Monday, November 29, 2010

Book Review

Free: The Future of a Radical Price
By: Chris Anderson

In Free: The Future of a Radical Price, Chris Anderson makes the argument that in many cases businesses can profit more from giving things away then they can by charging for them.  In traditional economics, supply and demand revolved around scarcity (limited resources available).  In Free, Anderson talks about the economy as it is online.  This online economy has an unlimited amount of supply and prices keep falling every day (and they will keep falling until they get as close to zero as possible).  Anderson highlights an example of this with digital storage.  Ipods, memory cards, and TiVo store digital data and as technology advances these devices have increasing capabilities of holding more data and taking up less space.  The more these devices are able to compact data, the cheaper the storage space becomes, “That’s why for the same price every two years or so you can buy an iPod that holds twice as much music as the last one.”

Anderson categorizes things into four types of free.  First, direct cross-subsidies such as “buy one get one free” deals which serves to entice the buyer into purchasing something else.  Second, the three party market is another example of free and one of the most common in the present.  Radios, magazines and social networks all employ this type of marketing.  For instance, radio is free to listeners because the costs is paid for by advertisers.  Third, is what Anderson calls “freemium.”  This is anything that is matched with a premium paid version.  Picnik is an example of this.  It’s  photo editing software that only requires a free download.  However, there are other features available that are offered at a premium (cost).  Fourth, nonmonetary markets which are anything people choose to give away with no expectation of payment.  Wikipedia demonstrates this. The information provided is completely free to anyone, as the providers of the information are not paid but share the information for simply altruistic reasons. 

Finally Anderson discusses a concept he refers to as “the penny gap.”  This concept is that anything that charges even a penny causes us to go through a process he calls a “mental transaction.”  He states “If you charge a price, any price, we are forced to ask ourselves if we really want to open our wallets.  But if the price is zero, that flag never goes up and the decision just got easier.”  It’s impossible for  other companies or businesses to compete with something offered completely for free other than to pay someone to buy something.

In conclusion, Anderson addresses the economics of free.  In our present time companies are moving more and more to into competition with free.  With the explosion of the internet, people can access thousands of things for free and companies are left with the task of competing with these things offered for free.  Anderson points out in a side-bar that in a teen boutique in Tokyo, customers get up to five free items each time they visit.  These free items are subsidized by a membership charge, “rental fee” of shelf space for companies, and turning their customers into focus groups.  This radical price of free is changing the shape of the economy.  Anderson’s book is a must read for any business professional.  Much like the teen boutique, it’s time for businesses to start thinking about how they can creatively compete with Free.

2 comments:

  1. this book was really interesting. i think i've experienced every type of free he listed. it seems like we are moving more and more towards "free" with the internet. i try to shop for expensive items as much as possible on the internet for the free perks like free shipping and discounts. plus, there's a much larger selection and i don't have to leave my house :) thanks for sharing hunny bunny!

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  2. Very interesting Chris. I am actually going to graduate school for Economics (it's all math based core courses now). There has been some talk about how close to zero firms are willing to go because there are constant cost reductions on the production side as well. Did Anderson address just how close to zero (min profit margin) firms would go?
    If you think I should read the book, please let me know.

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