Economy of free...Freeconomics?!

by Garrick Jones

This is my first post in some time – busy days in the QuirkStation here! To be honest, I didn't really have any intention of writing one this week either, but Nic sent round an article from Wired that just really got me going (in the purely “that's really interesting” kind of way). This led to me watching a 45 minute clip on the matter and, well, it really got me thinking and everything else fell onto the backburner. Trying to account for my time played no role here... I promise ;-)

So anyway, I thought Chris Anderson's presentation was excellent. For me it has opened up a completely different way of approaching Marketing and at an angle that I can fully appreciate as an Economics graduate.

What am I rambling on about? Well it's basically the idea of giving stuff away for free and still making truckloads of the green stuff. Anderson provides a number of examples that illustrate this, and I'm going to use one of those now... one that has previously been discussed at length.

That is “The Radiohead Model”. Yup, you know the one where Radiohead gives away their music and allows users to pay any amount they think the band deserve with no obligation. But, as we know, this increased awareness and promoted ticket sales for concerts and made them a lot more money than they would have if they had followed the traditional route.

As one learns in first year Economics, in a competitive environment, price is always going to tend towards marginal cost. Should that marginal cost approach zero, it is only natural to assume that price will too. My old classmates will lambaste me if I've got this wrong!

It is the idea of giving away something that has a marginal cost approaching zero as a method of marketing something else. With the technology of today, the distribution of another Radiohead song costs nothing, but the additional ticket that could be sold as result would bring in hundreds of dollars of revenue.

What also plays a significant role here is word of mouth. The ability for individuals to share a product at no cost with their friends has the benefit of amplifying consumer sentiment and we all know how valuable consumer generated praise is in boosting the credibility and sales of a product or brand.

There is another angle to consider here though. Seth Godin wrote a very interesting piece that discussed how the actual act of a transaction alters the stance of the individual you are working with. Godin refers to the example of a conference where snacks are made available for free. One sees a number of half-eaten bags left over, but had there been a nominal fee attached to the snacks it would more than likely been the case that there would have been much less left over and a higher level of satisfaction for those eating the snacks.

I think this viewpoint has value, but I think it needs to be considered in context. Anderson speaks about the value of attention and reputation where these are the new scarce commodities and can be interpreted to represent economies in themselves. I agree that these could hold just as much value (possibly more in some cases) than money.

The reason that these arguments apply so readily in the online realm is due to the fact that technology and the Internet have allowed the distribution of goods – particularly media goods such as music – to reach a marginal cost that approaches zero as previously mentioned, and in turn allows for the “economy of free” to run rampant. As Anderson said, “Every economy that becomes digital, eventually becomes free.” True that.

The abundance of one thing creates a new scarcity of something else. If there is an abundance of the product you're selling, give it away and tap into the scarce commodities of attention and reputation it creates. Then sell this to advertisers. And that my friends is where the green stuff comes in.

Old models played the game of giving away a little to entice consumers to buy a lot. Now we give away a lot to entice consumers to buy a little. That little bit is however the premium - the specialised stuff priced accordingly. And it works. This is the opportunity for suppliers to really engage with the consumer and it facilitates niche marketing.

Anderson suggests that this economy of free could potentially include all industries. I think this may be stretching it a little bit, but I think it's undeniable that we will see it spreading to more industries. I think it is up to companies and individuals themselves to find a place for this in their business model if there is a place at all.

2008/04/03 | permalink | comments (1) | trackbacks (0)

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