What are the business models of free Internet products and what are the profit points?

When I was in adolescence, I learned about some indescribable websites through the help of some childhood friends. Perhaps because I haven't fully developed yet, when they were admiring the teachers' work, I was thinking about another question: Who made this website and why did he let us see it for free?

With the popularization of the Internet , I have come into contact with more and more free Internet products. Until today, free has always been the absolute mainstream of Internet products.

Let’s do a little test: Now, name the 5 apps you use most often, and then think about it, are they charged?

The five apps I use most often are WeChat , Weibo, Bilibili , Duoduo , and ofo. It can be said that they are all free (Duduo has two free audio programs, and a monthly card for ofo is only 1 yuan, which is given away for participating in an event). But we know that behind these five products there are large teams and huge costs. So how do these companies that offer free products survive?

Free 4 forms

Although this article discusses "free" products, in order to analyze this issue clearly, it is necessary to expand the scope of discussion and include products that are apparently charged but are actually free. Specifically, there are 4 forms of free:

● Free products, such as 360 SafeGuard;

● Neither make a profit nor a loss, sell things at cost price, such as Xiaomi;

● Although they charge money, they earn very little, such as the American supermarket chain Costco;

● Worse still, some sellers lose money on every order they complete, such as the sellers on Taobao who charge 8.8 yuan for free shipping.

Therefore, the "free products" mentioned in this article are a general term for "0 profit products". As mentioned earlier, "0 profit" is also a general term, which may mean a meager profit or a negative profit.

Now that we know the four forms of free services, we need to analyze why these companies are willing to do this "loss-making business." The analysis will be conducted from two aspects: "cost" and "benefit".

How Free Reduces Costs

As we all know, cost consists of two parts: fixed cost + variable cost.

For example, if I run a paper mill, the factory buildings and machinery and equipment are my "fixed costs". Whether I make 1 sheet of paper or 1,000,000 sheets of paper, this part of the cost remains unchanged; while pulp, electricity, labor, etc. are my "variable costs". The more paper I make, the more I invest.

Free reduces fixed costs. Taking Xiaomi mobile phone as an example, Lei Jun insists on "using 10 times the R&D cost to achieve 100 times the sales volume"; using second-grade elementary school math calculations, we can see that in terms of R&D costs, the fixed cost spread over each Xiaomi mobile phone is only one-tenth of that of other brands . Free services stimulate sales to the greatest extent, which also dilutes fixed costs to the greatest extent.

The advantage of Internet companies also lies in the fact that not only do they have low fixed costs, but their "variable costs" are close to zero, so their free services are cheaper than traditional companies.

No matter how high Xiaomi's sales volume is, or how thinly its fixed costs are spread, it is impossible for the phones to be given away to customers for free, because the production of each new phone requires considerable variable costs such as raw materials and chips; while the WeChat APP has grown from 700 million users to 800 million users, and relatively speaking, the variable costs will not increase too much. Zhu Xiaohu , an early investor in Didi , ofo, and Ele.me, said that an Internet company needs to invest several hundred million to make its first 10 million, but may only need to invest a few million to make the second 10 million. This is the truth.

How to earn money for free?

The previous article talked about how free services can reduce costs, but no matter how low the costs are, you will still lose money if there is no income. So how do these companies manage to be both free and make money?

1) Trial period

The trial period is to let you experience the product and guide you to pay for it later, such as Photoshop. However, this model is very dangerous and can easily be disrupted by latecomers by offering permanent free services.

I wonder if you remember this cute little lion:

Its owner is called "Rising", which once occupied a large share of the anti-virus software market, but was later defeated by 360's free model. Today, 360 has 400 million users, making it an absolute monopoly.

However, if the product cost is high enough, a free trial period strategy can also be an effective competitive means because competitors may not even be able to afford the trial period. For example, the "taxi-hailing app war" a few years ago, although it only lasted for a few months, burned billions of real money, and the market changed from a fierce competition among many players to a Didi-dominated market.

