A Freemium Life

December 10th, 2008  

Combing some loose threads around some lazy thoughts, readings and conversations I’ve had with Nicholas Tolson, Chris Schultz, Angela, Ryan Booth and other friends of mine over the past week…

What is the right price to put on your work? Often, the right price is zero.
Michelle Goodman in the New York Times, When to work for nothing:

When you agree to work free, you reinforce people’s misguided ideas that the self-employed are independently wealthy hobbyists. Don’t degrade your profession by letting a cheap client take advantage of you.

While it’s important to get a fair price for your time, it’s entirely up to you to determine your own fair price. In many situations free may be the fair price for you, and don’t let anyone attempt to convince you otherwise.

Whenever we talk about free services or pro-bono work, it’s valuable to revist the idea of the “freemium” business model. Lately I’ve realized I operate my life on the freemium model, and I love it. But can the freemium model work for products and services with high marginal costs? Can it really work for me?

Freemium is not the same as free

Freemium is a business model which works by offering basic services for free, while charging a premium for advanced or special features.
(Wikipedia)

The freemium model flips the normal equation: instead of selling the vast majority of what you produce (and giving away a small amount to promote and incent sales), the idea is to give away the vast majority of what you produce and instead make a profit by selling a much smaller amount.

Let’s be clear: freemium is not the same as free. The cost to deliver the free versions of the product can be thought of as business development or marketing expenses; spending on customer experience supplements (or replaces) advertising.

While there is an active debate about whether the freemium model works, the fact is that the freemium model is not new; what has changed is that the range of products and services that can be delivered at zero marginal cost has increased drastically.

A Freemium Life: How do we balance giving away our time with making a living?

Simple: giving away our time is a way to make a living.

What I do has a high marginal cost; dedication, time, passion and intellectual energy all carry a high marginal cost. And especially in today’s world of early-stage startups, time is more valuable than money.

But even if I do not directly trade my time for money, I earn a lot in return for giving away my time. If you’re spending your time on doing things that make you better, work no longer consumes you; it creates you. We owe it to ourselves to spend our time on our passions, but more importantly we owe it to everyone we care about: only by fully engaging ourselves can we truly give back to others.

Would you rather:

  • Spend 100% of your time chasing and working on many projects for marginal compensation on each, or
  • Earn the same amount of compensation and spend 100% of your time on projects you really care about, but give away 90% of your time and only charge for 10% of your time (for an obviously higher per-paying project compensation)?

“Social capital” might be the key next-gen asset.

Moreso, giving away my time and connecting with people still creates something real: relationships and reputation have values. We all implicitly know this, but we’re reaching a point where we might be able to explicitly value our relationships… for better or worse.

Umair Haque, How To Be a 21st Century Capitalist

Next-generation businesses are built on next-generation assets. Yesterday’s businesses were built on cash, factories, and IP - financial, physical, and intellectual capital. Next-generation businesses are built, instead, on human, social, natural, and cultural capital - to name just a few.

… Here’s one of the commandments of next-generation business: capitalize something.

What happens if you “capitalize” your relationship and reputation networks? Can you become a “Pareto node”? John Hagel, Pareto Power and Leveraged Growth:

Effectively engaging with Pareto nodes requires a form of collaboration marketing. Collaboration marketing emphasizes the need to attract others, creating a motivation for them to seek you out wherever you are, rather than trying to reach out, intercept them and get their attention. Of course, in order to do that you need to develop a deep understanding and appreciation for what motivates the other party. It forces you to get out of the “what’s in it for me?” mindset.

The best way to attract others is by offering assistance to them, by being more helpful to them than anyone else. Once again, this requires a deep understanding of the unmet needs of the other party.

“Capitalizing social relationships” is an ideal with very practical applications

How can this apply to venture capital and entrepreneurship? In response to my post What is the next platform for new businesses?, Ethan Bauley outlines how the “the network is the platform” for Y Combinator:

So what do we do with this knowledge? A quick and obvious example of a node that exploits these trends is Y Combinator. YC is 1) launching a large volume of new companies; every new company brings along relationships that other YC companies can access 2) emphasizing collaboration among their portfolio companies, so that their social capital is exposed to other people that can use it, and 3) exposing their principal’s network to portfolio companies (of course all financiers do this, but because of the sheer volume of companies YC is dealing with, Paul Graham et al drive even more value for their pre-existing network).

Social capital has always been an important part of business, but what’s changing is our ability to monitor, measure and value relationships and the varied degrees of value they create.

What happens when we start trying to measure, value and “sell” social capital?

But what does “social capital” really mean? Better yet, what happens when we try to practically apply the concept to our lives and our businesses?

  • What happens when we develop an “accounting system for social capital”? How does our social structure change? How does explicit measuring and valuation change our behavior?

  • Similarly, what happens when we create a social communication system based on asymmetric intimacy? What happens when we create systems to publicly display our status?

    By creating systems that allow us to publicly display, measure and compare some facet of ourselves, we implicitly create societal competition over that artifact.

    How will we compete over “social capital”? Will we realize it is not a zero-sum game?

  • What happens when our methods, standards and codes of conduct for business development, promotion and selling change?

