Free Is A Great Way To Make Money

That’s how I ended a post I wrote almost three years ago, called In Defense Of Free. It’s a concept that regular readers of this blog know well. But I still get comments like this one from hyokon:

I am a bit worried about the current craze about ‘free’. There is
nothing that ‘should’ be free, but it seems like becoming a requirement.

I replied to Hyokon and suggested reading my post in defense of free. But I’ve got a better idea. Go read this post by Chris Anderson in this month’s Wired.

Chris credits me with the word freemium in the post and he’s wrong about that. I suggested we come up with a catchy name but Jarid Lukin delivered the name and try as I might, he never seems to get credit for it.

Other that that little nit, Chris nails the issue of the free business model in his post. Here is the key insight:

The most common of the economies built around free is the three-party
system. Here a third party pays to participate in a market created by a
free exchange between the first two parties. Sound complicated? You’re
probably experiencing it right now. It’s the basis of virtually all

And before everyone starts crying "advertising overload", Chris goes on to identify a number of non-advertising based free business models.

Bottom line – go read Chris’ post. I am happy to have his company working in defense of free.

#VC & Technology

Comments (Archived):

  1. Farhan Lalji

    Great post and a great article thanks.My favourite bit was the quote “a free lunch doesn’t necessarily mean the food is being given away or that you’ll pay for it later — it could just mean someone else is picking up the tab.”Very true. Another Chris Anderson got it right with, where I spent two hours last night going through presentations and others paid a pretty penny to see these live.

  2. AnnBernard

    I agree with the free model however, when people start saying they are willing to pay some money to have better customer service, less spam, more privacy and more functional features…perhaps those people are also worth listening too. You have free and then you have high end…where does that leave the person who wants a little more but can’t afford the high end of complete exclusivity?

    1. Andy Swan

      I agree….I REALLY like the flickr model…, but micro-subscription for our biggest fans to get more out of it.Seems like the baseline of every “digital” (bits and bytes) product should be free, since that’s about the variable cost of producing it. No reason not to make some flow from super-users that are happy to pay.

  3. Jamie

    If it’s not “advertising overload,” then it could be “breach of privacy overload.” Nothing is truly free. But, the point is still correct; It might be a viable business model.

  4. jill

    thanks for the link to the Wired article about the Free business model.A bit off topic..but this just furthers my belief that Wholesale Shopping Communities like the one I am forming are going to succeed and change the way consumers shop in the future.check it out at:http://jillicious.typepad.c…See how I came to this idea:http://jillicious.typepad.c

  5. Alex Iskold

    Hi Fred,My big concern is that large companies are using “free” for arbitrage and monopolistic tactics. It is one thing to say – here is a free version of Flickr upto X photos and then you pay, vs. here are free Google docs forever because we make a ton of money on ads elsewhere.These two things are not equivalent, and the second one seems super unfair to me. You can not enter a market with a 0 price, you kill of all competition this way.Second problem that I see is a whole new level of complexity added to the whole business equation. A transaction that previously involved 2 players (buyer, seller) now involves at least 3 – facilitator. Its fine, but it does sound complex. From Chris’s free air travel example – man, talk about convoluted. Would you invest in the company with such complex way of deriving revenue?Alex

  6. Chris Rechtsteiner

    Free doesn’t need a defense. Free needs an increased understanding of the complexities surrounding it.The larger the discussions & audiences around this topic, the better markets can and will develop to extend the paradigm.The largest problem is people hear free and think ‘ads’. Very soon there aren’t going to be enough quality ads or CTR/CPM revenue to support all of the products/services/content … so free w/o ads is going to be a critical operational imperative.Companies are going to have to get free experience right quick or risk being rendered obsolete.

    1. Charlie Crystle

      Free healthcare. Supported by Google AdWords.

  7. pwb

    The reason you should offer FREE is because you *can*! The variable cost of providing an interent service is very near zero. If you don’t, someone else will. And it’s a perfectly reasonable way to acquire paying customers.It’s lame we are still conflicted about this. And please don’t give me any of the “yes, but” or “it depends” crud.

