In the recently released book, Free: The Future of a Radical Price, Chris Anderson illustrates a recent trend in business, the business model where you give away products and services for free.  This trend has been especially popular among web 2.0 companies, where the focus has been shifted from making money, to making engaging products and building a fan base.  There are five different types of “Free” business models that are most commonly being used by businesses today. They are: 1) the ad-supported model, 2) the freemium model, 3) virtual goods, 4) the related goods model, 5) and the exit strategy. Is “free” the future?  Chris Anderson thinks so. How will future businesses compete against competitors who are giving away their product for free? In this article, we will look the most popular business models and offer additional strategies that will help the business leaders of the future compete against “free” AND make money.

1. The Ad Supported Model

This first type of “free” business model is also one of the most commonly found version, especially on the web. The idea is to create quality content that a lot of people want, which drives a lot of traffic to your site or product, where you then sell advertising space.  Most top blogs operate under this business model.  However, advertising models are becoming less and less sustainable. In addition, you have to have a LOT of traffic before you can make any money.  Due to the recent slow-down of the world economy, a lot of businesses are contracting their ad budgets. Less and less money is flowing through the system. Mega publisher Condé Nast Publications, had to close the door on one of their ad-based web properties, Men.Style.com, citing needs for cost-cutting. Men.Style.com had over 1.7 million unique visitors last month, and yet struggled to reach profitability. Many of the biggest giants on the web continue to rely on this model, some with more success than others.

2. The Freemium Model

The Freemium model is another very commonly seen business model used by web startups. Businesses offer a part of your services or product for free, with the hope that potential customers will see its value and pay for the premium version.  The Freemium model has been used for many years by software developers, in the form of free product demos.  One of the potential risks of this model is offering too much for free, creating a situation where the majority of the people using your product will not need to upgrade.

3. Virtual Goods Marketplace

The virtual goods business model works by selling additional or premium content to customers within the application or game. Although it borrows some ideas from the freemium model, this model differs by selling smaller pieces to the customer, instead of requiring a complete upgrade.  The virtual goods marketplace is most commonly seen today in games, where publishers will sell additional levels, addons, or other pieces of premium content.  However, with the growing popularity of micro-payment platforms, virtual goods are starting to bridge the gap into other markets besides just games. In a recent report completed by Jeremy Liew of Lightspeed Venture Partners, he estimates that Facebook is generating between 28-43.5M in annual virtual gift sales, a shocking 10 percent of its total estimated revenue.

4. Related goods model

The idea behind this freemium model is for a company to give away a product, with the hope that it spurs consumption of other products within the company’s organization. Google is probably the biggest and best example of a company using this model. Google gives away a ton of free services like Gmail, Google Maps, Blogger, Orkut, Picassa, and many many more (not to mention search), with the hope that as they control more and more of your online activities, they can sell more advertising placements to publishers though their legendary PPC ad placement system. Does it work? Yes! Google reported 21 billion in revenue in FY 2008, an almost 24% increase over FY07.  By controlling and monetizing a revenue channel (connecting internet traffic to PPC), they have been able to successfully used the related goods “free” business model.

5. The Exit Strategy

During the recent web 2.0 boom, there were many companies that focused solely on the creation of a product or service, without giving any thought to how it would be monetized. The strategy was to release their product to the world and attract as many people to their service as fast as possible. Giving away their product for free was an effective way to do this. Once these companies had thousands or millions of users, they would then hope to generate the attention of larger companies with money, whom they would sell to. Their business model was to simply sell their company as fast as possible. Throughout the past several years, this worked for many companies. Companies were gobbled up by Yahoo, Google, News Corporation, or other web giants. However, there are still companies out on the web where the jury is still out on their eventual success. Companies like Twitter, who have undeniably redefined communication on the web, yet they continue to operate without revenue.

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So how can companies compete with competitors giving away products and services on a freemium model?  One potential way is to not rely on one single revenue source.  For example, mix advertising and virtual goods together, selling pieces of your product or service, and offering some for free (ad-supported). Another way is to control an important revenue channel. Produce compelling products that people want, then control the ways they can access them.  Being a gatekeeper can lead to profitability. The days of relying on a quick exit are probably numbered. Therefore, it will be important for all new businesses to think about how they will make money from day 0, instead of having to face your investors at day 730, without a dollar to the company’s name.

Rishi Chowdhury

Customer Acquisitions Executive


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