Fast Company

Why Charging Just a Little Can Be Smarter Than Charging Nothing at All

The strategy of giving everything away often creates as many hassles as it solves. Why charging just a little can be smarter than charging nothing at all.

Google's much-anticipated desktop operating system, Chrome OS (debuting in late 2010), has one main selling point: It's free. The search company plans to give the software to computer makers in an attempt to amplify its rivalry against Microsoft. That's Google's way -- nearly everything it makes is free to users.

In an earlier generation, we might have scoffed at this marketing strategy. What business gives away its products? But not anymore. Free is the new normal. Today, every business that deals in intellectual property -- from software to journalism to music -- feels the no-cost push. If you're not giving it away, the thinking goes, you must be doing something wrong.

Though digital prophets champion our pay-nothing future, it's instructive to consider why free sometimes fails. To return to Google's Chrome OS, sure, Google will persuade some computer makers to install the OS. But when you consider what free really buys, the answer is not much. The computers are likely to sell at $20 or so less than the price of comparable Windows machines (Microsoft sells Windows XP to netbook makers for just $15 a copy). In exchange for that slightly lower price, customers will get computers that do much less -- they'll run fewer programs and connect to a smaller range of peripheral devices. And good luck finding tech support.

Most consumers get it. There's already a free operating system for computers: Linux. Yet netbooks running Windows outsell their Linux counterparts by a margin of nine to one. In other words, free is getting trounced.

Why? Because free costs too much, weighed down with hassles that you'll happily pay a little to do without. That's why people buy bottled water and cable TV. That's also the model that The Wall Street Journal uses to goad people into paying for news online. Anyone can read its stories for free through Google or a news-aggregation site like Digg, but people who want the full newspaper experience pay $103 a year for the privilege. More than a million subscribers consider that a good deal. This isn't an anomaly, either. According to a recent study by the private-equity firm Veronis Suhler Stevenson, consumers now spend more time reading or watching media they've paid for than free media.

There are also natural advantages to charging a price -- for starters, revenue, which can fund such extravagances as marketing and support. Google's free cell-phone operating system, Android, has had a tough time competing with Apple's iPhone in part because Apple has the funds to spend big sums on advertising and to staff its Genius Bars. Apple makes an enormous profit on each iPhone; Google, meanwhile, will make money only incidentally -- through advertising revenue from people who use Google products on their phones.

Some companies have been at the vanguard of making a paying business out of "free." IBM, HP, and other tech giants generate significant revenue selling consulting services and support for Linux and other free software to businesses. These customers are willing to pay for nominally free products, because they understand that only when money changes hands does the seller become reliably responsive to the buyer.

Even Google is starting to learn this lesson. You can run Gmail and its office suite for free, but if you'd like tech help, better reliability, and someone to blame when everything goes wrong, you have to pay. Perhaps Google should take this strategy more to heart. If rock-bottom prices don't work out for Chrome OS or Android, there's only one way to go: up.

Farhad Manjoo covers technology for Slate and is the author of True Enough: Learning to Live in a Post-Fact Society.

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9 Comments

  • Eugene Cantera

    You had me at the opening paragraph. My colleagues and I at MusickEd.com have gone round and round about this very topic. We could easily make our sequential music learning software available for free online and be at once social heroes and at the same time run the risk of being lumped in with the vast array of lousy music learning material already crowding the internet. Instead, we've opted to hold firm and make it affordable so that we can continue to write, develop, provide support, and foster a community of world-wide users.

    At a time when 'save the music' programs have been generally unsuccessful at stemming the tide of art and music program cuts, it's sort of nice to buck the trend and go the entrepreneurial route. Thanks for a thought provoking article.

  • Jason Vincik

    I completely agree with David Sky. Google has achieved one of the highest stocks in history because its business model offers quality products at no charge. The Internet has experienced some major changes over time: at first, it was a place to connect with now archaic technology such as IRC. The Web evolved into a portal for everything search. If you needed to find something or learn about something, you went to Yahoo.com and performed a search. Next came the addition of retailers seizing the power of the virtual space, selling products left and right. Finally, the Internet evolved into a forum for social connectivity and engaging your customers with your product offerings.

    On the contrary to Mr. Majoo's article here, online behavior has shifted from paying for products to finding anything and everything for free. Try Google's Adwords Keyword Tool and perform an analysis on the word "free." Five hundred and six million searches were performed in the last month just containing the word "free."

    Smart companies will take a close look at what Google has done with their business model and try to mimic the behavior.

