Freemium content

Chris Anderson looks at the "Economics of Giving It Away", the move to free digital products:

Over the past decade, we have built a country-sized economy online where the default price is zero — nothing, nada, zip. Digital goods — from music and video to Wikipedia — can be produced and distributed at virtually no marginal cost, and so, by the laws of economics, price has gone the same way, to $0.00. For the Google Generation, the Internet is the land of the free.

Which is not to say companies can't make money from nothing. Gratis can be a good business. How? Pretty simple: The minority of customers who pay subsidize the majority who do not. Sometimes that's two different sets of customers, as in the traditional media model: A few advertisers pay for content so lots of consumers can get it cheap or free. The concept isn't new, but now that same model is powering everything from photo sharing to online bingo. The last decade has seen the extension of this "two-sided market" model far beyond media, and today it is the revenue engine for all of the biggest Web companies, from Facebook and MySpace to Google itself.

Economies of scale still apply — in fact, they may apply more in a digital sense — the minimum numbers are still not trivial. For example, this site is not ad-supported, largely because the traffic is not high enough to make it worthwhile for advertisers to place ads here: the tiny proportion of visitors who might click on an ad make the potential revenue smaller than the (admittedly tiny) administration cost to track and account for.

In other cases, the same digital economics have spurred entirely new business models, such as "Freemium," a free version supported by a paid premium version. This model uses free as a form of marketing to put the product in the hands of the maximum number of people, converting just a small fraction to paying customers. It's an inversion of the old free sample promotion: Rather than giving away one brownie to sell 99 others, you give away 99 virtual penguins to sell one virtual igloo. (Confused? Ask a child: This is the business model for the phenomenally successful Club Penguin.)

Variants of this model have been in use for quite some time. One of the very first software packages I used was a word processor called PC Write by Quicksoft, which was a very early version of the "Freemium" model: there was no charge to use the product¹, but by paying extra you got additional features, a printed manual, and free technical support. For the early 1980s, it was a radical business model (and an excellent quality product for the time).

Many iPhone applications have both a free "light" version and a paid "full" version: the installed base is now large enough that it is a very successful model for the producers.