The economics of free
I attended Chris Andersons book launch for ‘Free’ on Thursday. I had low expectations of the panel discussion, but was pleasantly surprised.
While there was much discussion of marginal cost there was almost no discussion of marginal revenue.
Kevin Lomax (of Misys fame) has spoken to me, in the past, of the Valley of Death - a price point in Enterprise Software between USD20,000 and USD500,000. In this price range, you get all the pain of selling something as if it cost 500,000 (long sales cycles, lots of risk, expensive to manage), but insufficient revenue to justify.
It occurs to me that the real driver for freemium is a similar issue: people have nothing against paying for stuff that merits the cost - but there’s an entry bar of value. For sake of argument I’ll call this USD10. From a consumers perspective, the utility from anything that costs less than 10, does not justify the fixed cost of finding your wallet, taking your card out, typing in details and so on.
Therefore sellers are obliged either to charge nothing (and find a way of supporting the business) or gating with a fee.
Of course, this is really to say that the free model prospers only because no one is able to crack micropayments in a generic way. Micropayments work great in iTunes (one click, licensed from Amazon)- and this is attested to by the huge sales volumes (I’ve lost track; it was a billion songs a long time ago).
There were also representatives from one of the London free newspapers (handed out at every tube stop), and lots of extolling by others of what a great model this is.
But my guess is these models only work because both free newspapers are owned by existing newspaper publishers. Content creation is a fixed cost - it costs the same whether you have one reader or a million, so why not exploit the fixed costs by targeting unreachable markets (readers under 35) with a free paper? Essentially, this model only works right now because the free paper is subsidized by a paid (but generally loss making) product - and when the paying customers depart, so will their free proxies.
2 years ago