Making Money by Giving Things Away

Delivered by FedEx. Four years ago, Chris Anderson gained worldwide acclaim for his book, “The Long Tail: Why the Future of Business Is
June 07, 2010 Delivered by FedEx.

Four years ago, Chris Anderson gained worldwide acclaim for his book, “The Long Tail: Why the Future of Business Is Selling Less of More.” Now Anderson has developed a provocative new economic model for the 21st century: The path to profits is giving things away. Upon the paperback release of his new book, “
Free: How Today's Smartest Businesses Profit by Giving Something for Nothing,” we spoke with Anderson about how small businesses can tap into the developing “free” world.

“Free,” as you point out in your book, is as old a marketing device as Jell-O giving away complimentary recipe books to promote its gelatin. How has the digital age changed the notion of free as a marketing tool?

We can now confess the traditional form of free was a trick — what economists call a cross-subsidy. You got one thing for free but had to buy another, like razors and blades, or you were given free parking that was recouped by the markup on products in the store. Those techniques are effective to get people to pay attention, but they don’t create any new economic movement. It’s just transferring payment from one thing to another. With digital goods, the marginal cost to make and distribute is zero, so the price is arbitrary. Once the price is arbitrary, you can make the goods free for most people.

How can businesses make money by giving products away?

The primary approach is using a “freemium,” a free version of a product supported by a paid premium version. For example, Tapulous offered a free music game program for the iPhone® called Tap Tap Revenge, where you hit notes as they stream down the screen. Millions of people tried the free version, and a sizable number bought a paid version built around specific bands, like Nine Inch Nails. Whatever your business, you should look at all kinds of things that you can give away for free to enable your own freemium model. And with freemiums, when people shift to become paid members, the churn is the lowest of any sales model.

What makes a good or bad freemium?

Freemium is easy to say but hard to do. You can go wrong in two ways. You can give away too much for free and the customer has little incentive to upgrade. Or you can give away too little, in which case the customer has no desire to even try the product or upgrade. It’s a tricky balancing act.

What mistakes do you see small businesses make in their free business model?

They give away stuff with no business model whatsoever. They count on advertising to pay for everything, and that rarely works. Or the free version they give away is so crippled it actually creates ill will. They create confusion in the marketplace by not clearly telling the difference between the free and the paid versions.

How important is transparency in a free business model?

Companies are most effective when they provide very clear and simple differences between their free and paid products. If you’re totally transparent with customers about why and when they would upgrade from a free version to a paid version, they’re cool. If you’re opaque and people don’t understand your business model, they might be suspicious and think it’s a trick.

From a small-business perspective, how should free fit into an overall marketing strategy?

Free is often the best form of marketing. If your choice is between talking about a product and letting customers sample it, it’s better to sample it. A Web ad banner saying your game is awesome won’t have the same impact as letting people play your game for free. Free is more likely to go viral. If your product speaks for itself, you don’t have to advertise.

How did you use the notion of free to promote your book “Free”?

We created 13 different freemiums for the book. We gave away different amounts of content over different time periods in various parts of the world for different media, like audio and e-books. In retrospect, that was probably too many versions and we didn’t pair the free and paid offers closely enough. We were most effective in Japan, because that was one of the few places where we controlled the supply chain from end to end. The publisher created a limited-time offer where we gave away 10,000 books for free, and after that people had to pay for a copy. It was a simple offer over a limited time with total transparency — and we ended up selling 150,000 books in Japan, which is a huge amount.

Besides the need to control the total supply chain, what else did you learn from your own free experience?

People will look a gift horse in the mouth. You would think they’d be grateful to get something for free, but some people would complain that the offer wasn’t free in the way they wanted it, such as a download. You can’t take your eye off the customer experience just because you’re giving something away for free.

How do different people react to your theories about free?

There is a generational divide. For young people who grew up in the Google age, this seems obvious to them. People who are my age or older read the title of my book and assume it has to be wrong. They think this is some dot-com puff of smoke. Once they read the book and begin to understand concepts like freemiums, they realize free is about making money at the end of the day. But free is a deeply misunderstood and feared word. We’re drawn to it, repelled by it and can’t ignore it, but we distrust it.

Joe Mullich has written about business and marketing topics for Advertising Age, Business Week and many other publications. 

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