The price of “Free”

In my last post I promised that I’d elaborate on why I think “Free” is a flawed and misunderstood business model. This is that post. It’s a topic I’ve been meaning to write about for a while now; ever since I read Chris Anderson’s book Free around two years ago in fact.

My contention is that “Free” as described and used in many contemporary web-based businesses is a non-business model that is not only broken, but actively harmful to entrepreneurship. Free rarely works, and all the times that it doesn’t, it undermines entrepreneurial creativity, destroys market value, delivers an inferior user experience and pumps hot air into financial bubbles.

Free is Lazy

My colleague Dom Reed has just been interviewed about his wildly popular and ongoing self-portrait work. He’s been taking a photo a day for a year and a half now and doesn’t show any signs of stopping. Unsurprisingly he claims that the hardest part of his work is coming up with fresh and funny ideas for his daily photo. It would be terribly easy, he says, to take a daily photo of his dinner plate but why would anyone want to see that on a daily basis?

Creativity, in entrepreneurship as well as photography, is hard. Creating something that is of superior value for a given audience is not an easy task.

Free does not push you to create something evocative that users and customers are willing to commit to in the long term.

Free absconds on the entrepreneur-customer commitment: by asking for nothing you also promise nothing. Both parties can walk away because there is no relationship. On the other hand by asking for money (or some other form of commitment), however large or small an amount, you create a self-imposed drive to produce creative and valuable products because not doing so would mean letting somebody down.

Free undermines entrepreneurial creativity by giving you the lazy option: the dinner plate photo.

Free Destroys Value

Last year, my boss Neil Davidson (<– blatant flattery warning :-P) wrote an excellent short guide to software pricing called Don’t Just Roll the Dice. As the title suggests, the book argues that software pricing shouldn’t be decided randomly. There are three big reasons for not doing this: first, you might be missing out on revenue; second, your product price says something about the quality and intended audience of your product; third, your price also sets an expectation of how much effort has gone into production and how much value a customer should expect.

Choosing Free as your product price runs the risk of attracting entirely the wrong audience for your product or service. Although you may get tens of thousands of users, it is probable that those users are unlikely to ever consider paying you because by definition you have attracted people who are looking for free stuff. Reversing this decision later can be extremely painful: you will piss off your existing user base, potentially generating very negative publicity and you might need to start from scratch in terms of looking for the right audience.

However, you may have done something even worse in the meantime, especially if you’re in a new space. You will encourage your competition to also produce free stuff which will in turn set the expectation in the market that your kind of product should be free thus entirely destroying the value of your market.

Free is Ugly

At some point or another you will realise that you do need to create a revenue stream. If you end up in the situation I just described above, i.e. encumbered with an audience of people unwilling to pay for what you’re providing, you will be faced with a dilemma: start over and risk the bad press or try to squeeze some pennies out of a reluctant user base.

The latter is a slippery slidey slope that leads towards intrusive in-app advertising, pop-ups, link-baiting, shady affiliate marketing, email spam and a total lack of focus on user experience.

Shipping software, for instance, that is crippled by in-app advertising and ‘cross-sell’ pop-ups unless the user pays for an ad-free upgrade is madness. Not only is the revenue you may gain purely of the short-term sort but, it is a result of users running away from an annoyance rather than going towards something of value. The moment something better comes along, your customers and users will defect because they are not being treated with respect.

Free Inflates Bubbles

The idea that things can be free is behind a lot of financial bubbles. In the late nineties we thought that we could get distribution and infrastructure for free and we got the dot com bubble. A couple of years ago we thought we could get loans and bank credit for free and we got the property bubble. In both cases we left something very important out of the equation: delivery costs in the former and ability to repay mortgages in the latter.

Today a lot of companies in the web and social media space are similarly leaving something important out of the equation: paying customers. The paying customer of course doesn’t necessarily need to be the end-user but there needs to be one. If there isn’t one what happens is that entrepreneurs with a few thousand subscribers to their free service suddenly realise that hey, they do need money to pay the bills and a slide deck and couple of pitches later they’ve raised some funding with the promise of ‘monetisation’. Other entrepreneurs and VCs see this happening and think “hey, those guys can’t be that dumb, I’ll try the same thing” and hey presto, you suddenly have impossibly high valuations and smaller investors being squeezed out of start-up deals. The classic signs of a bubble.

