Chris Anderson, of the long tail, wrote a nice post about the “free” business model. He gets a lot of questions on that, as people are often confused how it works (someone has to pay the bill, and someone has to earn revenues). He provides 5 simple examples:
1) Giving away things for free and make sure the bill is payed by advertisement. He accurately points out that the master of this game is Google.
Think of these markets not as a two-way relationship between buyers and sellers, but a three-way relationship where the third party can be drawn in by something free that creates the product to be sold (in the case of advertising, this “product” is the fabled “eyeballs” that advertisers buy).
2) Redefine the market you are in. Easyjet is the example here. They do not seel airplane seats, they sell transportation. A flight can then cost only 5 pounds.
They sell hotel and rental car reservations to passengers. They sell tourists to the smaller cities the carriers serve (the payment is in the form of the huge discounts they get on landing fees). They sell cargo shipment to the companies that put packages in the hold (which is why the low-cost carriers tend to charge extra for baggage). They even make money off the food and drink they sell on board
3) His third point is interesting because he talks about the truly free services now competing with the “free but ad-based” services. This is the part where Facebook is wandering around in my opinion. Their business model makes them vulnerable to consumers that don’t want ads. Under the pressure build up they are now retracting their original beacon ad model and providing the user (an inefficient) opt-out possibility. Facebook will be stretching the limits on this one, but I bet, if users have to opt out every time for different applications they will get even more annoyed than when they didn’t even know they could opt-out. Oh boy, this is like a boomerang catching up.
Chris ends with the observation that since transactional cost on the Internet are virtually zero anyone can use it as a distribution mechanism.
Finally, is this a trick? Well, yes, sometimes it is. But not a deceit, just an appeal to psychology. “Free” has a power to entice. It grabs the attention, and no more so than when it really does appear to involve some sort of magic. And let me tell you, a flight across Europe for five pounds is indistinguishable from magic. Not quite free, but close enough to fire the imagination. What else could cost almost nothing?
I have taken a stand against the current web 2.0 free but ad based web model so far. I was thinking about the article Chris wrote and if it would change the way I feel about it. It hasn’t. Not really. Chris actually does a great job pointing out the successful cases. In my opinion in all of these cases the business model was driven by user value! Google’s revenue streams are ads, they take 75% of ALL ad revenues on the Internet. And they provide everything for free. But they are so clever with ads. You never associate Google with negative feelings about ads because they serve them at the right time. Why others even bother to get their advertisement business up and running against such a large competitor is beyond me, unless they can provide user value like Google does.
Easyjet, Ryan air, they provide appealing user value. Travel around the world (almost for) free. You take the small seats, the lack of service, the small hotel rooms, pay for drinks on the plane, because Easyjet provides you value. You know that if you get out of the plane you are in the centre of Rome, having the time of your life!
It did get me thinking on one aspect I have been talking about. I tend to advocate that in your business model you should focus on user value, and make him pay for that. This is a valid, and often much preferable business model than the free but ad-based model. But, Chris nicely pointed me to another option. It is an option that goes beyond the buyer-seller relationship. It is the option that involves 3 parties, as you can read in the quote of Chris I provided earlier. But this option only works if the user gets (or perceives to get) value.
Given the commotion on the Facebook strategy, small ripple turning into an avalanche which will gain strength over time, I think they got it wrong. They are providing the user value with the Facebook functionalities. But they aren’t providing value with either Beacon or SocialAds. And that is where they get it wrong. It is just a billboard scheme in a new coat. People will recognise it for what it is, and ignore it.
Thanks Chris, your observations have made me think again about business models. User value remains the single most important driver in any business model. Anyone care for a free lunch?