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?
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.
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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