Marketing Book Free by Chris Anderson presented by Sreekumar Pillai

1. The Economic Concept of Free
Chris Anderson
presented by
Sreekumar Pillai
1st October, 2012
Book
Introduction

2. Free
The Economic Concept of Free
by
Chris Anderson
Presenter : Sreekumar Pillai

3. Table of Contents
1. Objective
2. The Birth of “Free”
3. The Psychology of “Free”
4. The new “Free”
5. Free as Cross-Subsidies
6. Free 1: Direct-Cross
Subsidies
7. Free 2: The Three Party
Market
8. Free 3: Freemium
9. Free 4: Non-Monetary
Markets
10. Moore’s Law
11. Mead’s Law – Compound
Learning Curve
12. Economics of the “Free”
world
13. How can Airline Travel be
Free?
14. How can a Store give away
products for Free?
15. The Battle over Free
Webmail Yahoo Vs. Google
16. “Free” in Software Service
Industry?

4. Objective:
Shared Learning Sessions : The series of sessions of which this is the first is
intended to facilitate Group Discussions and create opportunities for Shared
Learning.
The topic under consideration here is “ an Economic concept of Free” as
propounded by Chris Anderson: Editor-in-Chief of the Wired Magazine.
The intention of this session is not to delve deep into the scientific validity of
any of the author’s observations; but use it to spur our thought processes.
We will find how the Psychological & Economic concept of “Free” is related
to our business and utilize the knowledge to define pricing strategies to
maximize growth.

5. The Birth of “Free”
Pearle Wait started Jell-O that manufactured edible Gelatin in 1895. He was
unsuccessful in marketing the product since Gelatin was literally unknown to
house wives at that time. In 1899 he sold the company to Orator Frank
Woodward, a local salesman for $450.00
• Woodward was not successful until 1902 when Woodward and his marketing chief,
William E.Humelbaugh tried an innovative idea.
• Jell-O salesmen distributed tens of thousands of Pamphlets to homemakers that had Jell-
O recipes, for “Free”; and merchants were advised to stock the product anticipating
enquiries.
• By 1904, the campaign was a big success and in another 2 years, Jell-O hit a million
dollars in annual Sales. The concept of “Free” was born.

6. The Psychology of “Free”
Psychologically, the feelings about “free” is relative not absolute. It can
create either of the two perceptions:
– Additional value
– Diminished Quality
• If something used to cost money and now doesn’t, people tend to correlate
that with a decline in Quality.
• If something never cost money, its quality is taken for granted.

7. The new “Free”
The new form of Free is driven by an extraordinary new ability to
lower the costs of goods and services close to zero.
• In traditional economics things tend to get more expensive over
time.
• In digital economy, which is the online world, things get cheaper.
• Traditional economy is inflationary, while the bits economy is
deflationary.
• “freeconomics” is being driven by the underlying technologies of
the digital age.

8. Free is a kind of Cross-Subsidy
All forms of Free boil down to variations of the same thing: shifting money
around from product to product, person to person, between now and later,
or into nonmonetary markets and back out again.
Economists call these “cross-subsidies.” Cross-subsidies are the essence of the
phrase “there’s no such thing as a free lunch,” meaning that one way or
another the food must be paid for, if not by you directly then by someone else
in whose interest it is to give you free food.
• FREE 1: Direct-Cross Subsidies
• FREE 2: The Three-Party Market
• FREE 3: Freemium
• FREE 4: Nonmonetary Markets

9. Free 1: Direct-Cross Subsidies
What’s Free : Any Product that entices you to pay for
something else.
Free To:
Everyone willing to pay
eventually, one way or another.
Zapos.com offers free shipping
back and forth to its customers
any number of times to encourage
online shopping.
Flipkart.com offers free shipping
combined with CoD option for
payment.
In any package of products and services, from banking to mobile calling plans, the
price of each individual component is often determined by psychology, not cost.

10. Free 2: The Three Party Market
What’s Free : Content, services, software and more.
Free To: Everyone
Here, a third party pays
to participate in a market created
by a free exchange
between the first two parties.
A publisher provides a product
for free (or nearly
free) to consumers, and
advertisers pay to ride along.
Free credit cards to consumers
means more spending at
merchants and more fees for
issuing banks.

