Post on 10-May-2015
description
Stanford BUS-21Martin Westhead
Mastering Marketing
Introduction
How to make money by giving things away
Introduction
Free can really make money It is controversial
- Is free killing other industries and businesses?- Does Freemium work?
What do we mean by Free? A Brief History of Free
- Free Lunches- Jell-o, King Gillette- Free Radio
New Free- New kinds of Free and- Models for making money from them- What free products bring you
Free Monty Python: Results – 3 months later
Monty Python DVDs - No. 2 on Amazon
230x (23,000%) increase in sales- Reminded people how
much they loved MP- …and they wanted more.
Cost to Monty Python:- $0- Plus a little curration
work
Free businesses make money
$8B (10 yrs)
$60B (14 yrs)
$0.7B (8 yrs)
Revenues for 2013
$1.5B (11 yrs)
$0.65B (10 yrs)
$0.16B (11 yrs)
FREE IS CONTROVERSIAL
Federal Trade Commission Guidelines
Only guide written for the use of a word in commerce: “Free” (1971)
Explain free offers- Obligations a consumer has- Is there a catch?
http://www.alllaw.com/articles/legal/article11.asp http://www.gpo.gov/fdsys/pkg/CFR-2011-title16-vol1/pdf/CFR-2011-title16-vol1-part251.
Is Freemium Dead?
Why the Freemium Model Doesn't Work – Mashable Freemium has run its course — Tech News and Analysis – Gigaom When Freemium
Fails - WSJ
Technology hype curve(Freemium)
Two sides to free
Village Voice
1996 gave in and went free 2005 New York magazine
Considered “killed” by free
The Voice from Beyond the Grave: The legendary downtown paper has been a shell of its former self since it went free
The Onion
Started in 1988 Free satirical broadsheet Expanded to
- 10 cities, - millions of web hits- TV production - Feature length movie
Free and continues to thrive
So, does FREE mean low quality?
Free saved the Village Voice- Circulation had fallen to 130K from 160K- Now at 250K- Free saved it
But there is a perception of diminished quality- Feelings are relative not absolute- The Voice used to cost and it does no longer…- The Onion was always free- Free bagel is stale – Free ketchup is fine
WHAT DO WE REALLY MEAN BY FREE?
Definition
The Two Meanings of “Free”
Gratis
- No Charge
- Free as in “Beer” (or Lunch)
- Primary focus of this class
Liber
- Freedom
- Free as in “Speech”
- Will mention in passing e.g. discussion of Open Source
The Two Extremes of $0 Products
Cost built in“No such thing as..”
No cost to me“truly Free Lunch”
Buy on get one freeFree ShippingFree gift insideFree phone with contract
Google SearchWikipediaFacebookYouTube
FlickrLinux
Dropbox
BRIEF HISTORY OF “FREE’
Free Lunch 1870–1920 – free lunch with purchase of a drink
- Saloons and bars in the US 1891 Rudyard Kippling
- Not just eating but “wolfing” on food- Overwhelming enthusiasm
A free lunch-counter is a great leveler of classes, and when a man takes up a position before one of them he must give up all hope of appearing either dignified or consequential. - 1875 The Times
The repast included "immense dishes of butter," large baskets of bread, "a monster silver boiler filled with a most excellent oyster soup," "a round of beef that must have weighed at least forty pounds,”
http://en.wikipedia.org/wiki/Free_lunch
Lunch was typically worth 6x the drink price but…- Patrons often stayed for more drinks- Came back at other times of day
Jell-O
1854 Peter Cooper - Obtained patent for powdered gelatin
1895 Pearl Wait- Added flavors, color, brand- But still had trouble marketing it
1899 sold to Orator Woodward- Still struggled to sell it
1902 with marketing chief, William Humelbaugh- Free samples too expensive- Instead give away free information – recipe booklets
- Supported by a newspaper ad- Distributed by a travelling sales force
By 1906 hit $1m in annual sales
King Gillette
Invented disposable razor- Anti-capitalist
Sold cheap razors to partners who bundled them free- Banks “save and shave”- Gum, Tea, Coffee, Marshmallows
Created a demand for blades- Recipes created demand for Jel-O
Same business model used today:- Printers – cheap printers, expensive
cartridges
Invent something that people use and then throw away – Advise from Gillette’s boss
The Radio Business Model
1925 Dawn of the commercial radio industry- Distance fiends
No one knew how to pay for content Content paid for by radio manufacturers (e.g. RCA) Radio Broadcast magazine competition
- 800 people entered, ideas included- Listener contributions (NPR)- Government licensing (BBC)- Pay for listings- Advertizing suggested but not popular
Radio Advertizing
1926 NBC’s Frank Arnold- Determined to give radio advertizing a try- “Fourth dimension” – print, flyers and billboards- “Guest in the listener’s home”
Problem with radio interference- Local station signal drown out distant station- Creation of the FCC- Not enough local advertizing
Solution came from AT&T- National radio network
Big audience critical for advertizing
Multi-party business model
Network
AudienceAdvertiser
Content Producer
Content $
Content
Attention
$
NEW FREE AND WHY ITS GOOD
How is 21st century Free different?
Digital/Online Free is different- Key costs are falling rapidly
- Feasible to round down
- Technology supports mechanics… - E.g. subscription billing management- Consider customer lifetime value
- …and massive volume- Needed for advertizing, Freemium- Anything where network effects are important
…but giving things away is easy, how do you make money…
Free Models
1. Direct cross subsidy- 20th century free- Buy 1 get one free / Free toy inside- (Not really free)
2. Platform- User get service for free- Someone else pays
- Access to users- Data of users
3. Freemium- Most users get free product- Some users pay for premium features
4. Donations / Pay-what-you want- Users decide how much the product is worth- Some get it for free
Benefits of Free
Free can lead to rapid growth- Volume makes more business models work
Accelerate technology adoption- Quick way to cross the chasm
Mindshare markets of- Reputation- Attention
Technology adoption
Tumblr – lightweight blogging platform- 300M monthly uniques (according to Yahoo)- 100M Blogs- No revenue
Bought by Yahoo for $1.1B – Why?1. Value of “reach”
- Tumblr moved Yahoo from comscore #3 to #1
2. User data 3. Future monetization opportunities
- Yahoo is good at Monetizing content- E.g. Native ads,
Mindshare effects: Why did Yahoo buy Tumblr?
Mindshare effects: Pricing a glossy magazine
3 prices1. Free online2. $4.95 at newsstand3. $10 for 1 year subscription
1 & 2 are purely economic Subscription price is a balance
- Cheap to increase subscriptions- Expensive to show commitment to advertisers- It’s a loss-leader, but can’t go to $0
Free is like an Economic force of gravity
Near zero marginal cost of reproduction
Price of copies will fall to $0
My Free Experiment
The Flower of Scotland Fantasy Sci-Fi story set in an
alternate Scotland- Terrorist fighting for Scottish
Separatism- Mari McLeod a barmaid on Skye
– only one who can save the world
Free PDF on Website Free books for class One condition
- If you like it – please post an Amazon or Goodreads review
Summary
Free can really make money It is controversial
- Is free killing other industries and businesses?- Does Freemium work?
What do we mean by Free? A Brief History of Free
- Free Lunches- Jell-o, King Gillette- Free Radio
New Free- Models for making money from Free
Next week
The Psychology of Free- Why Free works
Model: Direct cross subsidies Guest speaker:
Peter Fishman - Principal Analytics Manager, Yammer, Microsoft