Megatrend: The Post-Freemium Economy

The rise of the “free lunch” mentality will fundamentally reshape markets and industries. The post-freemium, “all-free” economy is inevitable.

This is a part of our series about global megatrends. Please read the introductory post. Once upon a time, newspapers were bought at the newsstand, sending letters required postage stamps, and tickets had to be purchased to watch movies. There was no such thing as a free lunch. That is about to change, and the word “free” is taking on a different meaning.

RATIONALE

Since the great PR revolution in the first half of the twentieth century, driven by pioneers like Edward Bernays, how we buy industrial products has changed. About a hundred years ago, rational reasons were advertised to the buyers. Satisfying a customer’s needs was the reasoning behind most marketing efforts. Yet since Bernays once said, “Man’s desires must overshadow his needs,” things have changed. The insightful BBC documentary by Adam Curtis, “The Century of the self”, deals with this development in detail. The PR industry has perfected the art of generating desire for products we often do not really need. The problem that still exists is, that while people’s desires can be manipulated, the amount of money in their purses remains unchanged. How do we market products to people who have a minimal amount of spending money? One result of the psychoanalytic approach to marketing was the realization that we generally tend to buy things we have already used. We feel safe with things we know and remain cautious of unknown products and brands. Companies like Gillette pioneered this approach with their “razor and blades” business model. In short, that model gives a customer a product free of charge, but complementary or replacement parts are premium priced. This works because customers already know the product and they will more readily spend money in such a context. This principle has found extensive acceptance in many industries. Cable companies give free DVRs but demand paid subscriptions. Certain printers are dirt-cheap, but ink cartridges are exceedingly expensive.  Some cheap and stylish coffee machines only work with expensive coffee capsules. However, the razor-and-blades business model is being increasingly criticized. The rise of the Internet and the prevalence of information on products and business models have allowed the broad audience to learn that this model does not always work to their advantage. The modern consumer perceives the razor-and-blades model as sneaky. The next advanced marketing idea was the “freemium” business model. Standard computer game versions are free, but extra “lives” or artifacts needed to achieve game the best results must be bought. Limited CRM or ERP software versions are free, but more useful or necessary functions cost money. Such marketing practices work pretty well, but still, there is a considerable part of the audience that, once grown to like the “free lunch” idea, rejects even the most valuable features as soon as they have to pay even one penny for them. The freemium economy, based on the idea that products and services at no charge are irresistible, has aroused a seemingly unrealistic expectation of the audience to get “everything at zero cost.” The markets have reacted to this development and begun promoting an “all-free” model from companies like Google. In this model, the product’s users agree to give their personal data away (which they think has little value) to the PR industrial complex, which in turn processes the data to generate advertisement campaigns for their customers. The actual product or service, such as Google Maps or Yahoo Mail, is fully funded by ad revenues and free to the users. This is the final stage of the “all-free” economy. The model works so well that companies that used to sell products through freemium are giving up their paid options altogether in favor of the “all-free” model. Examples include the leading keyboard replacement SwiftKey, the internet radio TuneIn, or the real-time translator Word Lens (which appears logical as Google acquired it). Practically any piece of software that can help the PR industrial complex harvest a large amount of personal data seems to be going “all-free” these days. All-free software is only the beginning of the market revolution. Consumers are likely to be increasingly price-sensitive in the age of steadily falling household incomes. It is only a matter of time for electronic devices and other products to become part of this trend. Fasten your seatbelts; we are fast heading for an “all-free”, post-freemium economy.

CONSEQUENCES

Individuals:

• Society will split up in two classes of customers: the poor who use all-free products and the rich who will buy premium products.
• Privacy will become a rarity. Even those who consciously avoid using all-free, data-harvesting products or services will remain a source of data for others, e.g., Google Glass which uses facial recognition for everybody in sight.
• For the very poor, the all-free economy will mean more options and an overall improvement in their material situation.
• Data harvesting from “all-free” products will ultimately result in various privacy breaches and cause numerous legal disputes and even class-action lawsuits.
• Personalized advertisements will become a prevalent phenomenon. Just like in science fiction movies, ads will be based on the long-term personal data gathered on the individual person who happens to be in the proximity of the given advertisement space, such as doors, windows, lifts, walls, pavements, lamps, furniture, cars, buses, trains, offices, etc.

Businesses:

• Businesses will replace their current customers with customers from the PR industrial complex.
• Data-harvesting products will bring their makers the highest market evaluations.
• Paid services and products in the middle- and the lower-price segment will generally suffer from decreasing demand. All-free products will destroy similar paid-for products from other vendors, creating a downward spiral: Company C1 offers product type PT1 for free but asks customers to pay for product type PT2, while company C2 offers a paid product PT1 while offering product type PT2 for free.
• The range of “all-free” products will include objects that are today unthinkable as being free, such as cars (self-driving cars will have plenty of helpful advertisement space), houses (advertisements on walls, windows, and many other objects of daily use), mass transportation, food (with personalized, live ads on the packaging), etc.
• High-end, privacy-secured products will thrive as the global niche of wealthy customers remains an attractive source of income for businesses.
• In certain countries, privacy concerns will thwart the all-free business model.
• Personal data will become a global B2B currency.

There is also a more far-reaching consequence for the entire national – and probably even global – economy. The “all-free” products will continue cannibalizing regular, paid products. The more businesses that offer “all-free” products and make money by selling personal users, the less consumers will be willing to buy products or services. In that way, the all-free economy is basically destroying its own source of revenue. The following chart illustrates this effect: In this scenario, starting with a certain number of all-free product users (“u1”), the economic benefits (a customer buying products) from more efficient targeted marketing (“P”) outweigh the costs of providing the free products and the advertising efforts (together “F+A”). However, at one point (“u3”), the number of all-free users becomes so large that advertisement efforts no longer benefit the economy. Since most products and services are free, increasing numbers of users will simply back away from buying paid alternatives. One can only imagine what happens when developing and selling new products turn out to have a negative ROI. This is a self-propelling, global economic phenomenon. It is practically impossible for individual businesses to break out from the global “all-free” economy and go back to selling paid products. This is likely to become a tipping point for the “all-free” model that has every potential to cause a major economic crisis.

CONCLUSIONS

The cumulative amount of advertisement budgets is already mindboggling: according to Adage, businesses worldwide spent a whopping $500 billion on ads alone. Other PR activities are not included in that figure, but they are likely at least another $20 billion. This global spending is set to rise steeply in the next decades. Despite concerns about data privacy, most consumers remain ignorant of it. Clever PR by the PR industrial complex will ensure it stays obscured for a long time. Indeed, the rise of the post-freemium, an all-free economy, may appear disconcerting. Concerns about data privacy, a changing consumer culture, the demise of entire product groups that are not easily converted to free data-harvesting products, and other issues darken the long-term perspective. On the other hand, many consumers will welcome the growing range of products and services they can use at no charge. “I don’t have anything to hide” will become a widespread mentality, further propelling the expansion of the “all-free” economy. It is hard to see the outcome of this inevitable development. It will likely take 2-3 decades until its effects become apparent. One thing appears certain: from today’s point of view, the world economy based on the all-free model will be a weird, maybe even disturbing, and confusing place to be.

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