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Fake Free and Freemium Products
8th January 2009
Peter Day pays a visit to the San Francisco offices of Wired magazine as part of his latest In Business aired on Radio 4 tonight and available through the programmes archive. He chats to Chris Anderson author of the acclaimed Long Tail whose new book is due to be published later on this year. Free: The Future of a Radical Price: The Economics of Abundance and Why Zero Pricing Is Changing the Face of Business.
Anderson discusses two types of ‘free offer’ to consumers. With “Fake Free” epitomized by the “buy one get one free” deals in supermarkets - ultimately as a consumer you pay a price albeit at a discount for a tangible product whose marginal cost of supply is positive.
But in digital markets where the underlying costs of supply are falling towards zero - for example digital storage, bandwidth, blogging accounts and services such as Wikipedia, it is possible to offer the vast majority of the product to people for free and yet still make money.
Someone is paying but it is not the consumer - in effect a new form of cross subsidy - because it only takes a few per cent of people to pay for premium services to cover the costs of supplying to the majority (freemium). Take the idea of free photo storage e.g. Flickr basic is free but Flickr pro which offer additional benefits and functionality is available at a positive price. Adobe acrobat reader is available for free download but adobe acrobat itself is available for purchase for businesses and other users who want to develop resources and documents in pdf format with all of the protections it offers.
In a similar vein, in the vast and fast-growing online video game market, it is becoming easier to sign up for “free to play” services but the games providers can make money by selling you new characters / extra weapons / timesavers - i.e. they charge the really committed users - the company makes money because the marginal cost of supplying to the majority of users is zero.
A really interesting piece of radio available here (Select “Free for All”)
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.