The time/money formula of free

At some point in your life, you will wake up and discover that you have more money than time. And you will then realize that you should start doing things differently, which means not walking four blocks to find an ATM that doesn't charge a fee, driving for miles to find cheaper gas, or painting your own house.

This same calculus is the foundation of a big part of the "freemium" economy. We see it a lot in free-to-play online games, such as Maple Story, where you can buy things like "teleportation stones" to let you get from one place to another without a long slog or wait for a bus. Most of these paid digital assets don't make you a better player, but they do allow you to become a better player faster.

If you're a kid, you probably have more time than money. That's the force behind MP3 file trading, which is kind of a hassle and but is free (albeit illegal, of course!).  As Steve Jobs famously pointed out, if you download music from peer-to-peer services, fixing the messy metadata as you go, the time it takes to avoid paying means you're working for less than minimum wage. Nevertheless, that works if you you're time-rich and money-poor. Free is the right price for you.

But as you get older, the equation reverses and $0.99 here and there no longer seems like a big deal. You migrate into a paying customer, the premium user in the freemium equation.

As some of you may know, one of my other side projects is an open source hardware company (developing and selling aerial robotics technology), and so I've been following the emergence of the open source hardware world closely. It's a really interesting example of how to make money from free, one that adds a new dimension to the open source software world because it's about atoms (which have real marginal costs), not just bits.

The way most open source hardware companies work is this: all the plans, printed-circuit board files, software and instructions are free and available to all. If you want to build your own (or, even better, improve on a design), you're encouraged to do so. But if you don't want the hassle/risk of doing it yourself, you can buy a pre-made version that's guaranteed to work.

For instance, take the great Arduino open source microprocessor that our autopilots are based on. You can build your own, with full instructions. Or buy one. Most people do the latter. The Arduino team make their money from a certification license fee they charge the companies and retailers that make and sell the boards.

You can build a good business on this model, as Limor Fried (AKA LadyAda, picture above), has shown with her electronics kit retail/design/community AdaFruit Industries. She and her business partner, Philip Torrone, explain the economics and tactics in a presentation here (good summary here).

Short form:

1. Build a community around free information and advice on a particular topic.
2. With that community's help, design some products that people want, and return the favor by making the products free in raw form.
3. Let those with more money than time/skill/risk-tolerance buy the more polished version of those products. (That may turn out to be almost everyone)
4. Do it again and again, building a 40% margin into the products to pay the bills.

As Torrone said in an email, "I can't imagine doing a book, a video, a magazine unless I had a community that would rally along the way. In the end it always seemed to be about a story, people like to see the beginning, middle, end and plot of something -- and if there's a buy button somewhere, they sometimes click it and reward us for working hard."

Presto: a free business model that scales neatly from bits to atoms. It's exactly what we'll be doing at DIY Drones, too. Not just because it's free, but because it works better than anything else out there. It's not a bad way to think about writing a book, either ;-)

Comments

[hyokon]

I feel much more comfortable with this one, compared to your Wired article. I absolutely agree that free can be effectively used as a part of a business model. I thought the Wired article was a bit extreme. I hope you are making progress in refining your thoughts.

Here are the simple reasons why I think free can only be a part of a business model (and the overall economy).

1. In reality, it always costs more than zero to supply anything.

2. Even if you can provide something for free, you need to make money somewhere.

[Weston]

Actually Chris,

I believe Steve Jobs is wrong on this one.

P2P content is actually easier and quicker than paying for it on iTunes, considering how long it takes to actually unlock the DRM from any purchased song.

Try my media search engine www.EverythingAmplified.com

It's quicker than iTunes and it has a much better Long Tail selection. (Plus, no DRM)

[Don Kim]

Coincidentally I read this blog right after reading an article in the Economist about the backend benefits of internet piracy. No doubt with the enormous ubiquity of information and media sharing going on, that the savvy companies, businesses and entrepreneurs will find ways to take advantage of all this open information.

[chao lam]

Is "... one that *ads* a new dimension to the open source ..." an intentional mistake? :)

[Chris Anderson]

Er, no ;-) Fixed...

[Steven Hodson]

This philosophy is all well and good and I'm not arguing the basic premise of it at all but there is also one other very basica fact that has to be dealt with in this equation and that is an all encompassing way for us to pay for those goods should we want to.

