshaping economic theory. In this economy, free is definitely attractive to many consumers.
Here are the big questions: How is free changing consumer expectations and behavior?
How is free changing the economics of businesses? How can free be part of viable business model?
When the price drops to zero, what else do customers value? How do you beat the free? Where is free headed in the next 5 years?
“Google is not a media company - most of its business is software and services - but it has used the media business model of advertising to ensure that it never shows up on your credit card," according to Anderson. "The psychology of free is incredibly powerful. Traditional marketing says this is awesome, you are going to love it but you can't try it until you pay. Free says this is what it is, I think you are going to like it, but try it out. When it comes time to pay, you are already price insensitive, you are a committed customer, you are engaged."
Anderson suggested free is the future as the increasing availability of open source software and the rise of cloud computing had made the barriers to entry for digital companies very low. But it doesn’t mean you have a viable business. If Anderson practices what he preaches, he should give away his new book for free. But who’s paying for it?
What happens to the economics of goods when scarcity is removed? How is the case difference for digital goods versus physical goods? In both cases, free encourages consumption and expand market share, if your competitor do it and they will take up larger share of the market. This can easily be modeled from a game-theoretic perspective. If you and your competitor both choose the same strategy, you are both on equal footing, consumers win.
Nash equilibrium does benefit the consumers, who enjoy more free products or services. But is this sustainable? Free is just another form of competition and forces companies to find creative ways to have them subsidized. Just like radio and broadcast TV. Social technologies allow companies to reorganize itself around getting people to work or co-create for “non-monetary rewards and distribution can cost nothing? The book keeper will not work for free? And office supplies are sponsored by Staples?? Someone still need to pay for keeping the lights on. High performance servers are provided free? OK advertisers can subsidize them, we're back to the ad model.
Free is a competitive marketing strategy, but not a business strategy.
