Tag Archives: money

Book Review: Free – The Future of a Radical New Price

Free: The Future of a Radical New Price is the most recent book from Chris Anderson, the author of The Long Tail. It explores a relatively modern phenomenon: free products, services, and content. As he describes it:

I’m typing these words on a $250 “netbook” computer, which is the fastest-growing new category of laptop. The operating system happens to be a version of free Linux, although it doesn’t matter since I don’t run any programs but the free Firefox Web Browser. I’m not using Microsoft Word, but rather free Google Docs, which has the advantage of making my drafts available to me wherever I am, and I don’t have to worry about backing them up since Google takes care of that for me. Everything else I do on this computer is free, from my email to my Twitter feeds. Even the wireless access is free, thanks to the coffee shop I’m sitting in.

And yet Google is one of the most profitable companies in America, the “Linux ecosystem” is a $30 billion industry, and the coffee shop seems to be selling $3 lattes as fast as they can make them.

Therein lies the paradox of Free: People are making lots of money charging nothing. Not nothing for everything, but nothing for enough that we have essentially created an economy as big as a good-sized country around the price of $0.00. How did this happen and where is it going?

That’s the exploration he makes in Free. How do you make money without charging? And what are the consequences for us as consumers, us as business owners, and us as citizens?

Why you shouldn’t read Free

Starting back with my very first book review (Rich Dad, Poor Dad), I always start my reviews with the negative aspects of the book. And, like Rich Dad, Poor Dad, Free has had its share of angry detractors. I summarize here from Malcom Gladwell’s review of the book.

    1) Information doesn’t want anything
    Many a young hothead has justified piracy, wikileaks, and violations of non-disclosure agreements with the rather vacuous “Information wants to be free.” Their opponents point out that information doesn’t want anything. But Free puts the quote in context. As originally stated by Stewart Brand:

    On the one hand information wants to be expensive, because it’s so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other

    Free is a book about those two dynamics: should information be priced according to the cost of reproducing it, or according to its value? Which one is better for your business? If free is better for you, how can you leverage it? If charging is better for you, what are your options?

    2) Free is just another price
    Technically speaking, yes. Free is a price of $0.00. But people respond differently to $0.00 than they do to $0.01.

    Free has a discussion of the reasons for this phenomenon, and situations that illustrate it, but suffice to say that we don’t analyze our options as carefully when there’s no money involved. Which means you can spread your message farther and faster with Free than you can with Very Low Cost. And that makes it worth analyzing.

    3) Free often doesn’t work
    YouTube is losing money for Google (as Gladwell points out, at a rate that would qualify it for a bailout, were it a bank). Lots of artists and authors are giving stuff away and not becoming famous. Therefore free doesn’t work.

    I don’t expect that there’s anyone out there surprised that giving stuff away doesn’t always make you money. And no one ever claimed that giving stuff away would work every time, for every person.

    On the other hand, I expect there are some people who are surprised that anyone has made any money giving stuff away. It’s an interesting phenomenon, and it’s worth learning more about when and how and why it works.

Anderson is a bit of an academic. He’s certainly a geek. And his writing tends towards the analytical and theoretical. He’s looking for first causes and underlying reasons, and that may not be your cup of tea. So you may prefer to absorb this information through the (free) audiobook, or through Wikipedia, or through the videos I hope to someday make.

That being said, you need to absorb this information somehow, if you intend to make money in the upcoming decades. As it says in rule 7 of Abundance Thinking:

Whether through cross-subsidies or software, somebody in your business is going to find a way to give away what you charge for. It may not be exactly the same thing, but the price discount of 100 percent may matter more. Your choice: Match that price and sell something else, or ensure that the differences in quality overcome the differences in price.

Note that you don’t have to give away your value (although you can), just that you have to be prepared to handle competitors who give away theirs. And to do that, you’ll want to know all of your options.

Why you should read Free

So let’s move on to why you should read Free, since — as I’m sure you’ve guessed — I believe you should.

Free Works
Not always. The book is full of examples of “failed” free.

But that’s rather the point. If it were as simple as

    give stuff away -> Profit!

then you wouldn’t need any help figuring out how to make use of this “radical new price”. It’s because there are failures that it’s worth discussing the method.

There are also examples of successful free — Google loses $700 million on YouTube, but still makes $23.6 BILLION overall. Xiang Xiang wouldn’t charge for her songs even if she could. Skype has become a word in the Oxford English Dictionary.

