Wired editor Chris Anderson is about to publish “Free,” a look at how the proliferation of free media online is expanding into other business dynamics. The über-designer David Armano explains the entire book in one graphic, above: Either you give something away by subsidizing it with sales of something else (either cross-sales of other products, or third-party advertising for free media), or you give something away while charging a small portion of your customers for premium service.
It’s a simple get-this-but-pay-for-that trade-off. And it seems to make sense; consumers have put up with advertising-supported free radio and TV for years, so why wouldn’t free expand?
Trouble is, when you push “free” models that work online to real-world goods or services, people rebel — because in the real world you see what other people get, and transparent cross-subsidies tick you off. The perfect example is the U.S. airline industry. When fuel prices skyrocketed, airlines had a big problem — they could either raise ticket prices or pass the extra charges along in other fees. Raising travel prices in a day when any consumer can shop for the best deals on Travelocity.com is suicide; if you jump $25 on your ticket price to Vegas, consumers flow easily to a competing carrier.
So airlines did what Chris Anderson recommends — move to Free Model 1, where the price of one good is subsidized by sales of others. Airlines held ticket prices steady but tacked on a range of surcharges, for baggage check-in, food on planes, etc., to cover their higher operating costs.
And people screamed.
The problems were many. First, surcharges forced lower-income consumers to bear a disproportionate share of the fuel increases; families going on vacation with four kids and 10 bags where walloped with high baggage fees, while affluent business travelers waltzed aboard with a single carry-on bag. Second, the perception of unfairness abounded as everyone in the real world could compare what others were paying; if you bring bags, you get charged, and your fellow passenger may not. And third, each surcharge created yet another negative touchpoint in the travel experience — a bump here, an unexpected fee there, a series of unfortunate events.
In theory, someone always has to pay and “free” models that move the cost around can work on many levels. But in reality, consumers going through a customer service experience do not like surprises, and they hate any perception of unfairness. A utility could reduce your electric bill by 30% and then charge you $350 every time a serviceman comes to check your electric meter. In this new model you’d pay the same amount every year, but the fact you pay so much for a home visit would probably be infuriating.
The online media world is moving to the free. Just don’t expect the offline world to meet it there anytime soon, because in the real world, the costs transfers are much more visible.