The Free Business Model

By Tim Shier on 2008/09/17

While a lunch is never free, thankfully everything else can be. A century ago this statement would have elicited several sniggers but in today's environment there is a strong argument to be made for making services and information available for free. Top businesses are realising the merits of the 'free' business model and it's fast becoming a central strategy behind many success stories.

Oh, How Things Have Changed

The international business climate has fundamentally changed and this is discussed in detail in the recent paper entitled "The Authentic Enterprise Report Summary" by the Arthur W. Page Society. Geographic location is no longer a limiting factor and the cost of 'new age' business resources (bandwidth, storage and processing power) are decreasing dramatically - and with it the volume of potential consumers is growing at an unprecedented rate. The ability to be truly global is now a realistic (and simple) option. As such, successful companies are realising that they no longer need to make large profits from a few clients and are exchanging this for smaller margins across higher volumes of clients.

$0.00 Services

Chris Anderson of Wired Magazine has presented a fascinating idea of "$0.00 Services" and has explored mechanisms for making money off this seemingly pointless business strategy. Consider the following three simple models (as described by Chris):

Model 1: Companies provide something for free once and then charge you. It functions on the same model as the popular drug dealer's "the first hit's free" philosophy. Any company which allows for a free trial etc. is employing this strategy.

Model 2: The user's attention is sold to a 3rd party in the form of surveys, advertising etc.

Model 3: The few subsidise the many. The best example of this is Wikipedia where donations from 'the few' are enough to keep the content free for the many.

A hybrid between these three concepts has been shown to be a very successful business model and many of the top companies apply it as their central strategy - Google is a prime example.

In reality this makes complete sense. You (as the company) save on marketing costs, get free word-of-mouth marketing and are ultimately competing on the quality of your product and not on the strength of your marketing team or your product's cost. As a consumer the entry barriers are very low and you can easily get what you want and need. While this may seem like a new development, it is in fact an old trick (heck, drug dealers have been doing it for years).

But what are the Factors that are Influencing Companies to go Free?

There are three real reasons - firstly, the cost of production decreases to the point that making it free (and getting masses of 'sales') results in higher profits than would be made after spending money on marketing and managing the product or service. Secondly, one company takes the ultimate risk and makes the service free with the hope of capitalising on the spin-offs caused by undercutting all its competitors (competitors are therefore forced to do the same). Thirdly, some long term ROI is identified (Public Relations is a popular one) and so it makes justified sense. (the world's favourite blog management system) is a fantastic example of reason one. Users can host their sites for free - including free access to the WordPress software and bandwidth - and those who want additional services can pay a relatively small fee to receive them. Does it work? O YE!

Some WordPress statistics:

  • 6.7 billion blogs in operation
  • 200 000 new blogs a week
  • Cost to user: $0.00
  • Year on year growth of 230%

Alternatively look at the top 5 websites (according to Alexa):

  1. Yahoo!
  2. Google
  3. YouTube
  4. Windows Live
  5. Facebook

Spotted the trend? (Hint: they're all free)

This mechanism for achieving HIGH volumes with a VERY low marketing budget is a fantastic model and has started seeping into every element of modern business and for three simple reasons:

  • Firstly, companies can make enough money in this way to create healthy profits;
  • Secondly, consumers are fast realising that there is always a free option - why pay when it's free (and if it isn't free then it's typically 'cheaper' to spend a couple of hours surfing the net and finding a copy); and
  • Thirdly, if your service is good it will grow exponentially as each user is also a brand ambassador.

The reality is that by making everything free, the playing field is levelled and companies will need to compete more according to consumer-focussed needs. Companies are finally being measured according to what they bring their clients (in terms of service delivery, client service and value adds). In exchange, clients are providing companies with their attention - which they can then build revenue streams around.

The trick to success is therefore not the acquisition of clients but rather improving the quality of your service in order to ensure new clients remain with your service and do your marketing on your behalf (as word-of-mouth agents) - a sure fire way to guarantee exponential, low cost growth.

Clean, decentralised and very manageable - free business models are the stuff marketing and business managers dream of. It's time to bite the bullet, take the chance and enjoy the economy of free.