The miraculous power of scale

In this talk at UC Berkeley, Google's Sergey Brin confesses (at minute 1:27) that he thought Wikipedia couldn't work. Most people wouldn't contribute, he rightly assumed, and it would never reach critical mass.

He was in good company. In the classic "free rider" problem, you imagine an elementary school class with 20 students. If only two parents (10%) agree to volunteer to  help out as room parents and drive on field trips, the whole system breaks down: there aren't enough helpers and the two parents get angry at the others for not joining in. And that's exactly what Brin assumed would happen with Wikipedia.

But he was wrong, he says, because he--even he!--had underestimated the way scale can change the game. Sure, the experts say only 1% of Wikipedia's users actually contribute to making it better. Indeed, if you do the math, it's even worse than that: probably closer to 0.01% (today, Wikipedia has 75,000 active contributors out of 684 million visitors). But that 0.01% have created 10 million articles.

Most people don't contribute, just as Brin had feared, but it doesn't matter because the tiny fraction that do are a tiny fraction of an absolutely whopping number.

The lesson is that more is different. The Internet, by giving everybody access to a market of hundreds of millions of people, can work at participation rates that would be a disaster in the traditional world of non-zero marginal costs. YouTube works with just 0.1% of users uploading their own videos. Spammers can make a fortune with response rates of 0.00001%. (To give you some context, in my business of magazines, response rates of less than 2% on direct-mail subscription offers are considered a failure.)

This is the underlying logic of the Freemium business model, which uses the near-zero marginal cost of online distribution to reach the maximum possible audience, converting just a tiny fraction of them to paid users.

That's impossible for traditional products, which usually have non-zero marginal costs. You can't mail a brownie to everyone in the world on the hopes that a tiny fraction of them will come back for more. But on the Internet, it's not only possible, it's the smartest strategy.

That's why Freemium is so new (it was waiting for a zero-cost distribution method), and so counterintuitive to many people. Freemium doesn't work with the small numbers we're used to in daily life. Getting 5% of 100 people to pay for your software is no business, and in the traditional world it takes expensive marketing to reach more people than that.  But getting 5% of 100,000 people to pay for your software is a very nice business indeed, and online it costs virtually nothing to reach that many potential customers.

This is the point that everyone seems to miss: Free is not a business--it's zero-cost marketing for a business. And it works best at the largest scale: a small percentage of a big number is a big number.

Comments

[Daniel Sweet]

I've heard a number of VCs say that they hate hearing pitches with the line "the market is so big we'd only need 1% of it to be huge!"

Is Freemium so new many VCs don't get it yet? Or are VCs on top of it and entrepreneurs just aren't widely incorporating the "zero distribution costs" language?

[julian.bond]

Let's not kid ourselves that the free side of the equation is *zero-cost* marketing. Running a large web site costs real money. Agreed it's much less than any other business that services large numbers of people but it's not free. What we're really seeing with many of the so called Freemium services is the use of VC capital to pay running costs in the hope that they can be sold before the supply of relatively easy funding dries up. That's not a business, it's an investment gamble.

[David Loughry]

This post is another argument in favor of proxri. Except contributing to Wikipedia is somewhat mentally challenging. By comparison, proxri are easier. Plus, a creative act is usually more enjoyable than a forced payment. My name below links to more about proxri.

[Mike Woodhouse]

Of the 75000, it's actually a fraction of that small fraction of a that large number that keep the thing clean, working and useable, but they care a *LOT*.

There's a good (couple of years old, but still relevant) interview with Jimmy Wales at http://twit.tv/floss7 where this comes out.

[Workpost Foreman]

Freemium is not always free but it is helped by scale. Even more helpful would be truly compelling services people are willing to pay for..

[Kevin Kelly]

More is different, but not enough. Nupedia, Wikipedia's first abortive version, was subject to the same freemium principles as Wikipedia. It only needed a few percent to thrive. But it failed because it never reached a critical mass. By the same token, Citizendium, Sanger's second (or is that third?) attempt to make a collective encyclopedia also obeys the freemium principles, but is not thriving, also without reaching some level x. What is interesting is that I think Citizendium HAS reached the level of the early Wikipedia, and may even have a higher rate of participation than earlier Wikipedia, but that is not enough.