    1. pwb

      This point cannot be overstated: “From the consumer’s perspective, though, there is a huge difference between cheap and free. Give a product away and it can go viral. Charge a single cent for it and you’re in an entirely different business”

    2. fredwilson

      I was thinking about adding that to my post about 20 mins after I wrote it but never got around to it. Free only works if your marginal cost is near zero. If that’s true, you have to have a free offering. If its not true, you can’tFred

  8. ProductArchitect

    I managed to trackback to your old post but not this one, so here goes a manual one. In addition to spreading the word about proper credit for Freemium, I mention an earlier Josh Kopelman post that deserves attention, plus suggest a book: Robert Rodin’s “Free, Perfect, and Now”.

  9. JM

    Mr. Wilson, how many, what percentage, and which ones of the companies you have invested in follow your philosophy of doing business based upon the “freemium” business model?

    1. fredwilson

      None use it as a primary business model but many use it as a part of theirbusiness modelfred

      1. JM

        So they use the “freemium” activities as part of their marketing strategy (i.e. rather than paying for advertising to promote their business product or service, they just offer part of their business product or service for free)?

  10. jackson

    Then let’s apply the principal to health care and education.Call me a commie, go ahead…….

    1. fredwilson

      We are sort of there with education. You can get a decent free education, atleast I did through high schoolIt’s supported by everyone, including those who opt outI think that model has to be copied by health carefred

      1. Ivan Kirigin

        There is plenty of room for growth in digital education and health care. The school system in particular is designed for an antiquated industrial age. Self diagnosis tools could certainly improve.

      2. Don Jones

        Canada copied the decent free education until high school – simple, routine healthcare.For more complicated, expensive procedures (College), Canadians come to the US…

      3. Paul_Wallbank

        Fred, your high school education wasn’t free; it was paid for your grandparent’s and parent’s taxes.This is the case with Canadian health care system as discussed in the comments below as well.If anything, US retirees flocking North to take advantage of the largess of the Canadian taxpayer is a good example of how damaged the “freesphere” idea really is.The whole business model depends on either another revenue stream or on the willingness of someone else be they investors or Canadian taxpayers.Free webmail is a good example; Hotmail is subsidised by Microsoft’s rivers of gold, Yahoo! is struggling to remain a stand alone entity and Google’s share price today has slumped on fears the ad revenues that pay for all the free stuff may be threatened.I’ve a few more thoughts about this on my blog at http://workingtech.blogspot…PS: Glad you and the Gotham Gal enjoyed Sydney, hope to see you again down under sometime soon.

    2. RacerRick

      No one else did, so I will. Jackson is a Commie.

  11. joeter

    For my economics senior seminar I wanted to build a model on this. I was trying to figure out more about the attention economy. I felt labor economics was the best place to start and used the basic labor-leisure trade off.I made the assumption that users were a cost of input just like factory workers since in web 2.0 sites the users add a large portion of the value (or at least keep the site functional).Y-axis: value of service (insert your marketing effort here)X-axis: trade off between ‘rent on privacy’ and ‘$ cost of service’ (i used a percent scale since I didn’t fully figure out a way to have them expressed in the same unit)The constraint I called the convenience rate, which then allowed for different indifference curves to be drawn tangent to it depending on user preferences.The multiple business models on the web would fit in between the x-axis scale.The model is basic and there’s a lot more I can flesh out, but that’s because it’s still in infancy; for a poor reason.Unfortunately, my proposal was turned down. My professor told me to try another topic he knew more about – like sports betting.

    1. fredwilson

      You need a new professor!Maybe you should teach the class

  12. Jarid

    Thanks for the shout out. I guess my name got lost in the long tail… 😉

    1. fredwilson

      It’s never lost on meI linked to your linkedin pageHad no idea you worked at urban fetch.You were consorting with the enemy at one time in my life!fred

      1. Jarid

        Ah, 1999. Good times. I’m sure we’ve got some good stories we could swap. Maybe we should write a book, and give it away for free…

        1. fredwilson

          And charge for the version with videos of the messengers hanging around the programmersFred

  13. ModusMarketing

    Interesting article! My company is in business of giving away free Word-Processor/PDF writer software as a webmarketing research. And so far it’s what we expected: Internauts like FREE.

  14. Sean Ellis

    My favorite thing about the model is its defensibility. By building your business from the ground up to compete with a free version of your product, you have a much stronger business (you face freemium downsell pressure from day 1). Imagine the premium only guy that suddenly faces competition from a new freemium startup. I play out this scenario in my most recent blog post: