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 PythonNovember 2008

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.

pdf

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