Untangling the confusion over different kinds of free, which can range from a simple marketing gimmick to a radically new economic model.

The first, which dates back more than a century. It’s the razors-and-blades model, as well as loss leaders of all sorts, from “free gift inside” to “free toaster for opening an account”. Get one thing free, pay for another.

The second is the media business model, ranging from free-to-air broadcast radio and television to all ad-supported content online today. Third party subsidizes second party.

The third is the new one, enabled by digital markets where the marginal cost of production and distribution is close to zero.

This is the one that allows the “freemium” business model, where 90% of the users get the basic product for free and 10% chose to pay for a premium version. In economics this is called “versioning” and is a form of using price discrimination (where the main price is zero) to maximize both the consumer utility and the profit in a market. In this model, charging a small percentage of a large user base beats charging a large percentage of a small user base.

Obviously best for consumer products with potentially large appeal, it’s the main Web 2.0 business model and can be found everywhere from Flickr and Flickr Pro to open source’s “support included” commercial versions of Linux.

Photo by churchillmethod.com.

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