Not even one in the world has a credit card nor can they get one. The vast majority of major outlets support only credit card payment. For exaple I might very much to open an itunes account without a credit card (I've tried more then a few time to verify this). I might want to buy books or other goods from Amazon but I can't because they only support credit cards or US based debit cards - not everyone who wants to buy goods lives in the US.

I manage fairly well with online buying because I do have PayPal but not even having that option let's me shop at places like Apple, Amazon, Microsoft or a vast majority of other possibilities.

Until there can be a ubiquitous payment method that is honored by all business on the web and that isn't tied to a credit card or geotarded debit card systems the people who would really prove this philosophy as being viable can't.

[Matt Haughey]

From the first issue of Make Magazine, I could see this playing out, and I've often been frustrated when some really cool homebrew project that would take me a week to build wasn't for sale by others. It started with the Kite Camera for me, I just didn't have a couple saturdays to devote to building the somewhat complicated project.

[idrawgirls]

It's totally true. Love the post, and love your book. Just stopping by to say hi. I am working professionally in concept art and design for video games.
Chris, you guys and your communities rock my sock off.
I found this Rich dad Poor dad book a year back, then...stumble upon internetbusiness mastery, then your book (The long tail), then seth godin...
Just want to say, my life is changing drastically. I feel like I have more control over financial independent then I thought I did. But working for people and with people have tough me a lot of great deal.
Anyway, I build a blog almost a year back...every single step is planed out. Offer tons of free tutorials with the long tail...then shorten it day by day.
Now I have products...it's amazing...how to community will support you and your products.
Now I am just waiting for the good time when everything meet my expectation so I can quit my career even though I love it. But what could be BETTER than get to do whatever you want to do along the same line without having a boss or corperate dictate your direction.
It's getting there.
Thanks a bunch!!!
Keep Rocking and cannot wait for your new book!!!

[ZaggedEdge]

Wish I had more of both, time and money!

[Scott Beveridge]

In theory, your plan sounds wonderful. But, in the real world, people don't rise above their debts and cross over to la la land. If they don't paint the house, it doesn't get done.

[Koen]

I guess Chris is right: 'Free' has an enourmous appeal to a lot of people.

Examples: "I want to have al the music I love on my iPod, but I'm not paying 5000 times 0.99$. I copy the hard disk of a friend, for free". Nowadays you can follow the world's news without a NY Times subscription, so you go to their website and read the news, and some ads... Etc.

DIY is another closely to 'free' related phenomenon. In Belgium, where I live, an own house seems to be the summum of self-realisation. A lot of young people do things themselves in the house to save skilled workers fees. Like: install the heating, painting, building walls or a roof...
They are so-called working for free, at the raw materials cost, to build a bigger house to impress friends, use more exclusive materials, or buy design furniture and lighting.

When they grow older, and have more money, you see the skilled workers coming in. At that age, people have more money and realise that they can spend their time better than painting and building...

[fatfoogoo]

This is one of the best articles I've seen in a long time about the benefits of a freeium economy. I think you've nailed the free-to-play, micro transaction model squarely on the head with the Maple Story example. As more and more of these titles continue to reach US shores, more and more gaming publishers are investigating the model, and EA taking a main role with it's upcoming release of Battlefield Heroes.

Excellent writeup - there need to be more like these!

[David Hobby]

Hey, Chris-

This post really resonated with me. I was a newspaper photojournalist (how's that for a career with a future) for 20 years. In 2006, I started a small blog with the intention of leaving a few bread crumbs behind for the new guys - to teach them how to light better with small flashes. It was all free, and did not even start with a commercial compass point in mind.

My last two years have read pretty much exactly like the steps in this post. An accountant friend told me in the early days that the information I was providing was valuable. So I should charge say, $25 for a year's subscription to view it. Boy, am I glad I did not listen to him.

I have learned that free is far more powerful than any ticket booth.

Thanks for all of the time you have spent thinking about these concepts. They are everywhere, but your articulating them so well is making the path easier to understand.

Regards,
David Hobby
Strobist.com

p.s. The only thing I do not like about your magazine is what it does to my schedule for the rest of the day when it arrives in my mailbox. WIRED totally rocks.