Now that giving away products and services for free is a viable business model, will a profitable model of paying consumers to use products emerge?

by Louis Cammarosano

In any transaction two parties assign relative values to what they are exchanging. A purchaser of a cup of coffee at Starbucks values the coffee more than the three dollars in his pocket and Starbucks values the three dollars more than the coffee it is selling.

The pricing of goods and services has been established in this manner for centuries. Some people will not pay three dollars for a cup of coffee, but others will. Starbucks determines how much it will charge and consumers how much they will pay through the price discovery mechanism of the free market.

In recent times, a new form of exchange has emerged that the price discovery mechanism of the free market has not yet fully tested.

These new forms of exchange involve companies giving away products and services for free.

We can refer to these business practices as the freemium or freeluxe models.

Freeluxe/Freemium

Under the freemium model a company gives away a product that is either feature, time, capacity or customer service limited with the goal of eventually charging the customer for full use of the product. Examples of this model include Pandora and Flickr.

The freeluxe model, in contrast, starts with no limitations on product usage and its business model does not depend on ever charging the user. Examples of freeluxe business models include Google, Facebook, Twitter and You Tube. The user has full access to all features of the products and never pays the company in exchange for their usage.

Gmail- A Freeluxe model that works

Under the freeluxe model the company offers the product and the consumer “exchanges” his use of the product in return.

The consumer deems the value received from using Google’s Gmail sufficient to his consent to use it.

Google in turn through the consumers’ use of the Gmail product receives a plethora of information about its users that it can then employ in the individual and in the aggregate to determine user behavior and preferences to sell advertising.

The relative monetary value that consumers place on their consent to use products like Gmail is nothing. But should it be? Should the consumer ask to be paid to use products such as Gmail?

Sound ridiculous? Perhaps Google one day WILL pay consumers to use its products-especially in areas that he has not gained market share-think Google Plus or the defunct Google Buzz.

PAY ME, Pal

Let’s look at an example -the Electric Gym- to see how markets may evolve from:

a paid exchange (we can call it the Paidium model) whereby the consumer pays money and the company provides a product or service; to

a freemium or freeluxe model where the exchange involves the consumer consenting to use a product that a company provides for no charge; to

a PayMe model where by consumer gets paid in exchange to use a company’s product or services.

Electric Gyms

Currently, people who belong to gyms pay healthy monthly fees to labor and sweat on the machines that their gyms provide.

What if a gym’s stairmasters and bicycles could be used to generate sufficient electricity that all the gym’s electrical needs and operating expenses would be covered as well as a surplus of electricity that could be sold to the grid for a profit?

In that circumstance we can predict a disruptive event to occur in the gym membership market. An existing gym or a new gym would open and offer free memberships and would rely on the sale of electricity for its profit instead of its membership fees.

If that model worked and there were sufficient profits, why wouldn’t a gym go one step further and instead of offering free memberships, pay people to come and use its electricity generating machines, perhaps at off hours to keep the current and profits flowing?

In the above hypothetical we see that the consumer waits for the gym to make the offer:

-first via a paid monthly membership where the price discovery mechanism works-the gym sets its price at say $40 month and then adjusts its price according to the volume of consumers willing to pay that price; then

- by offering free memberships where the consumer agrees to use the gym for free and the gym gets free electricity generating labor; and

- finally where the company offers to pay consumers to use its gym.

Price Discovery – How much do you have to pay or be paid?

Markets easily and daily determine the price of goods and services when money is exchanged for goods and services. In recent years, markets have learned the value of free through the operations of the freemium and freeluxe models. Consumers are willing to use products for free and companies have learned to offer such products and services profitably.

Markets have yet to determine the size or the value of the market beyond free – the Pay Me model. Until now companies, having only recently proven an economically viable free business model, have not deemed it necessary to offer to pay consumers to use their products on a permanent basis.

If offering products for free produces a profit, a company looking to garner or expand market share may consider giving up some of that margin to pay consumers to use their products.

The markets ripe for such disruption are the ones where the freemium and freeluxe models are working – social media sites like Facebook and free email like Gmail.

If Facebook or Gmail can turn a profit by offering those products for free, surely a competitor can steal market share by paying consumers a small monthly subscription to use their products.

Which company will be the first to test this model? How much will they pay? How much will consumers demand to be paid in exchange for using their products? Will competitors up the ante and pay more? Will they be successful?