Redeye VC

Josh Kopelman

Managing Director of First Round Capital.

espite being coastally challenged (currently living in Philadelphia), Josh has been an active entrepreneur and investor in the Internet industry since its commercialization. In 1992, while he was a student at the Wharton School of the University of Pennsylvania, Josh co-founded Infonautics Corporation – an Internet information company. In 1996, Infonautics went public on the NASDAQ stock exchange.

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FREE = Long Tail 2.0

Free_sign_med This month's issue of Wired Magazine contains a great cover story by Chris Anderson titled "Free! Why $0.00 Is the Future of Business" 

I think Chris does a wonderful job describing the rise of "freeconomics"  -- and is a must read for people thinking of shrinking a market.

It even contains a nice summary of my "Penny Gap" post:

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, one of clawing and scratching for every customer. The psychology of "free" is powerful indeed, as any marketer will tell you.

This difference between cheap and free is what venture capitalist Josh Kopelman calls the "penny gap." People think demand is elastic and that volume falls in a straight line as price rises, but the truth is that zero is one market and any other price is another. In many cases, that's the difference between a great market and none at all.

The huge psychological gap between "almost zero" and "zero" is why micropayments failed. It's why Google doesn't show up on your credit card. It's why modern Web companies don't charge their users anything. And it's why Yahoo gives away disk drive space. The question of infinite storage was not if but when. The winners made their stuff free first.

It appears that "FREE" will be the title of Chris Anderson's new book, due out in 2009.  I'm going to place my pre-order today.


Comments

Marc

"I'm going to place pre-order today"

Ummm... How much do you think Chris will (or should) be charging for a book about free culture entitled "FREE"?

Scott Lawton (Blogcosm)

I attempted to trackback to your earlier posts; no luck. If you want a good book on this topic while waiting for 2009, I recommend Robert Rodin's "Free, Perfect, and Now".

Raza Imam

Chris's article is on point. It's funny though, people have known that giving things out for free always benefits you in the long run.

It's a derivative of "Pay it forward", "Give before you receive", the Golden Rule, etc. But it's compelling because someone actually is mapping it to economic benefit.

The problem is that the culture of "free" seems duplicitous and self-serving, especially if companies start switching to a "free" model. Google will probably never lose my loyalty because they've been consistent.

When Napster was popular, I thought record companies were so stupid. Rather than promoting a new technology (and fundamental shift in the culture) they started prosecuting kids! Idiots. When artists that I enjoyed like DMX, Eminem, Metallica, etc. started bitching about copyright infringement they were written in my "cheapo, sellout, cry baby" book. I'm not being unfairly harsh here... you have millionaires and top notch MBA's crying about changing market conditions rather than adapting to them.

You're right Josh, the winners made their stuff free first. Everyone else is an impostor... good luck gaining my loyalty.

Raza Imam
http://BoycottSoftwareSweatshops.com

Sean Ellis

I'll definitely have to check out the wired article.

Free seems to be the topic of the week. A few days ago I blogged about my experience building a startup with a free-to-premium model. It was a necessary strategic decision to counter a well entrenched competitor that basically already owned the prosumer remote desktop access space. We effectively resegmented the category and then took a strong position in the overall category. A key benefit of a free-to-premium model is that you build a startup to compete in the toughest market conditions. You are your own biggest competitor.

Here's the relevant part from my post:

If you discover that the existing competitors are executing well, you’ll have to differentiate your offer with a better value proposition for at least a segment of the existing prospects. This was the situation in my last company. We faced a well entrenched competitor who was harvesting the majority of existing demand and spending millions every month creating new demand. Rather than simply trying to out-execute them (they were extremely efficient), we decided to counter with a free-to-premium offer.

This gave us a high response rate among existing main category searchers but also played into a new trend that had been developing over the last few years. In discovering a new expensive software solution, many prospective customers now check for free alternatives. For this new segment of demand, we quickly became the dominant market player. Once we had these users engaged on the free product, we could patiently upsell various complementary premium services.

Here's a link to the full post:

http://startup-marketing.com/2008/02/25/demand-harvesting.aspx

Philip Wilkinson

I was just reading that wired article in the coffee shop this morning - weird timing. I've always been involved in businesses where you give the products to customers for free but charge others for qualified leads - always seemed the best way. As Sean Ellis says above - often it's a good way of also getting into a competitive space..

On the subject of "micropayments failing" - how would you class buying a TV show or music track on itunes.. isn't that a successful micropayment?

Antman

I assume Chris's book will be free. If not, it would be a bit contridictory wouldn't it?

The idea is an interesting topic, however I will be curious to see how time plays a role. As "free" becomes the norm, where is the incentive to provide consideration? It's like customer service, good customer service no longer gets you anything, it is expected. If "free" becomes the bench mark, then what? Where is the incentive to become viral? There is no economy with out consideration? It will be a good read, regardless, especially if it is free. Shoot, it has to be free, what a way to test the hypothosis.

Lamb

Hahaha, antman has it right. His book has to be free, else it's a complete contradiction to his point. And of course you're going to pre-order, yorur name is in his book. idiot.

Lamb

Hahaha, antman has it right. His book has to be free, else it's a complete contradiction to his point. And of course you're going to pre-order, yorur name is in his book. idiot.

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