If you’re putting together a business plan or a slide deck that claims there will be an initial period of “short-term loss” while you establish a user base which you will then monetise, just remember that that is exactly what most of the pre-2000 dot com business plans were like.

So When Does Free Work?

Almost never. Somebody always pays. If healthcare is free, your taxes pay for it. If the flight is free, the extras aren’t. If the search is free, the advertiser is paying.

The only time when Free can really work for you is if you set your sights on having a specific outcome: acquisition. If you’re building technology, or a team, that is valuable to somebody else than you can afford to provide a free service and raise finance to fund that service until you’re in a position to be acquired.

Further Reading

If you’d like to grab a copy of Chris Anderson’s book “Free” to decide for yourself you can find it on Amazon in various versions.

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37 thoughts on “The price of “Free”

    • It would have to be you to point that out :-)

      I suppose I must point out that I’m not trying to create a business with my blog — although I should be self-hosting pretty soon (assuming I can carve the time for the necessary admin)

  1. Very interesting article Richard but after reading it a couple of times I couldn’t help but notice that it seems (IMHO) that what you’re really referring to is the ‘get users now – monetize later’ type of attitude as opposed to the concept of freemium per se’. The term freemium is a loose concept and the ‘get users now – monetize later’ is just a small part of it.

    The reality is that where are many cases were freemium works – and works well. The usual company Google comes to mind but there are other companies that do extremely well such as the usual anti virus companies (AVG, Avira, Avast etc.), Teamviewer, Zoho and more.

    Freemium is really just another marketing channel. There are ‘rules’ to follow to increase the probability that the freemium concept model works as it does have it’s dangers such as cannibalization.

    Then again – as you correctly said there is no such thing as free beer – someone HAS to pay.

    • All good points David and you’re right, that’s exactly what I’m referring to. In fact I don’t mention “Freemium” in my post but “Free”.

      Freemium can work quite well if its well planned and articulated that way right from the start (37Signals spring to mind as a good example of doing that).

      • Sorry – you’re right actually. While reading it the word Freemium came to mind and it stuck there. My bad.

        Keep up with the blog – the articles are always very interesting.

  2. 0apropos says:

    > The only time when Free can really work [is for]: acquisition.
    > -
    > If you liked this post follow me on Twitter.

    And did you have any popular services in mind?

    • That’s a pretty good example from David. If you look around quite a few companies get acquired for the tech or the team because one or the other is valuable to the acquirer.

      Other examples that pop to mind:

      Twitter acquired Summize (search for tweets = new tech) and TweetDeck (most popular twitter client = have more control over users). FaceBook acquired FriendFeed (real time updates, led to their revamped real-time news feed).

      A whole host of popular google services were acquisitions, most notably Google Maps, acquired from a small 2-person team who built amazing front-end technology that Google then used to gather information about local services/places which in turn they then use for better ad placement.

  3. felicetherese says:

    Brilliant post. This is something I’ve had a problem with for a while, but my own attempt to vocalise it was a lot more accusatory. I think Spotify is an excellent example of a business who thought they could ride the free wave on the back of a solid user base of paying customers, but who have had to adjust their business model time and time again (varying prices, limitations for free services, increasing what you get for your money, on and on) to get this solid user base of paying customers at the same time as giving people a whole lot for free. Something that looks so simple really isn’t.

    Do you think the same thing is true for discounting? I heard recently there was a Nursery Rhymes app that drew more negative comments about being too expensive at 59p than £1.79, which I guess ties in with attracting the wrong kind of customer, but sure does make it difficult to know how to most effectively build up a large user base.

    • Spot on with the Spotify example. Once you’ve implanted the idea that streamed music is free in millions of users, it is then very hard to change their minds and £5/month seems a huge amount compared to what you were used to. Perfect example of devaluing your own market.

