How the Concept of Free Would Work
Chris Anderson, editor-in-chief of Wired, explains the meaning of the disconnect between the price of production and the final price of the product.
How the Concept of Free Would Work
Question: How will we decide what is free and what isn’t?
Chris Anderson: I think the most profound thing about turning products into digital
products from my perspective is that price becomes arbitrary. In
the traditional world, there’s a pretty strong correlation between
the cost of a product to make and the price you can charge for it.
You charge something that's slightly above the cost and the more
competition there is, the less you can charge. It tends to drive
prices down to the marginal cost. In digital products where the
marginal cost is zero, the price can be anywhere from zero to
infinity. There is a complete disconnect between the price of
production and the price you charge. What this means is not that
everything goes to zero, you get a range. You get a much wider
dynamic range of pricing from zero to higher. Now how is that
The way it’s possible is that you’re using free to reach the broadest
possible audience, and then you segment that audience into
different ability and willingness to pay, which means you’re doing
different products. You’ve got Flicker and then you’ve got Flicker
Pro. What you’ve done is you’ve sort of said, here’s a service and
utility to all people who’ve got photographs. However, if you’re
really keen, if you’re a super enthusiastic photographer, at some
point you’re going to want more space. You’re going to want
better features, etcetera.
At that point, we convert you to pay and because you’re so
invested in the service, because you care so much about it, you are
kind of the alpha user; price is almost immaterial to you. You
value the service so much that you are willing to pay almost
anything. You’re willing to pay more than you might have if they
had a one size fits all product for almost anybody. That one would
have to be relatively cheap. Zero is the one that fits everyone. And
9.95, 19.95, 29.95, whatever, becomes the one for the segment of
enthusiasts. You can build a good business where you charge more
to some customers and less for others.
Question: Is market segmentation the answer?
Chris Anderson: Absolutely. What digital allows you to do is to have a range of
prices. What digital requires you to do is a have a range of
products. One of the examples I give a lot is the video game
industry, which may seem trivial but is a fascinating experiment,
watching an industry shift from silver discs, online, on their own
terms. The music industry had it sort of happen to them. Software
is kind of doing it as it shifts from discs to software as a service.
But the video game industry is doing it driven by consumer
demand. Starting in China and Korea is doing it to sort of reinvent
what they do. And as games become single player to massively
multiplayer, they start to follow the World of Warcraft model. It’s
a bit fascinating to watch them to figure out as they go on they tend
to be free to play and then to convert five percent, ten percent, to
One of the best examples that may be familiar to many people
watching is Club Penguin. Club Penguin is a game for kids, an
online game for kids. My kids play it. Probably many people in the
audience, their kids play it. It’s free to play, owned by Disney.
Bought by, if I’m not mistaken, four or seven hundred million,
lots, hundreds of millions. Free to play but at a certain point, you
know, your kid is going to want a pet for their penguin, called
puffle. Now to get a pink puffle for your penguin, you’re going to
have to subscribe. At that point, they come to the parents and they
say, “Mom, Dad, can I have your credit card? Will you get your
credit card out and subscribe for me?” What’s interesting about
this is that our kids come to us all the time saying, “I saw this ad
on TV, can I have it?” And the answer is no, right? You know, you
trust me. It’s not as good as it looks in the ad.
You won’t play with it for long. You don’t really want it. And it’s
easy to say no. But when your kid comes to you and says, I’ve
been playing Club Penguin for two weeks. I built my igloo. I
populated the igloo. I made these friends. I’ve done all this stuff.
Now I want more, the play utility already ascertained the value to
the kid, the importance in their life, already established. You’re
much more inclined to pay and they get something like 20 to 30
percent conversion rates. What’s cool about that, once you’re
willing to convert on those terms, is that you’re willing to pay
more. You’re more likely to be happy and your turn rates go down.
That is an example of segmentation. Within the game, they’ve
found all these different ways to charge you for more in a way that
felt totally natural. It’s like, I get it. I want more. I hardly mind
Question: What does free allow you to do?
Chris Anderson: What free allows you to do -- not everyone has figured this out, the
kind of terrifying reality of free for the advertising industry-- is
that it’s an alternative to advertising. Rather than telling people
about a product, you can let them try the product. The nice thing
about if you can try the product, you don’t have to take out ads.
You can just let the product sell itself, speak for itself, let it go
viral. People will recommend a product that’s free because there’s
no risk to the people they recommend it to that they’ll be unhappy
using it. At least they wouldn’t have wasted their money.
The potential there is that free products can go wide. Free products
can become viral. They can end up marketing themselves. And you
can end up converting ten percent of a very big number at very low
customer acquisition costs. That’s good. However, there are a
couple of problems. First of all, t what if you convert one percent,
or .1%, or .01%? At a certain point, the conversion rate is going to
be so low that it almost doesn’t matter how big your number is,
you’re still not converting enough people. The second point is that,
let’s say that your conversion rate is one percent but it’s out there
being used by millions of people. Well, I talk about near zero
There is a difference between near zero marginal cost and zero
marginal cost. Even if the product only costs ten cents per user for
you to storage, etcetera. It’s ten cents times ten million people. It
starts to add up to real money. So Facebook and Twitter are two
companies that are free to users. They got so popular and so big
that those tiny marginal costs started to add up to some very
significant real costs. They had to raise hundreds of millions of
dollars to pay. Now neither of them in their first form really
worked hard on that conversion, on making money, but as they
now have real costs, they’re starting to do it.
You’re seeing a real time experiment in the premium model. Of
course, Facebook may use advertising but Twitter is probably
going to try to avoid advertising and go for premium models. It’ll
be very interesting to see what happens. What does a one percent
conversion rate to paid look like at Twitter? What would a five
percent conversion rate look like? You know, a ten percent
conversion rate to Twitter would be the best business you could
ever imagine. In the regular world, if you’re selling muffins and
you’ve got a ten percent conversion rate, you’re going out of
business. But in a digital space, a ten percent conversion rate can
be incredibly lucrative because it’s, again, ten percent of a very big
How the Concept of Free Would Work
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