Thursday, February 12, 2009

Price Point: Free to 99% of Customers

The editor in chief of Wired magazine, Chris Anderson, has written THE WALL STREET JOURNAL published essay, excerpted here:

The Economics of Giving It Away

Over the past decade, we have built a country-sized economy online where the default price is zero ... the Internet is the land of the free.

Which is not to say companies can't make money from nothing ... The minority of customers who pay subsidize the majority who do not.

With physical stuff, samples must be doled out sparingly -- there are real costs to be paid. With [digital] bits, the free versions are too cheap to meter ... That's why so many people businesses ... are turning into software businesses ... which is why your ... accountant has morphed into free TurboTax online, your stockbroker is now a website, and your travel agent is ... a search engine.

... $0.00 is a very good price. Expect the shift toward open source software ... and Web-based productivity tools ... to accelerate.

... It's a consumer's paradise: The Web has become the biggest store in history and everything is [almost] 100% off ...

What about those companies trying to build a business on the Web? ...

The standard business model for Web companies that don't actually have a business model is advertising ... Two problems have emerged with that model: the price of online ads and click-through rates ...

Google has built an enviable economic engine on the back of its targeted text ads, but the sites on which they run rarely feel as flush. Running Google's Adsense ads on the side of your blog, no matter how popular [or not] it may be, will not pay you even minimum wage for the time you spend writing it ... I speak from experience [oh yeah].

What about the oldest trick in the book: actually charging people for your goods and services? ... It's now time for entrepreneurs to innovate, not just with new products, but new business models.

Take Tapulous, the creator of Tap Tap Revenge, a popular music game program for the iPhone. As in Guitar Hero or Rock Band, notes stream down the screen and you have to hit them on the beat. Millions of people have tried the free version, and a sizable fraction of them were ready and willing to pay when Tapulous offered paid versions ...

At the other end of the business spectrum there's Microsoft, which now has to compete with the free word processors and spreadsheets of online competitors ... Rather than complain about the unfair competition (which would be ironic), Microsoft created Web versions of its business software and offered them free to small and young companies ... you can use Microsoft's software without charge under its BizSpark program.

... The psychological and economic case for it [free] remains as good as ever -- the marginal cost of anything digital falls by 50% every year ... and "Free" has as much power over the consumer psyche as ever. But ... Free is not enough. It also has to be matched with Paid ... today's Web entrepreneurs have to not just invent products that people love, but also those that they will pay for ... Free may be the best price, but it can't be the only one."

Read more: The Economics of Giving It Away -- THE WALL STREET JOURNAL