You may not believe me, but I have news about the 'f' word; good news!
The four-letter word is the open secret behind the success of companies like Facebook and Google.
That is precisely correct. Had it not been for this fascinating magic word, we would not have come to know of the many forward-thinking business models that are considered the cornerstone of disruptive innovation we are awed at today.
In fact, the modern concepts of collaborative consumption and share-economy, that companies like Uber are driven by and companies like airbnb consider their bread-and-butter, all began with the f-word.
The word, ‘FREE sits at the centre of the new-age economy – the freeconomy.
In Chris Anderson's widely read article in Wired Magazine, Free! Why $0.00 Is the Future of Business, he observes, "Once a marketing gimmick, free has emerged as a full-fledged economy."
Like the other 'f' word you had in mind when you started reading this article, the word "free" was considered a taboo in the world of sales not too long ago. It was a radical idea to offer things for free; completely against the conventional wisdom of profit maximization. But now, the power of technology has virtually driven the cost of acquiring new customers down to zero. It is more viable than ever before to substitute that cost for offering freebies to customers. The cost of developing a product or service to be given away could be much less than what you would otherwise spend on marketing the product using conventional methods.
The way disruptive innovation has taken roots in the masses is by leveraging the power of freeconomy to its fullest. To scale a conventional business model, you have to acquire enough customers to justify the fixed costs required to produce goods and services. Conversely, you have to invest the capital required to cater to a growing market.
Today, not only has the fixed cost of running a business come down significantly – as predicted by Moore’s law – it has also become much easier to scale the business quickly by providing products and services for free to appeal to early adopters. Once the business has a sizable population of customers, even if they are not all paid customers, you have essentially set yourself on a path to exponential sales growth. The trust you build with your audience by offering something of value for free, does wonders when they start spreading the word and attract other customers. They effectively sell for you.
Should you decide to pitch to potential investors or acquirers, the critical mass of customers thus built helps you fetch a high price for the business. The investors understand that the sizable market you have created offers a great potential for future revenues.
It is crucial that the product or services you offer for free is something of value to customers. It might not have a significant cost for you, but the value it offers to your target customers will determine how fast the word of mouth spreads and how soon the critical mass is achieved. Also, they have to perceive it as something of value. As Chris points out, there is a huge difference between cheap and free. Giving a product away makes it go viral, but if you charge a single cent for it, you're in an entirely different business. The same product becomes too cheap to matter.
Thanks to the digital age, we now have so many innovative ways to bring the cost of doing business down. All it takes is storage, processing power, and bandwidth — things that are now becoming virtually free when you spread the cost across hundreds of millions of users. With the cost per user coming down close to zero, more and more innovative ways to leverage the power of freeconomy are coming up.
The choice of the free business model for you depends on a multitude of factors, including the nature of your product or service, the reason why your target customer will be attracted to it, how and how much you are charging for the premium product or service, and what your business strategy is (organic growth, getting bought-out, attracting investors).
© Majid Kazmi 2016
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