The Clean and Green Club

Free: The Future of a Radical Price, by Chris Anderson (Hyperion, 2009)
Reviewed by Shel Horowitz

The influential author of The Long Tail has once again broken new ground. He argues persuasively that the price of anything that can be digitized, and the price of even many things that are based in physical space inexorably gravitates toward zero–and then, even though it might be counterintuitive, demonstrates a seemingly infinite number of ways to monetize your free offerings.

Sometimes, free is a desperate response to a market gone out of control, as in Monty Python’s bold move to stop piracy by giving away their best stuff online, telling people to get clean copies instead of the low-quality stuff that was circulating. The troupe created a whole new generation of fans, saw an astonishing 23,000 percent sales increase, and shot to #2 on the Amazon video list.

And sometimes, it’s a way of fundamentally redefining the way we think and relate to information. Some of the largest New Thought companies have used this model, including Google, Facebook, and the not-yet-monetized phenomenon of Twitter.

Google is a particularly interesting case, because of the win-win nature of its free offerings. Even beyond its wildly successful advertising model, every time you search for anything on Google, you actually help refine its algorithms! In other words, the use of its service creates value for the provider. And of course, every time you click on a Google ad, you provide information about what ads work for what types of messages.

Google originally gained strong word-of-mouse/word-of-mouth popularity because it delivered a superior search experience. Once it found a way to monetize its much faster and more accurate search tool, Google rapidly expanded into a whole empire of information-based services, most of them free. And yet, giving away its core products has been phenomenally lucrative for the company.

(Aside: in the marketing world, we used to laugh at the idea of “if you build it, they will come,” popularized by the movie “Field of Dreams” but dating at least as far back as Ralph Waldo Emerson’s famous remark about building a better mousetrap. Then came Google. We’re not laughing anymore!)

Anderson argues that free helps create an attitude of abundance, going against those who cry out that resources are limited and the world can’t take the pressure, from Malthus to Paul “Population Bomb” Ehrlich. He cites as an example the explosion of computer use and benefits that happened once programmers were allowed to “waste” their bits and bytes to create user-friendly but processor- and storage-intensive interfaces and tools. He says that Moore’s Law (computers exponentially increase in power while decreasing in cost) applies not only to the processing unit, but also to bandwidth and storage–and this triple front drives prices toward zero (pp. 77-78). In fact, some successful companies actually anticipate this trend, and price today’s products as if we already had tomorrow’s computer power, thus accelerating the downward price spiral. Eventually, some companies begin to act as if the resources were free. Not “too cheap to meter,” as the electric companies used to predict, but too cheap to matter.

I think he’s half-right. There are real scarcities of any commodity based on physical product, and there are real limitations in the earth’s capacity to absorb or provide inputs. We see this in the rapidly rising price of oil, and in the very scary series of natural disasters and man-made calamities in recent years as the earth comes to grips with climate change. I shudder to think of his waste-encouragement model going back into natural resources management, after we environmentalists have spent the last 50 years trying to put the brakes on gratuitous, unthinking consumption and waste of resources.

But, as Anderson points, our scarcity is not in energy, but in fossil fuel. There’s plenty of renewable, clean energy to go around, in forms like solar, wind, small-scale hydro and geothermal. But there are also enormous energy reserves that can be tapped through conservation, a/k/a “negawatts”–through NOT wasting! This, Anderson seems not to recognize clearly, but I discuss it in Guerrilla Marketing Goes Green, and lots of other people have discussed it for decades (perhaps none with more clarity than Amory Lovins, whose work I discuss in depth in my own book).

Anderson correctly points out that any price at all, no mater how trivial, creates barriers. Even a single penny “makes us think about the choice. That alone is a disincentive to continue…If you charge a price, any price, we are forced to ask ourselves if we really want to open our wallets. But if the price is zero, that flag never goes up and the decision just got easier.” (p. 59)

In other words, there are cognitive costs: the need to think it through.

However, I’d actually extend Anderson’s argument to pay attention to non-monetary variables, such as time, convenience, and privacy. Even freebies have cognitive costs. I’m an avowed frugalist, own two very large websites with the word “frugal” in the URL, and know a great deal about how to get a bargain. Yet I pass by hundreds of offers for free stuff every year, because other costs are higher than I’m wiling to pay. I will happily sacrifice an hour and a half of my time to usher a concert of a performer I want to see, rather than pay $70 or $100 for a ticket. But if the concert is only $20, I’m more likely to just pay for it. I’ll listen to lots of free teleseminars if the organizers make it easy. But force me to fill out a long and complicated registration form and I probably won’t bother, even thought he organizer probably already has that same data from previous registrations–unless I anticipate so much value from the call that it’s worth providing the information.

Anderson actually does acknowledge this, noting (pp. 67-68) that as we acquire more money, we are less willing to put up with the inconvenience of certain free models, and more willing to just pay and be done with it. In fact, he believes the small percentage of wealthier, time- and convenience-conscious consumers will pay enough to subsidize the cost of making the lower-level model available free to the masses. My own experience, however, seems to indicate that for this model to work, you have to have a very large customer base, since usually only a tiny percentage will pay.

And yes, free can generate large revenues. He cites examples in dozens of industries where free turned out to pave the road with profit. One case study: the rock group Radiohead let fans name their own price to buy a copy of its CD, In Rainbows. Fans could pay whatever they want, starting with zero. The download brought in an average sale price of $6, and the album, worldwide, sold three million copies–including 100,000 of a $80 deluxe boxed set. After two months of digital-only pay-what-you-want, the physical CD entered both the US and UK charts at number 1, and the commercially sold iTunes digital version sold 30,000 copies the first week. The tour that followed, the band’s largest ever to that point, sold 1.2 million tickets (p. 154).

The trick, Anderson says (p. 177), is for the business to find ways of aligning its own interests to those of its customers: a marketing concept I’ve been advocating for years, including in my latest book, Guerrilla Marketing Goes Green.

Oddly enough, Anderson says it’s actually easier for a newcomer to move toward free in a particular market than an established player in that market, because the older company has made a large infrastructure investment, while the new company, benefiting from the price decline, isn’t hampered by the need to recoup that investment. At the same time, however, free models tend to concentrate power and profits in the hands of the market leader, who accumulates market share much more rapidly than in a buy-and-sell economy (p. 132).

A related concept: the tradeoff. When you have an abundance of one thing (such as freely available information), it creates a scarcity somewhere else (such as consumers’ attention, suddenly fragmented across millions of channels). Exploiting these scarcities allows the marketer to find ways of monetizing free.

Having already explored many of them in the book, Anderson concludes the book with a list of 50 different ways to monetize free, with examples. Many of them reverse each other, such as giving away services and selling products, followed immediately by giving away products but selling the services. Others involve upselling to a premium version, or giving away a demo but requiring purchase to get all the features.

It’s fascinating reading. Whether or not you adopt the principle of free in your own business, you need to be current on it. Go read this book.