      The Nursery Rhymes app example is interesting. I hadn’t heard of it but I think you’re also right that its probably about attracting the wrong audience. I would imagine that the kind of person paying 59p for that sort of app is looking for a cheap deal so more likely to complain. On the other hand, someone willing to pay the (comparatively) higher price of £1.79 is more interested in owning a quality app.

      To be honest, I don’t think there’s a simple answer here. Pricing is always tricky and it requires some research and experimentation. But as I said earlier, its about not being lazy and instead looking for some creativity both with the pricing strategy and the product.

  4. y3k-bug says:

    “Choosing Free as your product price runs the risk of attracting entirely the wrong audience for your product or service. Although you may get tens of thousands of users, it is probable that those users are unlikely to ever consider paying you because by definition you have attracted people who are looking for free stuff. Reversing this decision later can be extremely painful: you will piss off your existing user base, potentially generating very negative publicity and you might need to start from scratch in terms of looking for the right audience.”

    Absolutely correct: see the abundance of negative reviews of the last.fm app on the App Store since they’ve switched to a paid mobile service.

  5. Well well said. My observation after reading this post is that no matter how the world, society, and the way of doing businesses change, there are always some basics which never change. Product positioning is still and will remain crucial for surviving. Price-cutting was, is, and will always be devastating for businesses. Not only “free” never works, but potential clients are nowadays even getting suspicious of the word. When they are offered something for free, their mind wanders immediately…”now where’s the catch?”!

    Well done.

  6. I also equated “free” and “freemiums” when I read your article, but I make no distinction based on models. “Free” and “free(miums)” differentiation seems like a semantics game for wussies to me. Free is free and freemiums are free, or . . . you get to give away something you’ve worked hard to make in exchange for what, a base of entitlement minded users who’ll drop you like a hot potato when you ask them–at some vague unnamed point–to pay?

    I’m with Harlan Ellison. You wouldn’t ask your lawyer or your dentist or your school teacher to work for free(miums), would you? Then why ask me? And . . . are there some professions in which people have to give away their work to get a promise that, maybe, someone will buy it?

    My question is, of course, rhetorical, but I think there’s something inherently ugly about the way people avoid talking about these two terms nowadays.

  7. Free can work when you’re trying to commoditize your complements. For example, Red Hat isn’t in the business of selling server software, they sell support contracts for people running server software and the more people running Linux servers the more potential customers they have.

    • True. I think MySQL do (did?) that too – give a database for free and then offer consulting services around that. That’s actually a pretty standard business model in enterprise sales.

      I think the key difference is that Red Hat / MySQL and others are providing something of sufficient complexity ostensibly for “Free” but really, it costs the company using that product a substantial amount of $$$ to install, run and maintain that system not to mention the payroll involved.

      So although the technology may be freely available, Red Hat and MySQL are really in the business of selling their expertise and peace of mind.

  8. There is all sorts of wrong in your conclusion, it’s hard to know where to begin.

    First, free is not lazy. In fact, free allows for extra creativity. For example, you run this blog using WordPress. WordPress its built on the contributions of many – they dedicate a large part of their time to improving the product (which also uses free foundation products – LAMP) and they put their very best into it. If Matt M had to develop WordPress AND Linux, AND Apache AND MySQL AND PHP – do you think he would have bothered? It would have been too much for one person to do. And yet, here we are debating on his platform using a free product. Ironic. Automattic seems to have worked hard to make WordPress what it is today.

    Free is not ugly. To say something is ugly solely on the basis it’s free is narrow minded and forgets that beauty is in the eye of the beholder. I use a free theme for my website. I think it’s nice and simple, modern, elegant, and classy. Yes, there are ugly free themes out there but there are also some rather ugly non-free themes out there, too. The two just don’t equate.

