Consider the following case
You have just designed a web service. It lets you publish your body temperature from your phone that all your friends can follow. You are thinking of charging for such service, so people pay a monthly fee to use the service. But you do not know what price to charge and you do not know how many will subscribe at each price. In other words you do not know the demand curve. Because finding the demand curve is not a simple exercise and it is all the more complicated when you are creating a new product and the value to your customers is not clear. It will cost you to do a market research but nothing compared to what it will cost you to develop the market and reach our target customers. If you do not know the market size and what what you can capture you cannot undertake a huge investment in marketing this product.
It just happens that you read and hear a lot about the future of a radical new price and how the marginal cost of digital goods is $0 and how making your service free or following a free + premium model works and is now the law. You are told that what you are competing for is attention because this is an era of attention economics and abundance economics at the same time. Do note that attention is a scarce quantity but the products are available in abundance. The free + premium = freemium seems like the perfect fit for you.
All you need to do it is first give away the version of your service for free to grab people’s attention. You are told that since your marginal cost is $0 it does not cost to add any one free subscriber. Because you gave your service for free, it is going to go viral and will have a great uptake. Now that you have all the attention you wanted start monetizing it, either by up-selling some of your customers to a premium service that lets them publish temperature in two different units or by selling them thermometers. Simple right?
Why are you not running with it? What did you ask? You want to know the demand curve for the new upgraded service and thermometers? You want to know how the profit gained from this business model compares to profit you would have gained if you had bothered to find the demand curve in the first place and charged for your service? No, no, you got it all wrong. Your business is to grab attention, you got it now just monetize it without asking questions that will require market research and marketing budget. Demand curve is valid only in economics which is a study of scarcity and does not work when things you sell are in abundance.
What did you say? You are making decision not on whether or not to support one additional free customer but whether not to offer the service at all because all your costs are fixed? Your marginal costs are $0, be happy.
And you are worried about setting a bad reference price of $0 now and how this will affect customers’ willingness to pay for the premium service? Are you forgetting you will not achieve such a high uptake if not for the $0 price?
What now? You say, there are at least 100 others offering the same temperature publishing service – 60 of them offer your premium multiple units publishing for free and 100 others are offering a service that lets people publish their heartbeat? That is abundance, right? This is the era of abundance, did you not read or understand all the materials on that already?
Now don’t stand around claiming free is not a law. You did not understand the freemium model correctly. It is happening now whether you like it or not.