Otis Chandler's Reviews > Free: The Future of a Radical Price

Free by Chris Anderson
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's review
Jul 20, 2009

it was amazing
bookshelves: business, nonfiction
Read in July, 2009 — I own a copy

A business classic that everyone should read. Explains 20th century and 21st century economics from a big picture perspective. The basic thesis is that while in the physical world (atoms), products have cost and thus companies can afford to give away small amounts of free samples (5%), or give away cheaper loss-leader related products in order to maintain profits. In the digital world things are reversed as products have little to no marginal cost and companies can afford to give away 95% of the product for free and make money on the remaining 5%.

My Notes

* For physical products free is a marketing tactic. Give away one product to make money on another (cell phones to sell plans, razor blades to sell razors, jello cookbooks to sell jello, etc). This is the concept of a "loss-leader", and is the basis of much of 20th century marketing.
* Value psychology: things that were once paid have a difficult time going free because people think it must not be as valuable anymore. Things that have always been free can still have a high perceived value.
* The Penny-gap: The psychology of a free product versus that of a product costing even one cent is huge. Koppelman says many businesses can't make the leap. Study where truffle is $.15 and kiss is $.01 and 70% choose the truffle, then reduced to .14 and free and now 70% choose the kiss. Free is disposable so we can't make a bad decision by choosing it - it's a psychological thing.
* Products in a truly competitive market tend to fall to the marginal cost. A true competitive market was mostly an economic theory as most real economies have inefficiencies (the products are somehow differentiated). However with digital economies we finally have true competitive markets, with marginal costs so close to zero that it's often rounded down.
* Reputation and attention economies are other important things that motivate people. Time is money! People will pay for status or to save time in a game, even if they wouldn't pay for the entire thing. There has been an explosion in gaming lately as games become free to play then charge as people play (Habbo Hotel, WOW, Puzzle Pirates, Second Life, Club Pengiun, Runescape, etc)
* Giving away your product for free or allowing piracy can be a good thing if you can figure out how to make money from the attention you get as a result. Microsoft would rather people be using pirated versions of Windows & Office than be using a competitor - it establishes them as the market leader and leads to more sales. Bands in China and Brazil give away as many free copies of their album in towns they visit as possible to get everyone to buy a ticket to their concert.
* Google is the best example of the above. They make so much on advertising from their main product (search + advertising), that they can afford to hire thousands of engineers to work on dozens and dozens of quality products that don't need to make money, they just need to establish Google more as a brand people use (gmail, google docs, google calendar, google apps, youtube, blogger, google analytics, google ad manager, and many more)

I was also fortunate enough to interview Chris Anderson about this book: check it out here.
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06/29 page 100
34.72% "Gladwell vs Anderson: the war of the economists? http://bit.ly/uPCM6" 1 comment
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message 1: by Travis (new) - added it

Travis Good to know. It's on my list!

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