    Free doesn’t decrease value – it can improve it. Take Facebook, for example. Their product free for general use – but there are ads so you might not call that product “free”. The iPhone app is free, however. It doesn’t cost me anything. And yet, it makes Facebook more valuable to me because I can be connected to my friends while on the go. And, as of this writing, there aren’t ads in the mobile feed either. But yet I still come back to the site because the mobile app makes the service more appealing and more important to me. That’s value. Also, price and value aren’t the same thing. Take DRM’d music. If you bought music using Microsoft’s PlayForSure technology, you know that your music is worthless. Because you can’t play it anymore. Most of those license servers were shut down years ago. So while you paid $9.99 for an album, you can’t listen to it so the value is gone. Why do you think it’s so hard to get people to buy music these days? Well, for one the price is artificial in that it could be easily distributed for free. So they know the price is much higher than what they’re willing to pay. So, instead, they pirate it. Doesn’t mean the value the music less. They just don’t see the price being in line with value. Lastly, free can open up opportunities that wouldn’t otherwise exist. Music, again. A band seeds their album on some torrent site; posts their video to youtube. They slowly get fans and those fans get the music for free but they buy something they truly value – a live experience – which has two scarcities: time and seats. Time is valuable. Seating at venues is limited. Selling tickets while touring off the free music you gave away will net you a lot of money. If you charged money for your CD, you won’t get people taking a risk on your music and you’ll lose a ticket sale.

    Free doesn’t inflate or create bubbles. Free allows resources to be allocated differently – where it might be needed the most. Take, for example, a small business. By using free, they sign up for WordPress.com and set up a website. They don’t pay for any upgrades. They “save” themselves 15-45 dollars a month that could be allocated differently. That could be the mobile data on their wireless plan to allow for mobile customer service. Or, instead of paying a designer to create a theme, buy stock photography, self host, register a domain, etc., they save themselves the $3000-4000 and use it to hire extra help to get the business growing. Free let’s them invest in advertising to get their name out. Bubbles exist because people don’t know what they’re investing in. Bubbles are people rushing ahead with ignorance towards something they don’t understand. But it has nothing to do with the cost of the products they invest in.

    Free works in many ways so “almost never” is such a fallacy I question how long and hard you’ve thought of the problem. The classic example is the musician and the photographer. Both create media that can spread quickly over the internet. They can give away their products because they are so easily reproduced – electronic distribution naturally increases supply to infinity and, therefore, drives down prices to near zero. Costs have nothing to do with this equation – neither does value – as they are not related to price. But they can leverage their free products to get paying jobs – t-shirts, concert tickets (like I mentioned above) and photographers can schedule paying gigs like family portraits or weddings or whatever. That’s real money – that’s a living. There are so many ways to leverage free its amazing.

    The shortsightedness of your conclusions is staggering. There are so many different business models out there. Free can be a part of them. That’s not to say free IS a business model. Its that it compliments real models that deal in scarce goods or services. They’re the value add that makes people coming back. And the idea that it harms entrepreneurship is silly – it can only allow more entrepreneurs the chance to survive because they can focus on their competitive advantage.

    • In all the examples you mention you are right. My point is simply that “Free” is becoming the default option for many businesses and, unfortunately, it is *not* a business model. It can be part of your strategy, or a tactic, but it is not a revenue generator that will create a sustainable business.

      You say that “Bubbles are people rushing ahead with ignorance towards something they don’t understand.” and you’re right. Personally I think that people are rushing towards the idea of “I’ll give it for free and monetise it later” without understanding anything at all about that approach.

      • Then your argument doesn’t hold water.

        You claim all my examples are right, there’s nothing left.

        Models don’t have to be one singular thing. FOSS is a perfect example of that. You can monetize free software to make a business but it doesn’t mean that the FOSS software is a part of your business. Likewise, you can have a business and give away a side project completely unrelated to your main business. Technically, that’s a business. Yet you give that product away. You could earn goodwill or attract eyeballs to your main product you could be passionate about it and do it for fun.

        And give it away and pray, while not the best business model, is still a model. Free to get traction is a model. Free to get eyes, is a model.

        The thing is this, everyone thinks free – especially for creative people – is bad. It’s not. Its very good. And to say Twitter, free music, photos/art is bad because it’s free and they haven’t figured out a way to monetize it yet (profitably as far as we can tell) or it dilutes paid work is premature.

        Thank you for allowing me to pick apart your thoughts on free, though; there’s nothing like free thought. And I hope that the detractors of free understand why it is a good thing – in business and creativity. And the more free there is out there, the more we can focus on producing real goods/services out there that we all can benefit from.