11. Free 3: Freemium
What’s Free : Anything that is matched with a premium paid
version.
Free To: Basic Users
One of the most common Web
business models.
Software companies provide varying
tiers of content
from free to expensive, or a premium
“pro” version of software with more
features than the free version.
A typical online site follows the 5
Percent Rule –– 5
percent of users support all
the rest. In the Freemium model, that means for every user who pays for the premium
version of the site, 19 others get the basic free version. The reason this works is
that the cost of serving the 19 is close enough to zero to call it nothing.

12. Free 4: Non-Monetary Markets
What’s Free : Anything people choose to give away with no
expectation of payment.
Free To: Everyone
Gift Economy:
12 million articles on Wikipedia
and Open source software is
offered free. We are discovering
that money isn’t the only
motivator. Altruism has always
existed, but the Web gives it a
platform where the actions of
individuals can have global
impact.
Labor Exchange:
You can get access to free
[content] if you solve a few captchas, those scrambled text boxes used to block spam
bots. Ironically, your human pattern-matching skills to decipher text that originated on
some other site, by getting this solved, the spammers can gain access to those sites.

13. Moore’s Law
Moore’s Law dictates that a unit of computer processing power halves in
price every two years, the price of bandwidth and storage is dropping
even faster.
• The number of bytes that can be saved on a given area of a hard disk doubles
about every year.
• The speed at which data can be transferred over a fiber-optic cable, doubles every
nine months.
• The Internet combines all three, compounding the price declines with a triple play of
technology: processors, bandwidth and storage.
• As a result, the net deflation rate of the online world is nearly 50 percent, which is to
say that whatever it costs YouTube to stream a video today will cost half as much in
a year.
• The trend lines that determine the cost of doing business online all point the same
way: to zero.

14. Mead’s Law: Reason for falling prices
Semiconductor chips roughly double the number of transistors they
can hold every 18 months.
This was not just due to the standard
learning and experience curves but also
due to “compound learning curve” : a
combination of learning curves and
frequent new inventions.
There was a major invention every
decade or so that kicks the industry into
the sharp-decline part of the curve again.
As one production process nears the tail
of its efficiency improvement cycle, the
incentive to come up with something radically new and better increases. This creates a
cost decline never seen before: ultimately, the price matches a near zero.

15. Economics of the “Free” world
Prices of Primary inputs to industrial economy is going down
to such an extend that it has become “Too cheap to
meter”.
Economic Impact:
• Because of this, innovative pricing schemes can be devised.
• Rather than selling a product for what it costs today, you can sell
it for what it will cost tomorrow.
• The increased demand this lower price will stimulate will
accelerate the curve, ensuring that the product will cost even less
than expected when tomorrow comes and you make more
money.
Three technologies: computer processing power, digital storage
and bandwidth are getting too cheap to meter.

16. How can Airline Travel be free?
Free Air Travel: Factors that makes this possible
Sources of Revenue:
• Food and beverages are
charged.
• In-flight advertising
• In-flight sales
• Charge for extra baggage
• Variable pricing. The tickets are
charged 4 to 5 times the normal
charge close to the schedule
• Credit card handling fee
Manage Costs:
• Going e-ticket
• Control on cancellation fees

17. How can a Store give away products Free?
Pricing for giving away everything in a store for Free.
Sources of Revenue:
• Charge for entry. Only registered
members are allowed to store
• Charge rental for “Shelf Space”
from product companies
• Revenue from customer feedback

18. The Battle over Free Webmail
Yahoo Vs. Google.
2002:
Yahoo has a premium version of the email
service charging $29.99/year for 25MB
Cost of Storage space: $ 2.50 per MB
Revenue per User : $ 10.00 per user
2004:
Google gives Gmail free with 40 MB space.
Cost of Storage space : $1.00 per MB
Revenue per User : $ 35.00 per user
2007:
Increasing Revenue Per User
Cost of Storage space : $0.25 per MB
Revenue per User : $ 90.00 per user

19. Free in Software Industry?
How can we relate the economics of “Free” to Software
Services Industry?

20. Book Details:
Free – How today’s smartest businesses profit by giving something
for nothing.
Edition 2009,
Random House Business Books.
Price: Rs. 399/-

21. Thank you !!