Could “Free” be the new price of your innovation?
I facilitate a network group for innovation leaders in Denmark. When we start up again after the summer, one of our focus areas will be business models. No wonder the new book, Free by Chris Anderson caught my interest.
In his revolutionary bestseller, The Long Tail, Chris Anderson demonstrated how the online marketplace creates niche markets, allowing products and consumers to connect in a way that has never been possible before.
Now, in Free, he makes the compelling case that in many instances businesses can profit more from giving things away than they can by charging for them. Far more than a promotional gimmick, Free is a business strategy that may well be essential to a company’s survival.
One of the strategies Anderson discusses in the book is the Freemium business-model. This works by offering basic services for free, while charging a premium for advanced or special features.
The Freemium business model was articulated by venture capitalist Fred Wilson who said: “Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base.”
We all know about LinkedIn and Skype which are two prime-examples of the Freemium business model. Unfortunately, there are not examples outside the digital world. At least not yet as I hope you can share other examples by adding comments to this post.
New possibilities, new challenges
I find the idea of Freemium and the other free business models mentioned by Anderson interesting for two reasons. The first one is that I have seen so many companies struggle on how to extract value out of the services they deliver as a part of their product offering. Too often, this is just a give away even though there is a potential for developing a separate business case. I think Andersons book can give innovation leaders working with this dilemma some inspiration.
The other reason is that I see this movement towards free business models as a shift which in general will create new possibilities and challenges for innovation leaders. It raises questions such as:
How can you incorporate the free business models into your offerings?
What if you brought in external partners that could provide a free element to your offerings?
What if you could contribute with a free element to the offerings of others?
What if you could work with partners to co-create a new offering which includes elements of the free business model?
What if your business model gets attacked by competitors using free business models?
I think these questions are worth taking into consideration whether you work in the digital space or in a more traditional industry.
As a last comment, I am intrigued by the combination of free business models and open innovation. How will this play out? I am not sure but I will keep you posted on my thinking on this.
You can find more information and inspiration on these links:
Free, the full book for free at Andersons blog
Dear Stefan, you raise some very interesting questions. While the concept has become a common practice in the net and IT space (open software, Google’s OS offerings now matched by Microsoft), it is a matter of time before we find it in the physical world. I think the key here is what you can incorporate in your offering that you ‘build’ or ‘buy’ which you offer free because it channelizes or creates needs which you then service by charging a premium. One has to find applications where the free ’something’ entices a person to buy ‘the other’ for which a payment is required. Good questions raised.
Dear Stefan,
i believe that for the ‘internet space’ as mentioned by Pradeed, the challenge is rather to leave the ‘free’ model asap and start finding some real business models and incomes. I know this might not sound popular, and not mentioning tons of startups, but Facebook and even more Twitter, despite their great audience success (and i am myself a Twitter fan and user), have more than ever to prove their sustaibility in time of economic downturn through a concrete business model still to come.
About your point on how to link Open Innovation and Freemium, i see quite obviously ‘Crowdsourcing’ as the best demonstration of it : http://nextstreams.blogspot.com/2009/04/une-belle-initiative-de.html
Best
Martin
[...] he has a new book out called The Future of the Radical Price which according to Stefan Lindegaard may well have implications for [...]
Stefan, the easy answer is “Yes”, the difficult bit is “How”. The latest book of Jeff Jarvis “What Would Google Do” is filled with multiple examples.
Thanks for bringing this to focus, Stefan, to you as well as to Chris. Freemium is the pulse of the hour. I recently worked on developing such a model for one of my clients. While doing the research I found a important challenge. Most of the companies in the webworld, are not able to sustain to see the premium aspect of their business or are not able to decide on the right product mix to offer for free or to charge for.
Open innovation here will be the unique partnerships that will make money for the network when all the products are combine i.e. sum of all products will yield some money which can be distributed amongst all partners.
Thanks for the insight.
This was certainly an interesting read. Despite not having heard the term ‘freemium’ before, that is exactly the business model we are following at AmanziTel. Our inspirations for this approach come from the successful open source software markets, and consequently we have an open source product. However, we are targeting a niche market, using a services revenue basis. The free products are lead generators for services work, as well as for later premium upgrades. However, the business model cannot be based on premium upgrades alone, due to the niche nature of the market. A services business is required as well.
Regarding open innovation, we have found an interesting situation where most potential collaborators in the same market are unable to think in that way. However, we have found much better collaborative responses to open innovation in the general software development community, probably due to the long term exposure to open source.