Free!

Money makes the world go ‘round, but free makes everyone happy.

For those who do follow my blog, I mentioned that I am attending Ryerson University part-time to obtain my Bachelor of Commerce, Marketing Management degree. I am taking one course a semester and this semester I am taking Marketing Matrix and Strategy. In week two of my class, our course outline required us to read several articles on this new marketing phenomenon called ‘freeconomics’ and ‘freemium’ and the concept of charging customers NOTHING. The article says that charging nothing to customers will be the future of business.

Wouldn’t it be great if we could ‘buy’ things for free? Well you can…sort of. Let me explain a little bit more. This kind of economy where consumers are getting things for free is being coined as freeconomics. Freeconomics is originally driven by the technologies related to the power of the Web.  Technology is practically free like e-mail is with Gmail or Yahoo, or bandwidth for Youtube and Google.

Derived from freeconomics there is another model called freemium. What is freemium? In layman terms, it means offering services for ‘free’ for the mass and charging a premium for others or from advertisement. What that does is help the public access a product or service for free.

For example, Flickr has two different versions: one is free and the other is premium. The premium version which requires you to pay a fee offers more features than the free version. How Flickr makes their money is off the 1 Percent Rule business model. How this model works is that 1 percent of the users (premium Flicker) support all the rest of the users who do not purchase the premium.

Google is partly a search engine where users can use for free. Google makes their money off the pay-per-click or sponsored link ads. This helps subsidize their business so that they can offer their services to consumers for free (aka email and search engine usage).

Then there is the business model which follows the cross-subsidies. It is free to anyone willing to pay eventually one way or another. There are two examples: razors and gaming consoles. Any company that sells razors sell the unit at a very low cost and then sell the blades at an exorbitant prices (blades account for 70-80% of their revenue). Second generation Wii was free if customers purchased the deluxe version of Rock Band. Games for gaming consoles are not cheap and this is how companies make money is through the cross-subsidies.

Freeconomics is slowly rolling over to products and services other than online. Of course there is a price to pay. Look at cell phones in Canada. You can get a free phone if you sign up with a provider with a three-year contract. You can even get minutes very cheap but where they make money is off of packages like voicemail which becomes pure profit. Selling minutes to customers costs providers next to nothing. More bands are now releasing their albums for free on their website, but when their concert comes around, the paraphernalia and concert tickets are where the band makes money.

Most of the examples above are technology and web-based but what’s to say we as consumers couldn’t get tangible products or services for free in the future?

Freeconomics is still a viable business model. Could this be translated to the insurance industry? Insurance companies need three basic requirements in order to remain viable, this is courtesy of Superpages, but one basic requirement is very similar to the freemium model: an insurance company needs a large pool of insureds in a diverse demographic (age, gender, occupation, history etc).

For freemium to work, you need two different types of customers – those who are willing to buy into your product or services free of charge, and the small percentage of customers who are willing to pay premium. A company can make money by selling advertising space or follow the cross-subsidies model so that they can offer their product or services free of charge. We could already say that the insurance industry follows the freemium model through their insurance deductible. There are some who are willing to pay lower premium therefore their deductible being higher, and those who are willing to pay more premium and pay less deductible in case of an emergency. You hope that those who pay the higher premium covers the cost of future pay outs and still remain a profitable company.

So why is the concept of freeconomics and freemium such a new marketing strategy? Insurance companies modified the freemium model slightly in regards with their insurance deductible, but could the industry offer ‘free’ insurance in the future and follow either the cross-subsidies or the 1 Percent Rule?

Either way, wouldn’t it be interesting to see if the insurance industry could model their business structure on the freeconomics?