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.*
Anderson claims:
“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.
Paul, I enjoyed reading your opposite opinion to Chris Anderson. The one point that I would like to pick you up on first is that the music industry is not spiralling downwards. What is happening within the music industry is actually just a plain old re-distribution of power and money. The big four record labels are sticking fast to their old out of date marketing models in the vain hope consumers will be loyal to the old ways of buying and selling analogue media such as CDs and cassettes. Wealth is actually being redistributed to those who have adopted new marketing models and are less concerned with copyright and more concerned with the actual musical aesthetic. e.g bands that are making money from touring, gigging and merchandising are thriving, where as bands and solo artists produce studio only records relying solely on album sales through traditional marketing schemes are sinking fast. The big four are dinosaurs and are not keeping up to date with trends. They have simply become complacent and it is dangerous for someone to make statements based on their complacency please do some reading around this topic before making references to it in future articles.
Thankyou,
Adam
Adam Stonehouse
March 10, 2008 at 4:57 pm
Point well taken, Adam –
I’d rephrase my statement to mean “the music business — as we know it — is on a downward spiral.”
P
Paul Knegten
March 10, 2008 at 5:16 pm
You might want top re-examine the first sentence of your posting. Gillette did not give away razor blades to promote the sale of razors, but just the opposite. He gave away (or sold at deep discount) Razors to promote the sale of razor blades.
This gaffe puts your credibility into question at the outset.
John Brown
March 10, 2008 at 9:00 pm
Thanks John,
Typo, fixed.
I was referencing the original article, no need to question anyone’s credibility…
P
Paul Knegten
March 10, 2008 at 9:23 pm
I don’t really see you and Chris disagreeing. You call it bundling – he drives a harder bargain and invokes externalities. The underlying idea is the same. If I understand your argument, you seem to be saying (a) low price or no price might convey a lack of quality and (b) consumers don’t “need” to have things be free, they are willing to pay. Underlying this I think you are objecting to the (incorrect) notion that Chris is claiming that there will be no exchange of wealth when people receive products from manufacturers (or services from providers).
But I don’t think that is the claim Chris is making, but rather that the way in which wealth is exchanged for products and services is shifting. Transactions are more complex, containing more components and playing out over a longer period of time. And as the “natural cost” drops for a given service or product, the options for how a transaction can be structured expand.
Take the music example that you use — many bands are now giving their music away for free — in CD quality, in formats you want to listen to, easy to download. Why would they do that? Because the cost to NOT being listened to at all is much higher than the cost of giving away the music for free. Giving away the music helps develop the musicians reputation and perhaps drives attendance at concerts, purchases of t-shirts, subscriptions to live recording sessions (only available to paying fans), etc. Bands are experimenting with ALL of these models because (1) the mainstream labels have failed to be sufficiently innovative in their marketing of these bands and (2) because the natural cost of distribution is incredibly cheap by comparison to pressing a CD and shipping it across the country.
It is valuable to look at how when marginal cost falls it changes the rest of the value constellation around traditional business models and creates new opportunities for the distribution and consumption of goods and services. This is not giving up on the need to have a business model.
Ted Shelton
March 12, 2008 at 4:23 am
Ted,
Agreed — I think what I’m most objecting to is the general theme: that the future of business is $0.00, a compelling thought that I think needed to be examined.
The details, I agree, are for the most part a matter of semantics. But the general idea that free is something that consumers are growing to expect is dangerous thinking for a marketer — while it’s true in many forums, it should be avoided if possible, especially if the value of a product/service is something consumers can easily perceive.
I’m with you on the music example, though I have to stay with my contention that consumers are willing to pay for what they want in this market. The fact that some bands will choose to use their music as an ad of sorts is besides the point — I don’t see this building further expectation that music will be free; it just raises awareness of a particular artist to his/her benefit. Furthermore, I would argue that $0.00 is the right price point for this artist: the perceived value of an artist nobody has heard of is probably zero. However, once this artist becomes successful, wouldn’t you agree that it would make sense (economically, not artistically) to extract the value consumers are by and large willing to pay for his music?
Paul Knegten
March 12, 2008 at 9:46 am
A really interesting experiment in the music space is Amie Street — http://amiestreet.com/ — in which songs start out at $0.00 and as more and more people download the songs, the price increases (to a maximum of $0.98). That way the value of music as advertising is captured when a song/artist is unknown and then the value of music as music is captured as demand grows.
I agree that Chris’ headline is provocative — that is advertising for magazine articles. But I think if you actually walk through his “taxonomy of free” that all he is saying is that externalities will trump cash in a lot of new instances, because the marginal cost has fallen so far. Perhaps the more accurate article headline would have been; “Why is the future of business. Definitely not as catchy
Ted Shelton
March 12, 2008 at 12:42 pm
Oope – My last post lost my text inserted in between the word why and the word is — because I used an angle bracket to set it out (forgetting for once that this is a reserved html character. The sentence should read:
Why (developing ecosystems in which you derive value from your products and services through a set of market externalities instead of charging cash at the point of purchase) is the future of business
Ted Shelton
March 12, 2008 at 12:47 pm
And that is even too broad because I don’t think Chris even means to say that ALL transactions will depend on market externalities – just ones in which marginal cost is dropping through the floor.
Ted Shelton
March 12, 2008 at 12:48 pm
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March 15, 2008 at 12:02 pm
Hi Paul:
I enjoyed both Chris’ article and your response. I used to be a debater; and I am always fascinated when I hear two great minds going at it… It’s a pity we don’t have a rebuttal from Chris to your response to his article. Did you send him an email with a link to your response?
I don’t think he reads the comments on his page… At least, not all of them. I agree with your point of view if amended to include Ted Shelton’s point. The Amie Street example certainly put things in perspective. What insightful writing! You guys are great!
Rusty
March 25, 2008 at 12:09 am