Competing in Undifferentiated Markets

In his support for Mr. Chris Anderson’s book , Mr. Seth Godin writes

As I see ‘free’, there are two forces at work:

In an attention economy (like this one), marketers struggle for attention and if you don’t have it, you lose. Free is a relatively cheap way to get attention (both at the start and then through viral techniques).

Second, in a digital economy with lots of players and lower barriers to entry, it’s quite natural that the price will be lowered until it meets the incremental cost of making one more unit. If a brand can gain share by charging less, a rational player will.

Whether digital or not, any market that has lots of players, low or no barriers to entry and excess capacity where any one player can easily supply the entire market and the products are undifferentiated from one another, the price race towards the marginal cost. But is that the market anyone want to play?

If a player can gain share in one round by reducing prices (even to $0)  there is no guarantee he gets to keep it in the next round. There is also no guarantee that he gets to monetize it.

The question is not whether or not you make your service free (because your MC is $0) and gain share by charging less but whether your service adds unique value to the target customers, you can make a credible value proposition and get to share  that value created.