If someone can make free work, wouldn’t you like there to at least be a possibility that it’s you?

Free is more complex than you’d think
Leaving aside that the English word “free” covers two distinct concepts (freedom, liberty, aka “free like speech” vs no charge, gratis, aka “free like beer”), Anderson still identifies four different methods of generating “free” value.

    1) Direct Cross-Subsidies
    This is the kind of “free” that we’re most familiar with: the one where they offer you a free lunch if you buy a drink, or a free kids’ admission if you buy an adult’s ticket, or a free laptop if you sign up for 2 years of Verizon’s data package.

    Sometimes this is a fancy version of bait-and-switch (that laptop ended up costing you more than $1400, for which you could have gotten a really nice laptop). Sometimes it’s really a good deal for both the business and the consumer (like when the museum still makes money on the adult admission, but you still get a nice outing with all the kids at an affordable price). But when Heinlein fans say “TANSTAAFL” (There Ain’t No Such Thing As A Free Lunch”) this is the kind of hidden cost they’re usually thinking of.

    2) Three-Party Market
    We’re all familiar with this one too: it’s the “free” of television and radio. The stations produce content and broadcast it for free. Advertisers pay them for the right to interrupt the content and market to us. We pay advertisers by buying their products.

    TANSTAAFLists are still happy, since we’re paying more for our consumer goods than we would in a world without TV advertising.

    3) Freemium
    A contraction of “free” and “premium”, freemium products are anything that are free to basic users and have a premium paid version. Skype is freemium: Skype-to-Skype calls are free, and you pay for Skype-to-Phone. Almost all smartphone apps are freemium: there’s a basic free version, and a version that costs $1.99 with more features (or takes away the annoying ads). Most video games will let you play a couple of levels for free, and charge you for the whole game.

    4) Non-monetary Markets
    Wikipedia, a lot of the blogosphere, and MIT’s OpenCourseWare are all examples of this: the value is free because its creator values something (reputation as being an expert, self-expression, or the opportunity to show off) more than they value money. In many cases the artists could charge for what they’re producing, but they’ve made a conscious choice to take their payoff in wider distribution, reputation, or whatever.

Free is changing
Anderson notes that as he was researching and writing the books, he found two very different opinions of “free”. As a broad generalization, those over 30 were generally TANSTAAFLists — when someone starts talking about “free”, it’s time to make sure your wallet is protected. These are the people who grew up with the 20th Century Free, which was almost always of the direct-cross-subsidy type, and very often of the bait-and-switch type. Since the “free” samples cost the companies money, the companies had to more than make up that cost in the cross-subsidized products.

Again as a broad generalization, the under-30 crowd was so comfortable with the idea of free economy that they were surprised anyone would write a book on it. These are the people who grew up with the 21st Century Free, which includes some really high quality stuff at the cost of some ads, some reputation, or the understanding that you’ll subsidize it if you’re able. Because these “free” samples really are costing the company nothing (or next-to-nothing), they’re not as determined to make their money back from genuine customers, and so there’s more room for genuine win-win arrangements.

Summary

The fact that we now can distribute information and digital products for free has a profound effect on how we can make money. It means you can try business models for very low risk: $10 or less. It means you can reach millions of people for very little money. It means you can help hundreds of thousands of people, even if only a tiny percentage of them pay you back.

The same factors that Anderson analyzes in this book are the factors that make it possible for you to monetize your hobbies and passions. It’s worth knowing what they are.

Buy Free: The Future of a Radical New Price while simultaneously helping African children get an education. (Learn More).

Resources for Further Reading
Monetize Yourself Media: share your expertise for free
Distillery Tours and Alternate Monetization

The Role of Finance

Finance and accounting is one of the most intimidating areas of business. Even setting aside that numerical literacy sucks in US education, and so you may be a total arithmophobe, the long columns of numbers and arcane terms can be confusing even to someone who majored in applied mathematics (like me). Have you got the numbers right? (How do you tell?) If so, do you know what they mean? (Um..) Are you sure you know the difference between net revenue and earnings and profits? (I don’t).

The part of finance you have to care about

There’s a very good reason (no, really!) that Fortune 500 companies are required to do their accounting by Generally Approved Accounting Principles, by which they mean “all that complex and arcane mess you see on a standard Statement of Cash Flows.” Because Ford and Toyota are required to calculate Gross Revenue and Net Revenue and Profits and Earnings Per Share in exactly the same way, all of us can look at their financial disclosures and determine which company is actually doing better. (Want to place bets?)

