MediaMedia BuyingWhen Free Begets Fee

When Free Begets Fee

Why (and how) online companies give away their most popular services to profit from their most valuable ones.

I am an example. So is Google. And Adobe.

We don’t charge for our most popular product or service. Instead, we profit by charging for our most valuable product or service.

With $1.2 billion in revenues in 2002, Adobe Systems is the world’s second-biggest PC-software company. None of those revenues are from its most popular product, Acrobat Reader, among the most popular software programs of all time. Four hundred million copies have been distributed.

Google is widely regarded as the world’s best search engine. Its site provides consumers with 150 million free searches daily. According to Nielsen//Netratings, it’s the most popular Web site in the U.S. and has the highest audience reach (29 percent).

Privately held Google is tight-lipped about revenues and profits. Its executives have not denied published reports the search engine is profitable and earned upwards of $10 million in 2001 on revenues of $65 million to $70 million. Even greater amounts were expected and probably achieved last year.

I admit my company’s revenues aren’t in the tens of millions or billions of dollars. But it’s profitable and has earned excellent incomes for its partners since it was founded in 1996.

At this very moment, I’m giving away our most popular service, consulting advice. In this case, regarding pricing content. Each month, I write half a dozen columns for four publications (including a fortnightly column in ClickZ) in which I give away consulting advice. (I should note two publications, including this one, pay a per-column honorarium.)

In this fashion, I give away services for free to many times the number of people my company has ever had as clients, or probably ever will have. Google reports over 11,000 sites currently link to my ClickZ columns. My free advice is by far the most popular product or service anyone at my company produces.

Why do Adobe, Google, and I give away our most popular products and services? Are we crazy, cowardly, or confused?

No. Rather, we all know popularity and lucrative value aren’t directly related.

Acrobat Leaps Over Competitors

When Adobe first launched Acrobat, the company was fighting device-independent TeX graphical documentation software and Microsoft’s newly launched Rich Text Format (RTF). Adobe knew if it charged for applications to both read and write Acrobat documents, it might lose academic and scientific markets to the graphically elegant but daunting TeX (still popular among physicists and computer scientists); and likewise it might lose business and consumer markets to Microsoft’s less capable RTF.

Adobe needed a solution to that dilemma. As The Economist Technology Quarterly recently wrote, “The key, however, came not with the introduction of Acrobat in 1993, but with the decision to separate Acrobat Reader from the full version of Acrobat — and give it away.”

Adobe realized there would be only a limited market of those who would pay to use Reader. That would limit sales of the much more lucrative and valuable Acrobat authoring, distillation, and publishing software applications.

By giving Reader away, Adobe made the application the standard for downloadable documents, ensuring a broad market for the more valuable Acrobat authoring, distillation, and publishing products. Sales of these accounted for most of Adobe’s annual revenues.

Better Tech With Less Clutter

When Google launched in 1998, it faced formidable competition: Yahoo, AltaVista, Lycos, Excite, and more. Google believed it had better search technology and realized it couldn’t charge for that differentiation in such a competitive market.

Google understood by offering its better technology online for free to consumers (and doing so without clutter, in the most efficient graphic environment possible), it could, with minimal marketing expenditure, make its application the standard for search engines. A widespread market for Google’s more valuable products and services was established.

Many consumers who use Google’s site forget the company’s business is selling search technology, not conducting online searches. That’s Google’s business plan. Its executives privately acknowledge most revenues come from that aim. Corporate licensing and sales clients include AT&T, the Internal Revenue Service, Procter & Gamble, Sony, Nextel, and other major corporations and government agencies. Google’s even licenses its technology to former search competitors such as Yahoo and site traffic competitors such as America Online.

Take My Advice — for Free

This column is provided for free because I know not many of you would pay to read business columnists such as us here at ClickZ. I know offering this advice for free creates widespread marketing for my company’s personalized consulting services, which are more valuable to you and lucrative to me than any consulting advice column could be.

Often, the best price strategy is not to charge for your most popular product or service. Consider charging for the services or products that are most valuable to your customers and most lucrative to you.

In online publishing, this often means maintaining free access to the most popular portions of your site. Charge for the most valuable and lucrative subsections or services (not necessarily the products or services for which most consumers know you). If you attempt to charge for everything on your site or impulsively think you must charge for most popular sections, you could put a halt to your site’s traffic and with it, potential revenues.

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