There is no such thing as a free lunch.
Hmmm. Chris Anderson’s book Free: The Future of a Radical Price says that almost everything faces pressure to reduce prices to that lowest price, zero. Chris writes aboutsome extreme examples where even items with positive variable costs are sold for nothing. For example, Rynair’s CEO hopes to make all seats on his flights free. Think about that for a second. A company pays to provide something with a real cost, then gives it away.
But there’s no such thing as a free lunch. Rynair sells other travel services and may be able to offer gambling or sell some other products to make money. Although Rynair gives something away, the company only survives if it makes money somewhere. In the long run, revenue must exceed costs or the company goes away.
OK, that seems extreme and obvious. But what about digital content. The variable cost of digital content is essentially zero. It makes sense that the price should go to zero as well.
But there’s still no such thing as a free lunch. Companies will not deliver new digital content if they can not make money. They must charge for something or they will go out of business. Many companies give away digital products to sell physical products or other services. For example, many companies now publish highly informative blogs and websites in the hopes that when you buy in their category, you will buy from them. I was in the market for a smoker. As I read about smokers and how to smoke meats, I kept going back to the cook-shack website where they offered many helpful hints and tips. In the end, I bought a cookshack smoker (and the Brisket is phenomenal).
The point was that cook-shack and other companies give away free content in order to gain your attention and your favor in hopes of winning your purchase. The content is free, but they make money elsewhere.
So far, everything in this blog seems obvious (at least after reading it). Why bother writing it? I wrote this because I’ve been thinking about the concept that the prices of all products have pressure to go to free. It didn’t seem realistic, but it’s what I inferred from Chris Anderson’s book. As we can now see, all prices will not go to free. It’s not possible. Somehow, a company must make money to stay in business, and a company only makes money when it sells something, meaning a price higher than zero.
To be fair, Chris Anderson didn’t claim that all things go to free, I inferred it. In fact, in the back of his book he listed 50 business models for free and each one includes both something free and something the company sells.
Here’s the next question I’m struggling with: What will be free and what won’t?
Imagine a store that gives away hot dogs and sells hot dog buns. That’s a feasible model to make money. Now imagine a store next door that gives away hot dog buns and sells hot dogs. That’s a feasible model by itself, but probably not so feasible located next door to the first store. A savvy shopper would get the free buns at one store and the free hot dogs at the other.
Which product should be free? A first pass answer is items with lower variable costs are more likely to be free. In the hot dog and bun example, the buns are more likely to be free. This explains why so much digital content is free.
However, this answer doesn’t yet feel right, but it’s the best I have for now. If I come up with a better answer I’ll be sure to share it. What are your thoughts?
What lesson should you extract from this rambling? Think again about what you can offer for free and how you can leverage that into sales of another product. Free can be an effective part of a business model. Use it wisely.