KEY POINTS:
Freemiums:
In a traditional business model, a company might give away 1 per cent of its stock to generate enough publicity to move the remaining 99 per cent. Freeconomics turns this around: companies selling, say, web email can still make money by giving away their product free to
99 per cent of users and charging 1 per cent of users for a premium product - as long as they are big enough. For example, Trent Reznor of the band Nine Inch Nails adopted a tiered approach to selling his instrumental album Ghosts. He gave away a limited version on the internet and then offered more elaborate versions for increasingly higher prices, peaking at US$300 ($500) for special artwork and packaging. "The reason this works is that the cost of serving the 99 per cent is close enough to zero to call it nothing," says Long Tail author Chris Anderson.
Advertising:
This is the Google model: offer a product for free, such as a search engine, and sell advertising on it. It's become the web's model of choice and it also supports real-world models, such as the Japanese company that offers free photocopying for students on pages that have advertising on one side. "These approaches are based on the principle that free offerings build audiences with distinct interests and expressed needs that advertisers will pay to reach," says Anderson.
Cross-subsidies:
Nothing new here - you give away one product for free in order to sell another product, usually complementary. Anderson cites the example of San Francisco saloons in the late 1800s that offered free meals for anyone who ordered at least one beer. The many modern-day equivalents include: Sky TV often offering a free decoder with a subscription; Vodafone giving modems to their new broadband users.
Zero marginal cost:
This comes back to the reason that the music industry has had to look away from CD sales to make money. "Between digital reproduction and peer-to-peer distribution, the real cost of distributing music has truly hit bottom. This is a case where the product has become free because of sheer economic gravity, with or without a business model," says Anderson. So you figure out other ways to make money: touring, merchandise, licensing or attaching it to another product. In June, New Zealand streetwear label Huffer offered a free Yes King album download to anyone who bought a $75 T-shirt.
Gift economy:
Just look at the open encyclopaedia Wikipedia for the best example of the gift economy - people donate their time and money to create a free encyclopedia. There are ways, of course, to use Wikipedia for indirect financial gain: perhaps a regional tourist authority or local council writes an entry on one of the towns in its area in order to deliver information to potential tourists or migrants.
