#TBT: “Free” Is Not a Business Plan

Happy #TBT! Here’s an oldie-but-goodie post from Jim: “Free” Is Not a Business Plan.

Free is Chris Anderson’s latest book [@2009], and the premise is fascinating: In a world of bits instead of atoms (by which Anderson means electronic information as opposed to physical goods or services), the price of serving that one extra customer is so low as to be nearly zero. This in turn liberates the producer of such services to give them away on a broad basis and build the business financially in some other way.

And you know what? That’s absolutely true.

Google doesn’t need to and shouldn’t charge you for searches because you wouldn’t do them there if they did. You’d still be using Yahoo. Instead, they charge advertisers to reach you.

Anderson delineates several types of free, including that one and other familiar examples such as when you get something for free so that you’ll buy more later (free gym membership), or where you get one thing for free but to really use it, you have to buy something else (free cell phone, paid minutes).

Then there’s the type of free in which most people get the complete product for free and a small subset of users pay for an even better version of the product. This is called Freemium, and it’s perhaps best exemplified by online gaming, where 2 or 5 or 10 percent of customers pay for premium memberships while everyone else happily lives with a more stripped down (but nonetheless complete) version of the experience.

Again, absolutely right. And by the way, these ideas aren’t really new. Broadcast TV and radio are built on exactly the same premise: You don’t pay a thing to watch. Advertisers do.

Well, Anderson never said it was new, so I’m not criticizing him for that.

What I’m critical of is the attitude that people starting or running organizations should be cavalier about how they will make money. On the contrary, this is very important and should be at the heart of your thinking about your business.

I recently read this anecdote in a book by Bob Schwartz, but I’ll modify and paraphrase it for this instance: Imagine you’re on a river bank, and on the other side is the land of business success. Two-hundred swimmers hit the water, and just when they do, a swarm of alligators thrash around, attacking and chomping on the swimmers violently.

Just one guy makes it to the other side, turns back to your group of 200 and says, “Come on over!”

In my more than a decade of experience in the “bits” business, that’s about the ratio of success I’ve seen among companies who give it away for free and then say they’ll “figure out later” what the business model is. But that’s exactly what Anderson suggests as the “profit plan” in an “abundance world.”

Which is not to say that it can’t work. It just doesn’t work very often. If you’re up for it, and you like begging venture capitalists for money, go for it. That’s definitely one way to do business.

Use “free” as a lever. I certainly do it in my own business and you should too, particularly in the digital world.

But a lever’s useless without a fulcrum. That’s the business model, and it is NOT incidental.

The funny thing is that you only hear about the organizations that succeed using this model, and even many of those (Facebook, Twitter) are only dubiously successful when it comes to actual business results. It’s very easy to say “Oh, they’ll figure it out,” but I’ve seen one company after another, big and small, who thought this way fail to figure it out after years and years and millions and millions of dollars. A few have, for sure. Just not very many.

By contrast, the ghost fleet of companies that didn’t figure it out is huge. I have a certain kind of admiration for someone who likes to swim through alligator-infested waters, but I wouldn’t trust him with my money.

Would you?

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