But you are not a Fortune 500 company. You are not a publicly-held company. You can keep your books in any way that makes sense to your shareholders — which probably means, to you.

The purpose of finance and accounting is to answer one very basic, very important question:

Am I making money or not?!

All you have to do is enough accounting to be able to answer that questions.

The Three-fold Benefits of Finance and Accounting

Actually, the “finance department” (that’s you and your calculator) has three roles, each of which involve answering variants on that question.

Am I making money? Financial Supervision

It’s easy, especially in a business with high upfront costs, to feel like you’re making money when you actually aren’t. Say you pay $100,000 to open a new restaurant. And each month you make $10,000. Whoopee! Except…. you’re paying $2000 in rent and $5000 in raw materials and $2000 in salaries and….

How much money did I make? Financial Assesment

Unless you’re lucky enough to live in a country that doesn’t collect taxes from businesses (and I don’t think there are any), you’ll have to tell the government how much you made during the previous year. And you’ll have to convince them that you’re telling them the correct number. So your financial department should be able to produce that sort of report.

How much money would I make? Financial Projection

The third role of the finance department, often under-utilized by small businesses, is to help you with decision-making. When you’re deciding between two (or more) routes, make some guesses as to what would happen, and plug those numbers into your financial statements. What would your business look like in a year if you chose this route? What would it look like in 2 years? 5 years?

This method can help you avoid spending too much money at a time and getting yourself into trouble down the road.

Resources for Further Reading
No Frills Accounting — This is the spreadsheet I created to track the very basics of your financial situation. It’s a huge spreadsheet (there’s a lot of number-crunching going on in there), but it does what you need it to do.

Managing Cashflow

When you watch a video on YouTube, you sometimes realize that your computer connection is too inconsistent for streaming video; a few seconds in, the video suddenly stops, and you get a little loading symbol. The solution to this, as everyone knows, is to pause the video for a bit, while the “loading” bar gets ahead of you. You don’t have to let it load the entire video before you start; you just have to let it get far enough ahead of you that when the internet suddenly slows to zero, you still have enough video loaded in buffer to carry you through until the internet picks back up again.

When you listen to music online, through Pandora or your favorite radio station’s website, the program automatically does the same thing. In fact, that’s what takes up most of the time while you wait for Pandora to start: it’s getting enough of the song loaded in buffer that you can listen to your music uninterrupted.

Most electronic devices these days have a capacitor built in, so that if the power coming from the outlet drops suddenly, the computer/stereo/whatever isn’t harmed.

It Averages Out

What all of these have in common is that the stream is on average powerful enough to run whatever it’s supposed to do. If your internet connection is slower than the video, you do have to wait for the whole video to load; if you’re in the middle of a brown-out, the electricity coming from you wall won’t power the computer at all. But usually the problem is just how much is coming at any given time; you have peaks and dips, but they even out to enough to do what you want it to.

So you make a little “pool” — the electricity goes into the pool, and you pull your electricity from the pool rather than directly from the wall. When the quantity of electricity drops, the level of the pool drops, but the amount of electricity you pull from the pool can stay the same. When you get a power surge it puts extra electricity in the pool, but the amount of electricity you pull from the pool can stay the same.

How Capacitors and Buffers Apply to Business

If you’re going to self-monetize through non-employment, you’ll have to handle the one disadvantage that all other methods of monetization share: the money doesn’t come in nice, even, equal amounts on a regular basis. You’ll have months when you get only $100, and months when you get $5,000. So you need to be prepared to deal with this.

Step 1: Make yourself a buffer
The solution that works really well for other situations like this, as we’ve seen, is to make a “pool”. Maybe a savings account, or keep your checking account at a certain level, or whatever works for you. But you need to put the income from your business into this pool, and pull your paycheck from the business out of this pool, at the same amount each month.

Step 2: Make sure your averages are OK.
This is hard to do before you set up your business, but keep an eye on how much you seem to be getting in. If your monthly expenses are higher than your average income, then you’re in the same situation as the video on a slow internet connection: you may seem OK for a while, but there will come a point when you just stop dead. So be prepared to be flexible on your expenses, until you have a good idea of what your average will come out to be.