Better than free

by Russ Roberts on May 21, 2008

in Podcast, Prices

In my conversation with Chris Anderson, he mentioned in passing that free was as cheap as things can get. I answered that no, you can actually go lower than free. You can pay people to use your product, what is essentially a negative price, better than charging zero. Someone must have been listening. From the WSJ:

Microsoft Corp. hopes to make gains on Google Inc. in the lucrative
business of Internet search through a new service that pays consumers
who buy items they find through the software company’s search service,
according to people familiar with the company’s plan.

The
Redmond, Wash., software maker is rolling out a service called "Live
Search cashback" that gives consumers money back on certain purchase of
products found through Microsoft’s live.com Web search service, the
people said.

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{ 11 comments }

Mathieu Bedard May 21, 2008 at 9:38 am

Interesting..

If I recall correctly Paypal regularly does such promotions where they give you 'free money' to use their service.

As a side note though, I would have to be paid a whole lot of money to offset the inconveniences of the mess referred to as Microsoft live search!

Marcus May 21, 2008 at 10:21 am

It sounds like the credit card 'cash back' business model.

James Hanley May 21, 2008 at 10:25 am

Reminds me of a conversation I had with a computer tech a few years back. He was convinced we were in a brave new "post market" world because software companies were giving away their products for free. He thought this meant they were not priced and the market was not operating.

I'm not sure he ever agreed with me that free is a price, and as Russell points out, not even the lowest price available.

Matt May 21, 2008 at 11:09 am

I used to get things from Microsoft servers, but they crashed all the time.

Deane May 21, 2008 at 12:55 pm

Begs the question of who has been the customer all along?

What happens in Google search is that it's a good old barter exchange. Google gives me search results, I give Google site-time, link-click labor, etc.

Google then sells a product made up of my site-time, link-click labor to advertisers.

Now Microsoft seems to want to give me some money to incentivise that.

Markets in everything indeed.

The problem with Cris's thinking is that you get the sense that he thinks that "Free" as he calls it fundamentally changes economics. It doesn't. Just maybe how we think of business.

FreedomLover May 21, 2008 at 1:11 pm

So will this supplement Microsoft's $1 billion profit engine? That's all that Microsoft VPs want to know….

Brad Hutchings May 21, 2008 at 3:21 pm

@Deane: I don't get the feeling that Chris feels this changes economics. He is very passionate that it changes business, and I'd say from the business and VC types that I know that "giving it away for free and making it up on volume" is still a heavily derided business model, even in the tech industry. And yet, there are many examples, large and small, where the media business model works and even scales. And even scales down, so you don't need 1,000,000 users to make the model work!

That doesn't change economics. It changes the viable business model space. Where economics can come in, and where Chris seems to me to be asking for help, is in identifying what kinds of businesses this can work for and coming up with analytical tools. Intuitively, I think that stickiness (repeat usage) and connectedness (how tightly the network of the user base interacts) are drivers as important as near-zero incremental cost in making the free model work. Could the economics profession come up with ways to measure these things and perhaps even laws that might predict viability based on these inputs? That would give Chris's spiel some theoretical muscle.

I just know from experience how difficult it can be to defend a free model that is making money. Potential partners ask why you're giving something valuable away for free or cheap. They want to raise prices because there seems to be money left on the table. They want to exclude free users to make the service more salable. They ignore the benefits that free users bring, such as strengthening the network or even simply being qualified prospects that can be sold to tomorrow. They confuse freemium with altruistic models like open source. They think that Google can do it because they haven't had to sink to hiring anyone below the cream of the crop even as they've grown into a very large company, but that it can't work in general. The Microsoft example notwithstanding, they fail to see free as the high barrier to competition that it is. They fail to see how you can use free to carve a successful niche without having the responsibility to take over a giant chunk of marketshare that might not yet lend itself to a free model.

Chris's book is going to put the free business model on the table, officially, for a wide range of businesses. It will be an interesting catalyst for change in business. That change will define new issues for academic economists to ponder.

shawn May 21, 2008 at 4:28 pm

begs the question != leads us to ask the question

David P. Graf May 21, 2008 at 6:18 pm

Hmmm…so use Google to find what you want and then go on Microsoft to order it to get some cash back. Sounds like a plan to me though this is not what either Google or Microsoft is intending for us to do.

Doug Ransom May 21, 2008 at 9:41 pm

Well, you can get free food if you sit through a seminar for a timeshare. You suffer a disutility to get your freebee.

Same thing with Windows Live. They are paying you because otherwise you might just prefer to use Google as your search tool.

vidyohs May 22, 2008 at 8:45 am

Like a couple of the gents above have already pointed out, free is only rarely free.

When I went into independent business I choose the franchise route which offered freedom plus mentoring.

My mentor instructed me to "always give the customer something for free and make sure they know it."

It took me about 2 seconds to figure out that free wasn't free for me it was an investment which slightly reduced my net on a particular job, but converted the customer to become my advertising agent to bring in more volume. The customer, reacting to my generous competence, became my salesman as payment for that "free" service I provided. That was in 1983.

I have had reason to contemplate that concept since and in my thinking it is as old as business; or, at least goes back to the point where business became sophisticated enough to proceed beyond two people trading their own handmade goods one on one.

I said rarely above, what I meant by that is, the rare exception is giving a "free" service to a one time customer who never gets into the word-of-mouth stream.

The practice is valid even if once in a rare while it (the freebie) has to be absorbed or considered a carry over to the larger bottom line of your whole business.

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