The Danger of Free

Everyone loves to get stuff for free. We line up to get a free drink, we sign up for free checking accounts, and we're happy to get a free gift with the purchase of our next car. We love free stuff, even though we all know and understand that free is an illusion. After that free drink, we pay for the next three. The bank is making money by investing what we put in that checking account. The car dealer can afford to give away a small gift because the profit on the car is large. But none of this seems to bother us - free things still have a certain allure. But is the concept of free taking us down a dangerous road?

Marketers long ago figured out the attractiveness of free. For decades companies have been playing tricks using free to lure naive customers. But recently, our obsession with free has given rise to a new phenomenon - where the customer is never asked to pay. How? Because the business makes their money on advertising. Marketers are happy to pay for access to customers, who in turn love not having to pay. So the web plays the glorious role of middle man. Are we heading into dangerous territory? The paths that we are taking lead to confused customers at best; and monopolistic practices at worst. A culture where consumers think that increasingly more and more services should be free is not healthy.

Does Free Make Sense?

Most online consumer services today are free. That is, people pay nothing to use them and the services make money via advertising. The logic is that the more people who use the service, the more page views they generate and the more ads they are shown - so the happier the advertisers. On the surface this makes sense. After all, newspaper advertising has generally worked this way as well. Well, not quite. Top-shelf papers like New York Times, are not free - you need to pay to get them.

The classic newspaper business is both a subscription service and advertising supported. Subscriptions provide a solid base, and grow if the publication is interesting. Ads are then sold door-to-door by a salesperson with a with a fat rolodex and phenomenal commissions.

But this classic model is no more. In the brave new world, subscription fees are gone and the salespeople are replaced by CPM advertising engines. The problem is, things are just not that simple. When the economy is bad (think 2008), then advertising is the first to be cut. Now if your sole revenue source is advertising, then your revenue gets hit hard. The traditional subscriber base, which helps companies navigate through the economic downturns, is just not there, because it is no longer cool to charge people for the service.

The second problem is, of course, Google. The whole beauty of online advertising is that it is trackable - ROI is easily measured. Google's pay-per-click model (CPC) is far superior to the traditional impressions based (CPM) model. But how many other companies can mimic that? Can the New York Times sell CPC advertising? That remains to be seen. And Facebook is yet to prove itself in that game as well. Getting people to click on ads is still a rocket science on the web.

View: Full Story @ ReadWriteWeb

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