Now that we have learned what free is, let’s take a look at how companies are using free. There are primarily two different ways companies can afford to offer goods and services for free. The first is the “Freemium” Business Model, which I will discuss further today. The second (more traditional) is the Cross-subsidy Business Model which I will discuss in my next post. Who’s excited?
The “Freemium” Business Model
Anytime I have a question, I turn to my friend Wiki. Wiki says “Freemium is a business model that works by offering a game, product or service free of charge while charging a premium for advanced features, functionality, or related products or services.” The term was first coined by Fred Wilson, Venture Capitalist and Blogger. This concept is new to me but apparently has been around forever. My research of this has turned into “the more I see, the less I know” kind of thing. Here I thought Spotify was revolutionizing business, while several other companies had already made gajillions. Any of these sound familiar?
Skype. LinkedIn. ESPN (Insider). Flickr. Pandora.
The more profitable these companies become, the more we’ll see this term get thrown around.
The Freemium model can only exist digitally. It can also be thought of as the 1% Rule. For every person that pays for an online service, they support the other 99 users who are enjoying the service for free. This model couldn’t possibly exist while selling physical goods but has turned into the norm for online business. The cost of serving these 99 users is almost nothing.
How can this be?
Technology is the only sector which isn’t impacted by inflation. Computers that used to cost $1200 are now $400. Nearly every American (exaggeration) has a personal computer now in their pocket. The hardware is cheaper, the software is cheaper. Servers and storage are becoming unlimited. According to Reuters.com in reference to start-up Survey Monkey,
{A decade ago, such businesses would have struggled to offer free services to lots of customers because the cost of computer servers and storage was so high.
In 2000, the cost of a customer running a basic Internet application through the cloud was about $150,000 a month, according to Marc Andreessen, co-founder of venture capital firm Andreessen Horowitz.
Running the same application today through Amazon Web Services, a unit of Amazon.com, costs about $1,500 a month, Andreessen noted in a recent Wall Street Journal column.}
As the costs for providing services moves closer to zero, the expectation of free emerges. As a lead into the next part of the free series (it’s not actually free, you will be charged); what if something we expect to be free suddenly isn’t?