Later, Didi, which had monopolized the market, ended its trial period, greatly increased its average order value, and began to focus on how to make money. As shown in the figure below, Didi Taxi is not cheaper than taking a taxi directly.

2) Free + Paid

QQ is free to use, but its red, yellow, blue, green, cyan, indigo and purple diamonds all cost money. When I was in middle school, only aristocrats could recharge their QQ space with yellow diamonds, and the message board would have thousands of people "coming and going".

Of course, such illusory benefits are not very attractive to users today (except for live broadcast rewards). The charges generally correspond to real functions:

The most interesting one is a pornographic website in Europe and the United States. All its AVs are free, but you have to press and hold the four "QSPL" keys at the same time to play them normally, otherwise the screen will be black. It is said that few users can persist in using it for free.

3) Drain traffic to high-profit products

This model is called "cross-subsidy" in jargon, and its pioneer is Gillette. About 100 years ago, Gillette invented the razor with a separate blade and razor holder, but only sold 51 razors a year. In order to cultivate people's consumption habits, Gillette tried every means to give razor blade holders to consumers for free, so that almost every man in the United States had one. After that, the hot sales of disposable razor blades became a natural result.

Many Internet companies are well aware of this:

"Dedao" mentioned above has attracted a large number of users through the free "Li Xiang Knowledge Insider" and " Luoji Thinking ", and then converted them into paying users of other columns or "Listen to a Book Every Day".

Of course, traditional companies today are still good at this kind of tactics , such as the famous joke about McDonald 's: hamburgers don't make money, Coke and French fries make a little money, supply chain makes medium money, and real estate makes a lot of money.

4) Third-party market

This type of company is very "conscientious" and is determined not to take money from users, but to pick the pockets of third parties. In the jargon, it is called "the pig pays for the wool, and the dog pays the bill."

For example, Mimi Meng pushes articles to readers for free, and she makes money from companies that place soft-text advertisements. There are many products that use this profit-making method, such as Weibo, Zhihu, and Toutiao that insert feed stream ads, Xiaomi App Store and Wandoujia that provide APP display space, Youku and iQiyi that insert an ad at the beginning, middle, and end of the film, and so on.

Some businesses have made this business model very interesting:

5) Non-monetary benefits

Not all businesses are after money. In their eyes, there are some things that are more valuable than money, such as data.

In fact, the supermarket had no idea who the girl was, but the supermarket's system was able to monitor recent changes in the girl's shopping preferences, such as suddenly changing to a shampoo with a lighter scent, and thus concluded that she might be pregnant.

Big data has such power that merchants can achieve greater precision in production, logistics, inventory, marketing , sales and other aspects; and as the next hot spot recognized by the industry, the power of big data goes far beyond that . No wonder merchants would rather get the data for "free".

Summarize

It seems that there is no free lunch in the world. The Internet products we use for free are either still in the trial period (such as ofo), or use us to highlight the attention of paying users (such as Douyu Live), or want to lead us to paid places (such as Duode and Youku), or have other intentions towards us (such as the "data company" Alibaba ). Of course, it is not ruled out that there are products that have not yet explored a profit model (such as Moji Weather ), but they just haven’t been explored yet.

After understanding this level, I realized that the boss who "showed movies " for us for free back then was not a sex educator, nor was he the "good people with a peaceful life" that netizens were clamoring for, but he was a pioneer of the free model in the Internet industry.

Lei Jun called "free" the cornerstone of the Internet industry. It can be seen that the word "free" is of great significance and worthy of deep consideration by every Internet practitioner.

If you also want to practice a free business model, remember these three key words : free first and then pay, third-party market, and cross-subsidy. Financial freedom is waving to you~

This article was compiled and published by @Operation Research Society (Qinggua Media). Please indicate the author information and source when reprinting!

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