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  • Superfans spend so freeloaders don’t have to
  • Superfans spend so freeloaders don’t have to
    Philips Communications, Creative Commons (2015) ©
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Could 'free' make people spend more?

Free stuff is everywhere; from mobile games on the App Store to movies on YouTube. But as more media is available for free, how are content producers supposed to make money? Business consultant Nicholas Lovell, author of The Curve, argues that ‘free’ can actually spur people to spend more.

Location Global

Scope
King Digital Entertainment – the company behind Candy Crush Saga – has been sold for $5.9 billion. That's more than double what Microsoft paid for Minecraft; more than double what Facebook paid for Oculus. [1] King has nearly half a billion monthly active users and in the year leading up to September 2015, it made a revenue of more than $2 billion. [2] But all of its games are free. The billion-dollar question is this; how is a free game making so much money?

In the last two decades, records companies, film studios, book publishers, newspapers and more have weathered the creative destruction wrought by the internet. As products we used to pay considerable money for veer towards ‘free’, consumers are increasingly reluctant to pay for entertainment. For traditional gatekeepers, the future looks bleak.

But the answer is not to fight 'free', argues new business consultant Nicholas Lovell in his ground-breaking book The Curve. Many companies, like King, are making vast sums of money while giving away their product for nothing. Lovell argues that fighting this shift is pointless – not because pirates will win, but because competitors will find ways to make free work for them. They already are. [3] And not only that, they're generating more revenue than ever. How is free making people spend more?

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The power of free
Free stuff is everywhere. The App Store and Google Play store combined have literally thousands of free downloadable products. There are countless free games to download; millions of hours of free music, television and film on the internet. With the 'marginal costs' that comes with running a shop or manufacturing games consoles having largely vanished, the traditional value of many products has fallen close to zero in the eyes of the consumer; few are now willing to pay what they once paid. Radiohead experimented with this by offering their 2007 album ‘Hail to the Thief’ on a 'pay what you want' model, but ComScore estimated that some 62% opted to download it for free. [3] After all, if we can have it for free, why would we choose to pay?

Of course, artists and makers point out the time and money it took to create their product – this is known as the 'fixed cost' – and ask why they should give something away for free when it cost them so much to make. “One of the reasons to give your stuff away for free is that the competition is doing it,” says Lovell. “Your competition is two things. There are the pirates, who are really hard to beat. But the bigger threat are your competitors – legitimate, high-quality businesses doing what you do, but giving their stuff away for free because they've found a different way of making money. It's an inevitability that your competitors are going to give away for free what you charge for.” [4]

The trouble is, if everything's free, how does anyone make money? In his book, Lovell explores how various companies have created successful business models by offering their products – apps, games and more – for free, or at very low prices. In the case of Candy Crush, with its a half a billion users, more than 70% finished the game having never spent any money on it. That means that the $2 billion King made in the last year came from less than 30% of users. [5]

Maybe there really is such a thing as a free lunch Maybe there really is such a thing as a free lunch
« м Ħ ж », Creative Commons (2015) ©

In a sense, offering your products for free is like casting a vast net in the hopes of catching a few big fish. One example in The Curve is Bigpoint, a developer of browser games, which made some $85 million from 130 million registered users in 2009. Traditionally, we would conclude that the company was making an average of 55 cents per user. But according to Lovell, averages no longer matter. 80% of Bigpoint's revenue came from just 23,000 users spending an average of nearly $3,000 each. Gamers might be able to access the product for free, but once hooked, they're enticed to buy in-game items, 'boosts', 'power-ups' and extras like aesthetic upgrades. [3] In attracting so many users through offering its products for next to nothing, producers are more likely to find superfans who will provide a huge amount of their revenue.

The core of the argument in The Curve is that people value products at different amounts. In the past, businesses found the average price that satisfied the highest demand, and that was that. But now these products can be distributed for free, companies and individuals can be more discriminatory about their pricing. It’s possible to vary the price so that the biggest fans of a content creator could pay thousands of times as much as a casual passer-by.

Lovell argues that those who embrace the power of free have the opportunity to reach a global audience that they can connect to directly thanks to the internet, relegating the importance of gatekeepers – like record labels and book publishers – who in the past controlled access to audiences. Nearly half of the books published in the US in 2011 were self-published, while more than a third of Amazon's bestsellers are self-published. [3][6] Savvy entrepreneurs are evolving consumers from freeloaders into high-spending superfans. This model presents a challenge to many traditional industry players who may baulk at giving their products away for free, but it’s also an opportunity – because free has the potential to generate more revenue than ever.

Why would we pay for what we can get for free? Why would we pay for what we can get for free?
Brian Evans, Creative Commons (2015) ©

Think before you free
Lovell doesn't advocate going free thoughtlessly. “If you're giving something away, it has to start a dialogue, to start some form of relationship with that audience,” he says. “So if you're writing a post on Medium or doing some free blogging, know why this adds value to you and what money is going to flow to you as a result. In short, know what it's for. You shouldn't give stuff away for free just because you have to; you should give stuff away to start a relationship with someone who might go on to spend lots of money with you.” [4]

The Curve explains how we’ve moved through several phases of consuming; from 'is it available?' to 'how much does it cost' to 'is it any good?' Today, almost anything we could want is easily available at reliable quality and at low cost – or even 'free'. So Lovell argues that the new era of consumption is defined by 'how does it make me feel'? [3] In this era, the importance of building strong personal relationships with consumers is more important than ever.

