Disclaimer: This is Version 1 of some ideas I have been kicking around. Would love feedback, as I am sure there is plenty of work to do with these concepts. This is dedicated to the head of Gucci Warriors. Thank you for your painful lessons.
Today I participated on a panel at the MAVA CEO Roundtable where a big topic of discussion was ‘What do we do about free?’ More specifically, ‘should we give things out for free?” Well, in my experience, it seems that there really is no such thing as truly free. There is always a cost. It may be something you are happy to part with, or it may not be collected quite perfectly, but there is always a cost.
Hold on a second, Hooman – what kind of craziness is this. Isn’t everything on the web free? No.
Every product online has a business model. There are three models that rule the web:
1. Subscription – Salesforce
2. Media – Google Search
3. Transactional – Amazon
These are all what I call ‘Direct’ business models.
More and more today, there are folks that have created products, or services that do not adhere to a Direct Model. In fact, these products are given to a set of their constituents for ‘Free.’ Well, these are not free. Users pay (or had better pay) – indirectly.
An ‘Indirect Model’ is a part of total business model that ultimately is driven by a Direct Model. Indirect models feed one, or more, Direct Models. For example, Google gives Analytics away for free. This is an Indirect Model. The developer using Google is agreeing to let Google leverage the data in aggregate to optimize and create other services like advertising. From an accounting perspective, the cost of operating this service should almost be associated with the revenue generated from things like Adsense. Adsense is the Direct Model supported by an Indirect Model that is Analytics. Quantcast is doing something similar. Quantcast gives away it’s tracking services (Indirect), to support a future revenue stream in ad-optimization, or audience measurement (both direct).
Another way that ‘Free’ is used is as a Marketing tool. This is the ever-popular ‘Free-mium.’ Give away the lowest common denominator as a tool to upsell the potential client on a new service. This works if the amount you invest in online marketing of your free service plus the cost of running the free service is ultimately less than the cost of customer acquisition for alternative marketing to your ultimate target base.
This can be tied to an ‘Indirect’ Business Model for what I like to call the Double-Whammy effect. For instance, Google can leverage Analytics to cross-sell Adsense (Marketing) AND use the data to optimize Adsense (Indirect Model). Not all Marketing is part of an Indirect Model, but all Indirect Models could potentially be used to build a brand.
So, long story short, there are no businesses that give things away for free. Free implies that you pay nothing to the vendor. That is simply not true. They are really just leveraging an Indirect Model, or using it for Marketing, which ultimately benefits some direct model. Ultimately, you pay, you just don’t know it. You are either giving them data, or are acting as their marketing engine because you are more cost-effective then another campaign.
Just for fun, I tried applying this idea to Open Source. It works pretty well. For bonus points, let’s try it with Eclipse. For non-geeks, Eclipse is a popular Open Source tool used by developers to create software. It also happens to be moderated and supported by IBM. Well, how does this fit into the above framework? IBM uses Eclipse brilliantly. It is a Marketing tool to upsell and cross-sell businesses on services and products in the IBM Suite. Rational Software just happens to plug-in brilliantly to Eclipse. The lesson? He who controls the standard – or source – can always create the best products for the standard. You are paying them because you are building their brand and their potential x-sell reach for other Direct Models.
Granted, the efficacy of these mechanisms is undoubtedly still being ironed out and it is hard to really get these ‘right.’ Admittedly, I wrestle with the best way to do balance the force, as do we all. Nonetheless, interesting topic.
Enough ranting – gnight.