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FREE AS A BUSINESS MODEL economist will confirm that the demand generated at a price of zero

Receiving something free of charge has always
been an attractive Value Proposition. Any marketer or

is many times higher than the demand generated at one cent or any other price

1K point. In recent years free offers have exploded, particularly over the Internet. The ques-
tion, of course, is how can you systematically offer something for free and still earn substantial
revenues? Part of the answer is that the cost of producing certain giveaways, such as online data storage
PATTERNS still generate revenues somehow.
capacity, has fallen dramatically. Yet to make a profit, an organization offering free products or services must

There are several patterns that make integrating free products and services into a business model possible. Some of the tra-
ditional FREE patterns are well known, such as advertising, which is based on the previously discussed pattern of multi-sided
platforms (see p. 76). Others, such as the so-called freemium model, which provides basic services free of charge and premium
services for a fee, have become popular in step with the increasing digitization of goods and services offered via the Web.

Chris Anderson, whose Long Tail concept we discussed previously (see p. 66), has helped the concept of FREE gain widespread
recognition. Anderson shows that the rise of new free-of-charge offers is closely related to the fundamentally different econom-
ics of digital products and services. For example, creating and recording a song costs an artist time and money, but the cost of
digitally replicating and distributing the work over the Internet is close to zero. Hence, an artist can promote and deliver music
to a global audience over the Web, as long as he or she finds other Revenue Streams, such as concerts and merchandis-
ing, to cover costs. Bands and artists who have experimented successfully with free music include Radiohead and Trent
Reznor of Nine Inch Nails.

In this section we look at three different patterns that make FREE a viable business model option. Each
has different underlying economics, but all share a common trait: at least one Customer Segment
continuously benefits from the free-of-charge offer. The three patterns are (1) free offer based
on multi-sided platforms (advertising-based), (2) free basic services with optional
premium services (the so-called “freemium” model), (3) and the “bait &
hook” model whereby a free or inexpensive initial offer lures
customers into repeat purchases.

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