Free is not a business model

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Free is not a business model

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Firstly – I’ll start by saying I think Chris Anderson is an incredibly clever guy. I thought his book ‘The Long Tail’ was and is the future of business.

But when it comes to ‘free’ he has got it wrong this time. As has Seth Godin and all the other ‘free’ converts.

As Malcolm Gladwell correctly points out, they are forgetting many of the fundamentals in business, by getting caught up in the stale newspaper argument, which in the new digital economy is easy, soft and will disappear.

The irony of this ‘newspaper’ argument is certainly lost in the broader economy. The non-digital economies are a lot bigger than newspapers and other beleaguered digital industries.

So why is ‘Free’ not a business model?

Quite simply, any business without a revenue-generation model won’t exist over time. We only need look at the dot-com bust of the late 1990s to see this reality.

It’s also much too easy to get caught up in the success of Google and others who ‘started free’ to build demand.

But many of the subsequent ‘Free’ offers – like YouTube, Facebook, MySpace, Flickr – are considered successful for the owners only because they sold to a business with a large chequebook – not because the business itself was financially successful.

The Google business model is not too dissimilar to that of Network TV – generate eyeballs, sell advertising. Nothing new here.

The real question in the so-called ‘Freeconomy‘ is how many businesses can be supported by the advertising sales model? Why the idea of ‘Free’ is being touted as new is beyond me.

Here’s what ‘Free’ really is: it’s part of the marketing mix.

It’s the 4th P: Promotion.

It always has been and always will be.

Anything a company gives away for free is a promotional tool to sell something. If these businesses who use the so called ‘free model’ fail to sell something, there are only two options for them as time passes:

  1. Go broke and run out of cash
  2. Get bought by large company who values what they have created, albeit ‘non-financial’

Whether it be Proctor & Gamble giving free shampoo in letter boxes in 1957 or Google giving free search and maps in 2009, it’s part of the mix to attract potential customers, who will be converted into ongoing revenue. It isn’t free.

Free is not a business model. Moreover, it’s sampling and promotion for associated revenue-generating activities. So to call it the future of business as ‘free’ is absolute folly.

Sure Anderson can argue that digital stuff is becoming so cheap it may as well be free – as per the transistor example he uses. But the thing that really costs money is building demand and infrastructure – the kind of stuff that’s really expensive.

The other point to consider is that just because some things that previously cost money (i.e. newspapers) are now available free online, doesn’t mean everything is heading down the free path.

Rather, it means that certain industries are dying – not that ‘paying’ will be a thing of the past. In fact, there are just as many examples of items that were once free and are now being charged for: education, toll roads, water, seeds.

The advice I’m giving here is simple.

No business can survive without revenue. Free, isn’t free, but a promotional expense, the fourth ‘P’. If your industry is getting flooded with free, it’s on its deathbed – look elsewhere. Industries die all the time when the revenue dries up, just like those trying to cope with the current digital conversion. Don’t assume you can build something awesome and give it away, relying on your ability to sell it (the business) or something associated later. Chances are you’ll run out of money before that.

The future of business isn’t free, and the idea isn’t new. It’s part of a complex marketing mix. And if you want to own a start-up to thrive, my advice is simple: have a price that isn’t all zeros.

Stephen Sammartino escaped his cubicle after 10 years marketing global brands. He has now founded two start-ups, recently launching Rentoid.com – the place to rent anything.

Photo: royblumenthal

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