  • How will the “shadow system” of social and business relationships change as our social ties become increasingly transparent? Are the days of back room deals coming to a close?

Our current online social networks are just a start, a limited application of our maze of relationships and connections. The real cultural and business impacts are still to come.

And only by participating now will you play a role in setting and leveraging those trends. Start now.

—

[1] There has been a pretty active debate lately among professional photographers about “working for free”. John Harrington and Chase Jarvis have provided two of the more interesting viewpoints on this pretty hot issue in the photography industry…

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By Taylor Davidson. Posted December 10th, 2008. Category: Bridging Online and Offline Interactions, Financial and Business Models for New Opportunities, Reorganizing Lives  

SIMILAR THOUGHTS

  • Taylor, you post is great and reminds me some old lectures that strucked me when i read them :

    "What are the new types of struggle, which are transversal and immediate rather than centralized and mediatized? What are the ‘intellectual’s’ new functions, which are specific or ‘particular’ rather than universal? What are the new modes of subjectivation, which tend to have no identity? This is the present triple root of the question: What can I do, What do I know, What am I?...What is our light and what is our language, that is to say, our ‘truth’ today? What powers must we confront, and what is our capacity for resistance, today when we can no longer be content to say that the old struggles are no longer worth anything? And do we not perhaps above all bear witness to and even participate in the ‘production of a new subjectivity’? Do not the changes in capitalism find an unexpected ‘encounter’ in the slow emergence of a new Self as a centre of resistance? Each time there is social change, is there not a movement of subjective reconversion, with its ambiguities but also its potential?" (Gilles Deleuze, "Foucault", 1988)
    As Steffen Böhm explaine : "These questions are not the result of some kind of narcissistic preocupation with the Self. Instead they point to the radical questing of subjectivity as such; it is a critical interrogation and transformation of the specific production process that make up our Selves: it is a questionning of the "I" that is always already politically and economically related to the "we" of the multitude".
    Promiss, next time, i'll try to quote Steve Martin :-)
  • I'm coming back to this post for a second read.

    I'm known to those in my network as someone that can quickly hammer out answers to just about anything in the realms of technology and markets I service. I bring either actual experience (been there done that) or a Google-Fu query to isolate leads for an answer.

    When presented with "do you know" I prefer "I'll find out" to "I have no idea" when I can't immediately provide an answer. My rate card is based on the skills and value of the service or the information I pull together to solve a problem or answer questions.

    That said, I've reviewed my Linkedin Q&A activity. It's interesting...

    I've answered well over 100 questions following things I just know and can provide immediately. Of those, over 90% are freely available and public. Another 10% of them included me suggesting another expert that might provide a deeper answer than I was providing.

    The real eye opener for me was that I average around 10% private responses indicating that I can go into more detail if they contact my company (who I work for). So, in roughly 1 out of 10 responses, I saw an opportunity to place a premium on the information or skills I could bring through continued dialog.

    By contrast, my work as an subject-matter expert is pre-monetized and starts with a premium service assumption that I, like Linkedin Q&A, know the answers already. The only "freemium" available is a client knowing that I exist as someone that has performed for others previously.

    A review of those paid subject-matter expert stats show a trend as well. Of the most recent 50 of these paid consultations there were easily just as many no-shows, cancellations, and general lack of follow up from a prospective client.

    That's 50% of nothing gained (paid consultations) vs. 90% of everything given (Linkedin Q&A).

    So, does that mean "premium" service might have the same value as "free" service in terms of how those with needs seek out those services?
  • It's taken me awhile to sort through this in my mind, and I'm still working on it, so I apologize:

    1) The great potential in giving away our knowledge, value and time is to create connections and opportunities that we had not considered, or targeted, or comprehended. Connections and networks have always been and will always be the most valuable way of finding people to answer questions and solve problems (i.e. create value), but what is changing is how the connections and networks work.

    We're still learning the ropes we've created for ourselves; cultural changes lag technological changes.

    The greatest opportunities (and future payoffs) are for those who recognize where our culture is going in regards to how we find, value and exchange value.

    2) Value is determined by the receiver, not the sender; by the buyer, not the seller.

    Leading to: value is created through execution, not ideas; by what someone does with the knowledge and ideas, not by the idea or the knowledge itself.

    Resulting in: "premium" and "free" are determined by buyers, not sellers.

    3) The real difficulty in my mind is how do we justify opaque knowledge? How does the opaqueness of knowledge transfer hinder the transfer from even occurring?

    The Heisenberg Uncertainty principle at work.

    There's an inherent information asymmetry that is difficult to overcome. That's why we have degrees, certifications, job titles, resumes; but they don't eliminate the information asymmetry, they only help justify it.

    Instead of justifying the opaqueness, I'm interested in finding ways to eliminate it.
  • I like this neologism. I've begun posting all my start-up ideas on my blog for anybody to use, with the idea that I could be brought on as a consultant or co-founder if someone has the wherewithal to embark on it.
  • Completely agree with the power of giving away things you won't execute yourself.

    But I tend to give away help on the execution itself, often when the contribution is difficult to value before the fact. Probably not the smartest path...
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