    Case and point: an innovative and new company is emerging on the Internet called iJango. The founder of iJango discovered that the single most important thing you can offer to any person online is something for free. He took it a step further by developing incentives to those who perform every day tasks on the Web. Partnering with Google, Yahoo, MSN and hundreds of other Fortune 500 companies, iJango is about to revolutionize how we utilize the Internet. Now, you can get paid just for performing a simple search on the Internet. The magic in this equation is the FREE business model. People want something for free. Online, we all expect it. If I had to pay for Google, I wouldn't use it. If I had to pay for technical support - I'd figure it out myself or research a million articles online until I became knowledgeable on the subject.

    Paying for a webinar? Forget it. Nine out of ten webinars result in a sales pitch anyway. As a marketing consultant, I understand that webinars are an effective marketing tool - but, that's it - just a marketing tool. I would never pay for a Webinar knowing that my contact information will end up in the hands of a sales person. In essence I'm paying someone to telemarket to my phone number, send me countless spam messages and try their hardest to sell their widget or Spacely Sprocket to me.

    To further substantiate my claim, I'll add this: as a 30-something professional, I watched the Internet evolve since I was around the age of 20 years old. As a Generation X-er, my behavior online is closely aligned with Gen Y or "Millennials."

    Gen Y and the newest Gen Z have known nothing BUT technology, cell phones and the Internet. These kids were born with a laptop fastened firmly to their shoulders. Anything and everything these kids consume is built around the Internet. Many of them don't know what a vinyl record even looks like. Even more...why would they pay for an MP3 music file when one of their friends can email it to them for free?

    Gen Z is who we will be marketing to in the next few years to come. Knowing this about their behavior will mean the difference between sales and crashing and burning.

    --
    Jason L. Vincik
    Marketing Communications Consultant
    New York, NY
    http://www.thevinciks.com

  • Mohamed Abdelaziz

    I couldn't conclude if you actually support Free or not. I simply don't. Google's best bet is to offer a vanguard product/service innovation with their new OS, which would make people want to try it and even pay for it. ABC marketing (old school but I strongly believe that it still applies to almost everything): Free trial is weak/wasted trial. Consumers have 20-50$ to spend on an OS, but they'll invest it only if the product offers an advantage.. so let's wait to see what Google's innovating this time!
    A comment on your last point "If rock-bottom prices don't work out for Chrome OS or Android, there's only one way to go: up": I sincerely disagree, once you offer something for free, it's a lot more difficult to ask people to pay for it. Pricing down/ slashing price is a lot easier than pricing-up/charging. Google should maybe try to charge for their Chrome, then give it out for free/discounted price when charging money proves to be an issue.
    Mohamed Bakry

  • Joe Harder

    I'm pretty happy I bought 100 shares at $295 or so...

    But seriously, Google is such an interesting example of a company taking a different approach and seeming to be successful at it (at least for now). Can they continue to adapt as they grow and technologies change will be the question. I personally would rather have free support for a paid-for product than have to pay to get support for a free one, but Google does have to keep the revenue stream going somehow. It's like the article from a couple of days ago about free wi-fi on planes. If it's all free, you're probably in trouble as a business, so figuring out what should be free, what should be cheap, and what should be dear is a critical decision.

  • Joe Harder

    I'm pretty happy I bought 100 shares at $295 or so...

    But seriously, Google is such an interesting example of a company taking a different approach and seeming to be successful at it (at least for now). Can they continue to adapt as they grow and technologies change will be the question. I personally would rather have free support for a paid-for product than have to pay to get support for a free one, but Google does have to keep the revenue stream going somehow. It's like the article from a couple of days ago about free wi-fi on planes. If it's all free, you're probably in trouble as a business, so figuring out what should be free, what should be cheap, and what should be dear is a critical decision.

  • Joe Harder

    I'm pretty happy I bought 100 shares at $295 or so...

    But seriously, Google is such an interesting example of a company taking a different approach and seeming to be successful at it (at least for now). Can they continue to adapt as they grow and technologies change will be the question. I personally would rather have free support for a paid-for product than have to pay to get support for a free one, but Google does have to keep the revenue stream going somehow. It's like the article from a couple of days ago about free wi-fi on planes. If it's all free, you're probably in trouble as a business, so figuring out what should be free, what should be cheap, and what should be dear is a critical decision.

  • David Sky

    Um, there is a huge hole in your logic... I agree that consumers want support for a product, and in the past paying money was the best way to get that. But the entire existence of Google, and the key to its success, is giving away free services in the first place.

    Sure, they have a way to go with Android, and support for an operating system is different than serving up search results people really do find useful, but I think they'll manage to figure this out as well (or, as you said, other companies will make money selling support for the Chrome OS).

  • Aly-Khan Satchu

    The Future is slicing and dicing real fine and creating a micro Payment like Channel. The analogy with Google is incorrect. Google are the preeminent platform and thats chasing 6b Consumers and that needs to be free. Owning that Option is a very valuable and scaled thing.
    Aly-Khan Satchu
    www.rich.co.ke
    Twitter alykhansatchu