      • Dblade says:

        I think your points are in the wrong rather.

        WordPress and blogging has massively devalued another market: Journalism. I came to this article from AllthingsD, the tech blog of the WSJ. By doing so I am not paying a single cent to either the owner of this blog nor the link referrer, for something that in the past would have made an excellent magazine or print article.

        Creativity only flourishes when people can get paid for it. Without that, there is little incentive to do so long-term. Most of the creativity in many fields is only free due to revenues from another source, and once those fail, so will the creative content.

        This goes with many of your examples. Facebook is free mostly due to skimming off Facebook Credits for paid apps like farmville, for selling information and for ads. Pirated music is “free” because people do buy DRM music, and it’s enough to support artists. Although not so much, as new artists are hit the hardest by piracy, and the legacy acts that can just press old LPs to MP3s benefit.

        The live experience…do you honestly think that people who can’t afford 99 cents for a song will pay $50-100 to watch their band lead for a legacy act? Or travel to Seattle because the new indie band can’t afford to do tours due to needing a job to support playing music?

        Photographers highlight another difficulty: free forces the artist to self-promote. The artist has to make the mugs through cafepress, publicize his own work since free means no revenues for advertising or PR, and take the financial risks of needing to expand out of photography into durable goods. The old paid schema had one good thing: it enabled division of labor by paying people to segment tasks. Your agent promoted, your publisher handled tie-in merchandise, and you made money and focused on creating art.

        The original article’s points are valid. I’ve never even heard of anyone upgrading to paid versions of Avira or AVG as a consumer. Why when the free stuff is fine? How has anyone planned to monetize color, or even Twitter? The ad-supported model simply can’t bring in enough revenue. Free content is causing sites that need to transition from print to a web model some insane hardship.

      • “Creativity only flourishes when people can get paid for it.”

        Wow. That is that the most cynical statement I’ve read all day. The truth that every creative person knows is that creativity is its own reward. For most people it is the only reward they’ll ever get for it.

        “WordPress and blogging has massively devalued another market: Journalism.”

        Another astonishing statement. Modern paid journalism has devalued itself, at least to me. Their only master is money which leads them to lie about events and avoid exposing the dishonest acts of people who are paying them to write things to keep us diverted from what’s really important and divided as a people. I read no papers, watch no TV news. I get most of the news from Internet articles and podcast and from public radio. I like in-depth coverage, not sound bites. I care nothing about what politicians say but I watch closely what they actually do. I also know that my opinions may be wrong.

        Peace,

        Rob:-]

  9. Forget where I had heard it but great quote –

    “If it’s free for you, you probably are not the customer”

    I think many forget this or think the latest fad of the day bends the business rules (PC revolution, Internet, Outsourcing and now Social Media) but they all come back to reality eventually. If anything I see teenagers looking at ‘free’ sites and tools as throw-away and have little value for something they can just toss w/o care. Think all the various free email addresses people have accumulated. Freemium is a way to go I guess, but love all the Muscat points that I have seen ring true.

    • Then why do studies show that people who pirate music also buy more music than people who don’t pirate music? Answer: because people who care about music want it more than people who don’t. The work hard to find the music they like and pirated music is one way to find new music. Once they find an artist they like then the will buy that artist’s music.

      This is why new/unknown artists have learned to put their music out for free on the Internet. It’s the most perfect form of advertising. Here’s another quote -

      “Many writers worry about digital piracy if they put their work online, but you should be more worried about obscurity.”

    • Um, what free Google thing? Google is one of the richest companies around for a very good reason: it has paying customers. While it may be free for you as a user, it’s most certainly not free for advertisers is it?

      My point was not to say that nothing can be free. Rather, if one bit of the equation is free (Google Search in your example) there must be another part which isn’t (advertising in your example).

      Google is in the business of delivering an audience to a customer who pays a very high price for it.

      • Hobbs says:

        Has anyone ever advocated any other type of “free” model? What exactly are you trying to attack in your blog – does it even exist?

