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The Economics of Giving It Away - WSJ.com

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Saved by 60 people (-12 private), first by anonymouse user on 2009-01-31


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Gratis can be a good business. How? Pretty simple: The minority of customers who pay subsidize the majority who do not.

Highlighted by neynahz

In other cases, the same digital economics have spurred entirely new business models, such as "Freemium," a free version supported by a paid premium version. This model uses free as a form of marketing to put the product in the hands of the maximum number of people, converting just a small fraction to paying customers. It's an inversion of the old free sample promotion: Rather than giving away one brownie to sell 99 others, you give away 99 virtual penguins to sell one virtual igloo. (Confused? Ask a child: This is the business model for the phenomenally successful Club Penguin.)

Highlighted by jdblack64

"Freemium," a free version supported by a paid premium version. This model uses free as a form of marketing to put the product in the hands of the maximum number of people, converting just a small fraction to paying customers.

Highlighted by neynahz

With physical stuff, samples must be doled out sparingly -- there are real costs to be paid. With bits, the free versions are too cheap to meter and can be spread far and wide.

Highlighted by neynahz

All this worked well in a rising economy, where non-monetary riches such as attention (Web traffic) and reputation (Google PageRank, which determines how high your site will appear in a search) could be turned into cash with the wave of a venture capitalist's wand or a well-timed acquisition.

Highlighted by neynahz

Venture capital has dried up, Google is killing products rather than buying them, and Yahoo can barely support itself, much less look for others to fund. What does that do to Free as an economic model?

Highlighted by mkunruh

Web startups are having to do the unthinkable: come up with a business model that brings in real money while they're still young.

Highlighted by neynahz

The standard business model for Web companies that don't actually have a business model is advertising.

Highlighted by neynahz

Facebook is an amazingly popular service, but it also an amazingly ineffective advertising platform.

Highlighted by neynahz

Running Google's Adsense ads on the side of your blog, no matter how popular it may be, will not pay you even minimum wage for the time you spend writing it. On a good month it might cover your hosting fees. I speak from experience.

Highlighted by neynahz

What about the oldest trick in the book: actually charging people for your goods and services? This is where the real innovation will flourish in a down economy. It's now time for entrepreneurs to innovate, not just with new products, but new business models.

Highlighted by neynahz

Microsoft, which now has to compete with the free word processors and spreadsheets of online competitors such as Google. Rather than complain about the unfair competition (which would be ironic), Microsoft created Web versions of its business software and offered them free to small and young companies.

Highlighted by neynahz

But extracting a business model from free is not always easy, especially when your users have come to expect gratis.

Highlighted by neynahz

the exit doors are closed and cash flow is king.

Highlighted by neynahz

Free is not enough. It also has to be matched with Paid. Just as King Gillette's free razors only made business sense paired with expensive blades, so will today's Web entrepreneurs have to not just invent products that people love, but also those that they will pay for.

Highlighted by neynahz

Not all of the people or even most of them -- free is still great marketing and bits are still too cheap to meter -- but enough to pay the bills. Free may be the best price, but it can't be the only one.

Highlighted by atulsabnis