There is a children book called Cloudy With A Chance of Meatballs which is a great story about a town where food was in abundance, because it rained food three times a day. It rained breakfast, lunch and dinner. In this scenario, there is such thing called free lunch. In fact the town hired sanitation crew just to cleanup the excess food from the streets and keep them clear. I bet no one in the town went hungry and there was no need to save food for the rainy day (pun intended). There is a page in the book that shows a restaurant with people eating inside. One notable aspect about that restaurant is there was no roof. Waiters simply caught “the rain” and served their customers. The marginal cost of food is zero for the restaurant.
That brings us to free as a business model that Mr. Chris Anderson talks about. Mr. Anderson says how free is the future for digital goods and services because their marginal cost approaches $0. The meatballs book applies Mr. Anderson’s argument about marginal cost to physical goods. Abundance of one component simply makes it irrelevant in pricing because a marketer cannot make a value proposition based on that component. The business model shifts to other components that deliver value.
- Since the marginal cost of food is zero, should the restaurant serve its customers for free?: No. The marginal cost is irrelevant. The restaurant should charge the customers for the convenience (someone else catching the raining and serving) and experience. The fact that marginal cost is $0 for food only changes the product/service that is being sold.
- If the restaurant simply serves the rain that people can do it for themselves, why would anyone go to any restaurant?: Same answer as above.
- How would one restaurant differentiate itself from others?: Better service, live entertainment, complements like wine that is not part of the rain.
- What role do chefs have to play in such a town? If the food from the rain is bland or flavorless then chefs role could be to improve its flavor. They could also specialize in plating the dishes in an attractive manner.
Pricing is about capturing a share of that delivered value. Since “free” does not capture value it cannot be a business model.
In a previous post I calculated the approximate CO2 footprint of a bottle of beer to be 125 grams. The calculation did not look at the CO2 share of raw materials (cultivation, storage, transportation) and used the average CO2 output of the entire brewery (New Belgium Brewery) instead of calculating for individual process steps.
The New York Times has a nice calculation for a bottle of wine, shipped from France and shipped (to New York) California. The respective numbers for France and California are, 1371 and 2514 grams. The breakdown is as follows:
The transportation numbers for California are higher due to coast to coast shipping. If we take the average then it is about 700 grams and for local consumption within California it is about 50-75 grams (guesstimate).
To put this in perspective, a bottle of French wine is equivalent to driving 3 miles and a bottle of California wine is about 3.5 to 5.5 miles. So if you biked to work for an average of 6 miles round trip and finished the evening with a bottle of French wine, your saving from not driving th car is cut in half.
The transportation costs for beer is lower because most breweries are located close to the market they sell. The numbers however may well be an underestimate.
In both the Beer and Wine CO2 per bottle calculations, the numbers are average. That is the total numbers are distributed among the quantities produced. But most of these CO2 costs (manufacturing, transportation, storage) are fixed costs and not marginal costs, producing and consuming one more bottle of beer does not increase CO2 cost by another 125 gram. But the numbers do add up if everyone cuts just one bottle of beer per week.
For driving, the 450 grams per mile is marginal cost, so even if you are the only one who chose not to drive there are savings.
I wonder what is the CO2 impact of drunken driving!
The concept of Willingness To Pay (WTP) is meant to convey what price a consumer is willing to pay to buy a product and still be left with a positive value. The idea of profit maximization is to price a product in such a way to extract every bit of value from the customer that they will be indifferent between choosing and not choosing the product.
I have not paid any for any of the web services I have been using. Search, blog, group collaboration, my own social network, surveys, documents, spreadsheets, etc.
Now when a new service that is marginally effective aims to charge me for using it, the choice is easy. Unfortunately the price of web services is now their marginal cost, $0 , not because it has to be priced at MC but because my reference price is $0.
Anyone who attempts to charge a non zero price without managing the customer reference price (that is improving it from $0) has a wrong business model. You cannot simply move from free to fee without first focusing on customer reference price.