Excellent products are the key to free internet business model

The practice of offering free products or a version of it has long been a subject of controversy. Free sometimes requires more consideration because it also has many forms. We should look at it from a critical perspective and delve into why some companies succeed in this way and others fail. After referring to some economic academic papers, behavioral psychology books and corporate strategies, we have summed up the following points.

The rule of marginal cost

Reasonable pricing can play a big role in attracting customers. It contains an economic principle that is more "true" than gravitation: in a fully competitive market, long-term product prices (also called "Market clearing Prices") will be the marginal cost of production.

Because of the declining cost of host and bandwidth, the marginal cost of most Internet products is now approaching zero. In other words, if the cost of providing services to customers (temporarily ignoring the cost of support) is "0", the long-term price of the product in the market will also be "0" (which is the result of competitive pressure).

Experience Products

The core of the "free" model is the product or service offered to customers. Most Internet products or services can be defined as "experience products": customers need to spend a period of time to see its value.

Dropbox is a good example. Think back to what drew Houston said: "In fact, Dropbox provides a product that people don't know they need, and only after they try, will they discover its value." ”

Many scholars have studied the pricing of experiential products. In 1983, Carl Shapiro, an economist, concluded that as customers tended to underestimate the value of their products, the best pricing for experiential products should begin with a lower trial price, and then gradually raise prices as customers discovered the value of their products.

At other times, customers may overestimate the value of some products. In this case, the best pricing strategy should be to raise pricing as much as possible in the initial phase or to sign long-term contracts with customers.

This is why customers are unwilling to prepay or sign a long-term contract for a service or product.

So, the trial pricing here is actually a signaling mechanism. In other words, a lower initial price implies that you are very confident in your product-it will create value for the customer.

"Free" psychology

There has been a lot of research into the "free" psychology. Chris Anderson's "free" and Dan Ariely's "Predictable irrationality" ("predictably irrational") are two books devoted to the subject. In short, we can think of "free" as an emotional hotkey that can quickly reduce the psychological barrier of customers. Because many people ignore the investment of time, "free" makes them feel "without any loss".

From this perspective, free is a giant accelerator that motivates people to use the product or service. But after people start using the "0" price, it's hard to convince them to start paying. This phenomenon is enough to have a proper noun: "penny gap" – it is often the hardest to let customers pay the first penny for your product or service. That's why you need to be smart about choosing advanced features.

Decision factors

If everything above is set up, "free" (or "free business model") should be the answer to the decision. There are, of course, other factors to consider during this period. The following basic framework can help you make a smarter decision. Do not assume that "all complex problems have a simple answer" is the truth. This framework is useful as a thinking tool, but it does not have a simple formula.

First, you should ask yourself the following questions:

How big do I want my company to be? If you just want to build a company that can bring you 8000 dollars a month, and have a good product, you don't have to adopt a free business model. But if you want to build a dominant company and have a sizeable market share, free business models can accelerate the spread of your product.

What is the value of these free users? For all successful free business model companies, they have the means to earn or save money from free users. Some are reducing marketing costs (Dropbox), some are making money on advertising or data (Pandora, Evernote, Mint), and companies can benefit from both. If you haven't been able to use the free user resources to save money on the market or to get revenue from a third party-now think about how it can be achieved!

What is the cost of providing services to free users? This is a key factor in the free business model. If you spend a lot of money or time to serve these free users, you will lose a lot of cash. The cost of these services must be lower than the dollar value they can bring.

How big is the market? Evernote's CEO, Phil Libin, said: "The easiest way to get 1 million people to pay is to let 1 billion people use it." "Free can also give you a different way to gain income." You need a big market to ensure that there are enough people to pay for your product or service at the end.

Can customers get value from other customers as well? This will determine how many new users the free user will refer to this product. We have three levels of value:

Intrinsic value-you can only contact Skype with people who also use Skype; you can only share a Dropbox folder with another Dropbox user. In this regard, free business models can be a very powerful strategy.

Added value-you certainly don't want to have only one user in LinkedIn. You get value from other users who also use LinkedIn. In this respect, if you use an effective invitation mechanism, free business models can help you gain traction.

Worthless-you don't care if anyone else applies evernote. The only reason a user recommends such a product to another person is because he thinks the product is very good.

"Free" type

One of the key factors in the operation of the free business model is the structure of the products and services provided. What free services do you offer? What are the fee-based services? There are many different types of free strategies. Let's take a look at some of the most popular:

Real free business model-free version and premium version for the product.

There are two ways to do this:

Based on value-this is the most successful free business model strategy. The more customers use this product, the more value it generates, and the higher the cost of transfer, at a certain point, it reaches a limit, and the user has to pay a fee to break the limit. Evernote and Dropbox are such products.

Based on attributes-such as providing a free product to a user (such as a company-scale user). Take business-to-business applications. If I am a freelancer, I will always use this application and never upgrade. But if it's a company with three people, because you can't add more users, there's no way to actually try it, and ultimately I may not be able to see its value.

Cross-subsidized free products-provide a free product and charge for its complementary products.

Free trial with time limit-provide users with an X-day free trial period and start charging after the end of the probation period. The key point of this pattern is how to determine X. On the one hand you may want this time to be shorter, on the other hand it will be long enough to enable customers to recognize the value of the product.

Open source as a free mode

Lately I've seen a lot of entrepreneurs struggling with free open source, so I think it's necessary to differentiate here. Open source mode will undoubtedly accelerate your product diffusion, but also a viable free mode. This model has two major advantages. Developers can contribute to your product (like WordPress), which can also speed up your product development. Another advantage is that customers can master the source code, they can do something, and then you can offer some fee for professional functions or additional value services. The key point is that your code is open and anyone can build a company by commercializing the code. Remember, it is very difficult (often impossible) to undo the decision to open the source.

The last secret of success

There are a number of factors to consider when evaluating the use of free business models. However, I would like to share the last secret. In the study, we found that these successful free business model companies have one common point: they all have extraordinary products. If your product does not create value for users, all of this is worthless and there is no way to make you successful in a free business model.