I think the surprise is not how low of a participation rate you actually need, but that you can get participation at such high rates given the mass audience.

The real news you bring is being able to run a busines selling only to a few percent of the people using your product, while the rest use if for free.
Part of the miracle of this is the way customers seem perfectly willing to accept this duality. I think we had a lot of training for this. Free radio music/paid LPs, and free TV/paid cable TV.

[Maria H. Andersen]

Remember the 80/20 rule? 20% of the people do 80% of the work?

I guess in today's Internet world (or at least Wikipedia), that should be the 100/.01 rule.

[Willem-Jan]

The 80/20 rule probably still applies within the .01% that contribute (as well as within the 99.99% that only consume)

[Jeremy]

man... it would be nice to get those sorta hits.

Hey Chris, I love your blog and read it every time you got a new post!

[Nigel]

So the success of freemium is dependent on having a free product that reaches a certain level of popularity, thus facilitating the sale of complimentary products. For such an outcome, you need to have a quality free product that people want. Even so, the fact remains that people will not use the free product unless they know about it.

[Lauren]

Basically, if you can get traffic, you can make money. The internet is a plethora of money-making opportunity. It's all about having a great idea, putting it into action, getting traffic, then sitting back. I'm glad wikipedia earns as much as it does. I've often wondered about this.

http://atlastmylove.com
http://runholy.com

[William Samedy]

Scale can be a transforming factor. I have used this concept in trading. Take a trading philosophy and apply it to a number of assets. As you increase the number of assets, returns get better and in some cases a losing strategy starts giving positive returns.

Only with technology can one person envision managing a portfolio of a few thousands the same way he can manage a few hundreds or twenty stocks. For that kind of scales a few years ago you needed a big trading desk with many traders.

[corre]

It costs virtually nothing to reach 100,000 potential customers? I think start-ups would tell you different. On the other hand, I'm just a student, but our lecturer always emphasises the fact that doing business on the internet isn't free. According to him, it costs around $500 to gain and maintain a customer online, that's far from free in my eyes. (although, I admit I have no idea where he got that number from)

[Chris Anderson]

@Corre: Nonsense. Where do these professors get these silly numbers? Let me give you an example. One of my startups, BookTour.com, has been used by about 100,000 people in the past year. About 10,000 have signed up and became customers. The whole site is based on Amazon's EC2 service, and all the processing, bandwidth and storage costs are $35 a month. That's close enough to free to me. Please take these numbers to your professor and get him/her to explain how he came up with his/her figure.

[Adam Singer]

@Chris - that's exactly what I was thinking. Alot of these aging college professors didn't quite grasp this internet thing when I was a student either. Eventually I stopped arguing and just bit my tongue during discussions.

[Laurie Neumann]

Very interesting post. You always hear that you need more and more traffic, but this post makes it clear as to why you do.

Thanks for sharing.

[Ken Kaufman]

It costs a lot to create something that is worthwhile enough for people to use, even if it is free. Getting a small to percentage to pay for it is even more cost.

[Peter Simones]

Such a simple concept, yet I'm probably not the only one who hadn't framed growth in this sense before. Really, it's just a simple xy relationship with x equalling the number of users and y equalling the conversion rate (whether that means revenue, engagement, contribution or something else business-model related). If either one is exceptional, growth will follow in line.

As a side note, it's always great to see guys like Brin, who are seemingly worth more money than several small nations, look straight out of a 90s NKOTB video.

Always enjoy the posts, Chris.

Peter Simones
http://www.Cramster.com

[jeff paul internet business]

Your post has on internet marketing is definitely true. Internet marketing has opened new ways of attracting visitors to the website giving the webmasters a way of earning cash as well as web status. Let's see what the future holds for internet marketing.