Skip
Current Issue
This Month's Print Issue

Follow Fast Company

We’ll come to you.

6 minute read

Leadership

How To Thrive In The Free-Product Economy

Someone will probably make a product just like yours, then give it away for free. Why not beat them to the punch?

Building technology has never been cheaper than it is today. Or faster.

In the past twelve months, Ruby on Rails programmers built more than a million apps on top of Heroku, a platform that allows coders to save drastic amounts of development time. Historically, the majority of the cost of a typical app comes from maintenance, says Heroku COO Oren Teich; companies like his build layers of technology that deplete those setup and maintenance costs—not to mention experience required—to build software. "Innovation is increasing," Teich says. "This is a huge trend we're seeing day after day."

Moore's Law says computer processing power gets steadily cheaper and faster to produce. This rapid innovation has given rise to new rules for technology pricing, essentially pushing prices down on even brand-new products. On the web, this is something I call the "Law of Free Product Economics," which goes as follows:

If a product on the market can be monetized by any means other than directly selling it, a comparable version of that product will eventually be offered for free.

It's Happened Throughout History

Early newspapers cost money; we paid for the product. But news eventually found another way to make money and simultaneously increase reach: advertisements. Since then, the price one pays for a newspaper or magazine is typically a fraction of the actual cost.

The parallel goes beyond news and content: As the cyberhighways of the 1990s expanded, the most basic, universal software applications (like email) quickly became free. Today, we're witnessing an acceleration of the trend toward free in products both consumer and enterprise.

It Happens Because Of Networks

An oft-mocked cliche of Internet startups is the practice of investors funding companies to build up massive user bases without clear ways to make money. Big networks like Foursquare, Twitter, and Facebook operate for years in the red until membership reaches some tipping point, after which monetization can be "turned on."

Network effects, however, have allowed purveyors of monetizable goods to set various products free in order to entrench users and build barriers against competitors. Google is famous for this. Google Docs, Gmail, Gcal, and a host of other products keep people within Google's ecosystem; the endgame—and what pays for all the free product development—is sponsored search advertising.

Another example, hand-made goods marketplace Etsy, lets its users build free e-commerce web pages, something other sites charge money for. Etsy makes money, of course, via transaction fees when customers buy scarves and mustachioed iPhone cases, but its software product is absolutely free.

It's Happening In Enterprise

Recent innovations have spurred discussion around a concept called "consumerization of the enterprise," or the trend of stodgy, corporate software being unseated by lighter-weight, easy-to-share, cloud-based tools like Yammer. Core to this trend is the "freemium" pricing model. Essentially, software is given away for free with limited features, and customers are charged only for more advanced features or for hosting.

As competition in app building increases, entrepreneurs are releasing better versions of enterprise software—with more features—at increasingly free-er rates.

It's Happening With Various Models

At the end of the day, in order for a product to become free, there must be another means of making money through it. Even in open-source software, monetization comes via donations. The most common ways product developers make money from free wares are the following:

  • Advertising and sponsorship: Content and networks are often monetized this way, though many other products are as well. Think Twitter, Pandora, Words With Friends, and this very website. In many cases, companies will offer to remove advertising if users make up the cost themselves, but the users never have to pay anything.
  • Hosting and storage: Often with SAAS products, users never truly pay for features; instead they pay for bandwidth, disk space, or air time. Wordpress, for example, is free, but charges a few bucks a month to users who want to host their blog on Wordpress servers with a custom domain. Per-seat or per-user enterprise products like Salesforce and Mailchimp essentially make money from data storage and server time, rather than on tools.
  • Transaction processing: As with products like Etsy and PayPal, tools tend to be free in marketplace businesses—both to encourage liquidity and because transactions are easily monetized via fees. There are even examples of this in the physical realm: Square, for one, gives credit card readers away for free in order to amass users, then makes money on transactions. 
  • Services: People will pay for red-carpet treatment, and free products often feed users into monetizable service upsells. For example, open-source programmers often charge for tech support on their free apps.
  • Cross-sells and upsells of other products: Inferior products may be given away in order to warm potential customers up to more lucrative products in a model dubbed "freemium." The Law holds up with freemium because at the top of the product food chain lives the product that cannot be monetized by another means. Everything below that point becomes free in support of the paid product. (Until someone else finds a way to make the premium feature free.)
  • Shortcuts or patience-busters: This method consists of giving apps away for free, but charging people money to jump the line or cheat. Social games like FarmVille are an interesting example of this: in-app purchases become a way to circumvent patience. In fact, at the 2011 Open Mobile Summit, FarmVille’s Director of Mobile said 90 percent of the game’s revenue came from in-app purchases, according to ReadWriteWeb

 

Of course, the existence of free alternatives does not mean some paid apps or games cannot compete on quality or uniqueness or brand. But the economics of an industry change quickly in the presence of the free option, which is quickly becoming a given.

Setting Your Own Product Free

For web innovators, the Law Of Free Product Economics may sound like bad news: You may have spent agonizing months of your life building a product; it should be worth something.

The good news is, parodoxically, giving your product away for free may unlock greater profit opportunities than if you keep it behind a paywall. Wordpress, Dropbox, Evernote, Aviary, Desk.com, and countless other everyday apps all thrive off of giving their core product away for free.

At my company, Contently, our core business is a marketplace (connecting journalists with publishers); however, in the process we've built our dream software tool: a workflow system for managing freelancers and editors in a cloud-based newsroom.

A handful of other companies sell similar tools; all of them charge on a per seat basis, the typical enterprise software approach. Naturally, we like our tool a lot more than theirs, so our first instinct was to make our product even more expensive. However, we realized that meant facing the inevitable fact that someone would one day release a free version, not to mention closing a product we loved off from a large number of people we thought could use it. So we crossed our fingers, and opened our platform gratis.

People go to great lengths for free. They're willing to give you all sorts of information and feedback, and they're often willing to hear a sales pitch for your upsell. (In our case, it's payment solutions and VIP service for big media companies and agencies.). Since releasing the Contently Platform for free, the influx of Fortune 500 brands and big media companies interested in our paid solutions has been, in a word, awesome.

The bottom line is someone will probably one day ship a version your product for free. Maybe it will lack this or that feature you hold so dear, but that won't matter. The broader the appeal, the more likely someone's going to undercut your paid product with a free one.

I say beat the competition to the punch. It's going to happen anyway. And setting your product free may just earn you the most business you've ever had.

[Image: Flickr user John Catbagan]

ARE YOU REGISTERED TO VOTE?
Register now to make sure you have a voice in the election.
loading