You shouldn't give stuff away for free just because you have to; you should give stuff away to start a relationship with someone who might go on to spend lots of money with you

Nicholas Lovell, author of The Curve

He points to crowdfunding as an example of how people support things they've invested emotion in. “Kickstarter shows that some people are prepared to give money to things simply for the journey, simply for the joy of being a part of it,” he says. “There's a mental shift taking place there – people wanting to support you, to participate, to own products you make. And it’s for reasons other than just owning the product you make.” [4]

But while products can be published, funded and distributed for free, the traditional gatekeepers can’t be dispensed with entirely. “Gatekeepers are still incredibly important,” says Lovell – whose book is published with Penguin. “I am not anti-gatekeeper. Penguin helped me achieve a mass-market audience.” [4]

Over half of in-app purchases are made by less than 1% of users Over half of in-app purchases are made by less than 1% of users
Jens Schott Knudsen, Creative Commons (2011) ©

How does it make me feel?
For bigger organisations interested in harnessing insights from The Curve, Lovell posits the example of content marketing. “It’s trendy, everyone’s doing it,” he says. “The CEO knows they ought to have a Twitter account; there should be a company blog; they should probably make a video of something, because all their competitors are doing it. Then they'll spend a bunch of marketing money on a piece of content with no strategic purpose and it’ll fail.” Lovell believes that while content marketing is important, it won't work unless it has a clear purpose. [4]

There are very cheap or free products at the low end of the curves, with a 'normal' product in the middle. Then, at the high end, there are products superfans will purchase. Marketing in the age of 'how does it make me feel?' should simply try to get people to enter the curve. “If you're in a business working on widgets, don't start by focusing on superfans,” says Lovell. “Start by building a relationship with customers, then over time you'll start to understand what superfans might want.” [4]

He offers the example of King Arthur Flour; a miller that went from being the fifth to the second largest supplier of flour through harnessing thinking from The Curve. At the low end is free but valuable content – videos on the website. One of the most popular simply shows Americans how to correctly measure a cup of flour; it has more than a 100,000 views. Aside from videos, King Arthur Flour launched an informative website and a helpline connecting customers to experienced bakers. Beyond this is the 'normal' product; the flour. And finally, there’s an online shop, where people can buy baking equipment and high-value products. “Here's a brand that’s enabled you to be a great baker by telling you they can help at every stage of your development,” says Lovell. Superfans even pay hundreds of dollars to fly to the company headquarters for baking masterclasses. [4]

It’s all about seeking out superfans It’s all about seeking out superfans
King Arthur Flour, Creative Commons (2015) ©

Insights and opportunities
At first glance, the rise of free products and content poses a huge threat to traditional ways of doing business. “Now it's harder for everybody,” says Lovell. “Before, you needed a handful of tastemakers to respond to what you were doing; you needed to schmooze ten agents to get one to represent your book; you had to pitch to ten retailers to get one to stock your project.” Now, in the era of 'how does it make me feel?', it’s vital to start the process of building a following before anything – through social media, through informative blogs, through free video content – and everything besides. [4]

For creatives and entrepreneurs willing to invest time and money into building a relationship directly with a target audience, it’s about luring in the largest number of freeloaders possible in the hopes of catching some superfans in the process. These superfans can be expected to pay more money, with the old idea of a price being based on the average amount people are willing to spend quickly becoming a thing of the past. Less than 1% of mobile gamers account for more than half of all in-app purchases – it’s that 1% businesses are keen to seduce. [7] As more products become cheaper to make and are sold at low-cost – or for free – by competitors and pirates alike, producers need to harness new ways of making revenue.

Start building a relationship with your customers now. That way, when they do turn to 3D printing, they’ll still turn to you

Nicholas Lovell, author of The Curve

The potential for free to change everything is perhaps at its most exciting – and terrifying – when we consider 3D printing, which Lovell gives an entire chapter in his book, though he’s clear that it's still several years away. “But it will suddenly arrive,” he predicts. “It’s the same as when people said the internet wasn't a threat. Now, you can't really run a business without it.” 3D printing will enable the power of free to swing through all industries, allowing people to reproduce all kinds of items simply by getting their hands on the design blueprints. The big cause for concern here is that there are no economies of scale – each item is as cheap or expensive to build as the last.  “I would urge businesses to assess whether they can compete on product price in the long-term,” continues Lovell. “Because 3D printing is going to get better. And the advantages of personalisation will outweigh mass production because the first ten cost the same as the last 10,000.” [4]

As far as Lovell’s concerned, when faced with such revolutionary technology, the answer is not to fight it, but to start asking how you can make the most of it – now, not later. “It's all about talking to your customers, communicating and connecting,” he says. “Start building a relationship with your customers now. That way, when they do turn to 3D printing, they’ll still turn to you.” [4]

Darren Loucaides is a travel writer and music critic for the BBC. He’s lived and travelled in Italy, the Middle East and Latin America, and has become obsessed with the parallels between cultural and political trends.

Sources 
1. Candy Crush maker King bought by Activision Blizzard’, BBC (November 2015)
2. ‘Activision Blizzard buys Candy Crush Saga developor King Digital for $5.9 Billion’, Mac Rumors (November 2015)
3. The Curve: From freeloaders into superfans, Nicholas Lovell (October 2013)
4. Interview with Nicholas Lovell conducted by author
5. Candy Crush Saga: 70% of the people on the last level haven't paid anything', The Guardian (September 2013)
6. ‘Three reasons you need to adopt a Millennial mindset regardless of your age’, Forbes (May 2012)
7. ‘Who buys in-app purchases?’, Canvas8 (March 2014)

Author
Darren Loucaides