Why the Future of Business Isn’t $0.00
I’m writing in response to Chris Anderson’s interesting (but rather obvious) Wired article, “Free! Why $0.00 Is the Future of Business.” I disagree.
The premise is sound enough; the author cites the famous marketing strategy of Gillette of giving away razors to drive sales of the disposable blades. Similarly, computer printers have become very cheap to drive sales of the higher-margin ink cartridges. This strategy has been used in marketing time and time again, not the least of which was making cheap cameras so people would spend more money on film back in the ’80s.
It’s not free. It’s bundling. The combined price of the package is considerably more than $0.00. While it’s true that consumers don’t usually take into account the total price of the bundle when making a purchase decision (they may be influenced by the seemingly free initial cost), I don’t think this is indicative of the future of web marketing, which is sort of what Anderson implies in the rest of his piece.
Let’s talk about the web. Yes, we as consumers are used to consuming the web at no cost. The music industry is on a downward spiral from pirating that can be almost entirely attributed to the proliferation of absolutely free alternatives to paying for music available through P2P. A consumer’s willingness to pay is completely destroyed in the face of a free alternative. The “psychology of free” is indeed powerful — however I’m going to claim that it’s *terrible business.*
“From the consumer’s perspective, though, there is a huge difference between cheap and free. Give a product away and it can go viral. Charge a single cent for it and you’re in an entirely different business, one of clawing and scratching for every customer. The psychology of “free” is powerful indeed, as any marketer will tell you.”
Anderson misses the other side of the story. Price is not an absolute. “Free” is not the price consumers want to pay in many, many cases. I know that sounds counterintuitive, but let’s explore the following hypothetical situation:
Recall the last time you’ve been at a wine shop. You probably saw bottles of wine with price points such as $8.99, $15.99, $59.99, and $180.00, or points in between. What were your perceptions of the quality of each of these wines, without having tried any of them? Which would you have bought if you were on your way to a dinner party, your best friend’s engagement, your first time cooking dinner for a new significant other, or a frat party? Different answers for each, I would imagine. What about a free bottle of wine? Ehh…
The psychology of free carries with it a stigma. Say goodbye to any hopes of brand premium, and don’t even think about charging people for it once they’ve gotten used to it being free. Not only is the psychology of free suicide for a brand, the economics of free don’t work out either. “Give it away for free, get a lot of users, and then worry about value capture” is something that caused the collapse of web companies in 2000 — are we forgetting this? I can’t trust any business model that is solely based on eyeballs. It might work for the top 0.1% of traffic generating sites, but it certainly isn’t something I’d count on for a startup.
But why should people stigmatize free when they’re getting a high-quality, useful service for free? Because in many cases where it matters, they aren’t. Take the music industry: while it’s possible to get CD quality, full-length albums at no cost, I have *rarely* been able to get what I want without a) opening the downloaded archive to find that the uploader has chosen some exotic file format that I can’t play (.ogg, .mpc, etc.); b) the quality is far below CD quality; c) it’s not even the album I wanted. This is why iTunes has sold over a billion songs, and I *gladly* pay a premium to be able to get the song I want, when I want.
Consumers are willing to pay! This is not going to change, regardless of the dwindling marginal cost to the supplier of a product or service. It’s dangerous to look at marketing from a marginal cost perspective in any case — look at the economic value to the consumer and price accordingly. I see smart companies doing this in the future, and companies that can’t find an economic value to their consumers that is larger than free are going to find themselves struggling to find a business model.