  10. If I get a drink someone else will go thirsty.
    If I eat someone else will starve.
    If I get gas someone else has to walk.
    If I get something for free someone else has to pay.
    There is a ludicrosity (I made that word up for you and since I typed it it’s real) in your blanket statement. You could apply it to anything, ANYTHING. If I have a baby someone else will go childless. It doesn’t hold water (and if it did someone else’s would spill on the ground). You can’t broadly stand atop a mountain and scream something is valid in this manner. It doesn’t look good.
    You seem to want to argue free as bad but free as good as long as “x” is met. You are agreeing to a reply that they are correct while it contradicts your own statement.
    You are using facebook, wordpress, twitter, etc. all for free. Well who are you screwing over and how do you feel about that; I mean someone has to pay right?
    If someone has to pay so that someone else can get something free then what we are looking at is 2 successful parts of a business model. Not one evil and one good. You sell one aspect of your business to one section of consumer while you give some aspect to another branch. If it brings some of those free to pay then great otherwise make sure you model is sustainable with the original model. That is just one example out of many in how free can be used but the fact remains it is still free for someone.
    See how I did that. By the same token you can claim someone always pays I can claim that for someone it IS free. If they didn’t pay in terms that you deem worthwhile and someone else did that does not make a spit worth of difference for that person who paid nothing. They still received whatever good/services it was for no cost.
    I only came here because I read a rebuttal article on Techdirt and felt that I needed to say something. I don’t appreciate your stand and I think you are either misinformed or afraid of the “new order” but I respect your right to voice your opinion.
    Have a good day and a better weekend.

  11. I think the comments here refute your post completely. We all know that nothing is free. We all know that free can only be a component of a sound business plan. You say Google isn’t free because they have customers. But they provide a service to both the ad buyers and the free searchers. What about church? Church is the very essence of free. Many are corporations, have employees, sell products and services. Yet much of what they do is free.

    I really don’t understand what it is about “free” that bothers you. It’s like you’ve taken a position and are trying to prove your right. Maybe you’re just being a devil’s advocate. That’s fine ’cause it’s given all of us a chance to crystallize our thinking and given us a forum in which to express ourselves … and all for free.

    Thanks and peace,

    Rob:-]

  12. Emmanuel says:

    Some Interesting points, unfortunately I have to disagree with most them because I think you have one fatal assumption here that Free has to mean not making any money what so ever. Thats far from the case, Free is a means to an end in a way, that end is generally making money and there are various ways how it gets you there.

    Lets consider Google since you mention that in your article, you’re arguing that Google is not free because Advertisers are paying. While it is true that advertisers are paying Google big money that only happens because Google offers free services to people. Free allows you to get a lot of people that a paid service will have a hard time to do if even can be at all possible. Having a lot of people opens doors such as advertisement or even acquisitions. That is exactly what Google do, they offer free services to the masses to lure as many people as possible. The more people they get the more money they can make by selling advertisement services. Just cause they’re making billions it doesn’t make their search engine and other services any less free to the masses does it?

    Free is not a magic formula that means you’re going to succeed obviously but if done right it can help and a lot.

    At the end of the day what free does best is get you people and thus exposure, its up to you to device your business model in such a way so those people are then converted into revenue.

    If you re-think your points with the premise that free is a strategy to make money elsewhere you might rethink some of your statements above. Once one realizes that Free can still mean big money as well demonstrated by Google and a large number of other companies, one can conclude that the intensives are there much like any other business model ergo there is in fact no less reason with free to be lazy, or design a product that is sub standard then a paid for version.

    Attracting the wrong kind of people to your product is still a possibility but I am not so sure thats not a risk for paid products as well! In any case this probably depends on the situation and will be something you need to keep in mind when designing your specific business model.

  13. You make some valid points, but ultimately the idea of “free” as in “freemium” is very much a legit concept and is used every single day successfully by hundreds of companies.

  14. Matt says:

    Richard please give some examples of companies implementing free and the value that gets destroyed in the process. You make some interesting points but they are somewhat abstract and academic without examples.

    If you are referring to those companies that provide their service totally free (note, not freemium as there is no paid tier) ["paid for" on the backs of investors if course :)] and never monetize but are rather acquired for their talent, product or user base, then no examples needed as they are more than plentiful.

    But please confirm either way.

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