The products are free, so why can’t we make it?

When the world entered the Internet age, the free model was once hailed as a killer weapon to subvert the traditional business model. The most classic example in China is that the free anti-virus product launched by 360 defeated other domestic anti-virus software, won 400 million users, became the leader in this field, and was eventually listed in the United States.

Its founder Zhou Hongyi summarized the methodology behind this set of methods in his book - "Zhou Hongyi's Autobiography: My Internet Methodology".

However, along with the popularity of the free model, controversy has also continued. Many people question whether this model has destroyed the existing business structure and is suppressing competitors through vicious competition. There have also been reports of companies that claimed to provide free services, which had rapid growth in the early days but eventually closed down and failed.

Even Zhou Hongyi, who advocates free services, began to reflect on his decision in the media this year after 360 encountered some setbacks in its attempts at mobile phones and smart hardware, saying

Why has the free model failed in this era? The paid version has been killed by the free version, and the free version doesn’t work either, so what should we do?

To understand why the free model fails, we need to first understand what the free model is, just like when we want to fix an appliance, we need to know how it works before we can find and fix the problem.

The free model is different from the traditional business model of buying low and selling high. Instead, it first acquires a large number of users through free products, and then makes profits through advertising and value-added services.

From a broad perspective, the free model refers to acquiring users with low profits, zero profits or negative profits, which also includes low-price models and subsidy models. In other words, selling some paid products at extremely low prices can also be considered a free model in a broad sense.

For example, Didi acquires users through subsidies. Although each order is charged, it is actually in a negative profit state, so it can also be regarded as a free model in a broad sense.

Different from the traditional "free trial" promotional methods or gimmicks, the Internet's free model is free for an unlimited period of time. For example, the basic social functions of WeChat that you use are completely free.

The free model emerged after the advent of the Internet. This would have been impossible in traditional industries because of the differences in cost structure between Internet products and traditional products.

Traditional products have costs such as manufacturing, transportation, and channels. The transportation and channel costs are not directly perceived by consumers, but the manufacturing costs are explicitly visible. In other words, consumers all know that this product must have production costs, and each additional product will incur new costs.

Consumers will bargain with merchants and ask for gifts, but you will never see consumers asking merchants to give things away for free when they buy something. If someone really dares to do this, they will definitely be driven away by the merchant. If a merchant gives something away for free without setting any conditions, many people may not dare to accept it, because many people will think there must be something fishy going on.

In the cost structure, there is another division method, called fixed cost and marginal cost. Fixed cost refers to the equipment and delivery room required to produce the product. Even the cost of producing one piece needs to be invested. However, the fixed cost required to produce 1 piece and 100 pieces is fixed. What changes is another part of the cost, such as materials, labor, packaging, etc. This cost is called marginal cost.

In the Internet field, fixed costs are quite high, requiring a lot of design, development, and testing work. In comparison, marginal costs are much lower, and each new user only requires a small increase in server and bandwidth costs.

Even in the eyes of most users, there is not much increased marginal cost. For example, watching a movie on a video website, listening to a song in a music software, or downloading an app in the app store , users basically think that it does not increase the cost of the merchant much, and will naturally think that such things should be free. Some users even think that the merchants who charge such fees are "blinded by profit" and "money-hungry."

Since China's Internet was in its early stages of development, a lot of software came from abroad. Foreign companies were unable to prevent domestic piracy and infringement, and coupled with the poor domestic legal environment for intellectual property protection, most Chinese people did not have the awareness to pay for software and Internet products.

However, this environment has also prompted and forced Chinese Internet companies to innovate in their business models, using free products to accumulate user base, and then monetize based on the user base. Through the initial completely free strategy, it is possible to accumulate a large number of loyal users, establish user barriers, and ultimately monopolize the industry to gain profits, such as paid value-added services such as QQ membership and QQ show based on free QQ, as well as the flow of profits to more subsequent game , music, and film and television profit projects.

Running a business is not doing charity . For a business, the purpose is to make a profit. If it is free, how can it make money?

From a long-term and global perspective, companies still have to charge fees, but they can do so temporarily or partially.

Temporarily free (separation of free and paid in time):

It is free at this stage, but will be charged in the future, such as Youzan Mall;

Partially free (split between free and paid):

It is free for ordinary users and charged for advanced users, such as QQ membership;

It is free for C-end users and charged for B-end users, such as Baidu search;

One product is free, and other related products are charged, such as Sogou Input Method.

Through these two separations, the cost is essentially transferred, and some people will be able to enjoy very good products and services for free for a considerable period of time.

Sogou Input Method has hundreds of millions of users, and the product itself is free to use. With the help of this billion-level product, Sogou created Sogou Browser , which is also free to use. However, the browser has Sogou search and URL navigation, on which there will be paid advertisements from merchants, which has become the main profit point for Sogou. This is what Internet people often say: "The pig pays for the wool, but the dog pays the bill."

This profit model is based on the existence of a sufficiently large number of users. If there weren't so many users, merchants wouldn't pay for it.

So there is such a point of view that every user who uses the product also becomes a part of the product and is used by other users.

For example, in a live show, although there are a large number of free spectators, it is precisely this large number of spectators that creates the pleasure of showing off when paying users spend money to buy props. Therefore, for every user, even if they do not spend any money on this platform for their entire life, it is of great significance. Similarly, in some games, some free users are used to set off and play with advanced users, and the privileges of QQ members are for people who do not buy membership.

However, many companies that insisted on this low-price model eventually found that this model did not work and died halfway. What was the reason?

Previously, choosing monetization was an ideal situation in the development stage of an Internet product. But in fact, when considering the time of product monetization, there is not only the product life cycle as an angle, but many other factors need to be taken into consideration.

Challenge 1: Some industries have very high marginal costs

As mentioned earlier, the free/low-price model relies on the marginal cost of the product not being high. But in fact, the marginal cost of some products is not low. For example, smart hardware products are not virtual products and also have production, manufacturing and logistics costs.

For example, if the cost of a smart watch is 100 yuan, if you sell it at 95 yuan each in order to increase sales, you will lose 5 yuan on each unit sold. The more units you sell, the more you lose, and eventually the company may go bankrupt.

In order to attract users, some O2O companies did not charge commissions to merchants in the early stages and had to bear the payment fees for each transaction themselves. When the number of transactions increased, this became a considerable amount. At the same time, since the threshold of O2O products is not high, it is easy to fall into a price subsidy war, which directly increases the investment cost. These costs that need to be subsidized to merchants and users are cash investments that cannot be passed on. For start-ups with limited financial resources, this is a very big challenge.

Challenge 2: Free is no longer a unique advantage

The reason why Taobao defeated Ebay and 360 defeated Rising was largely due to the competition between free and paid services.

But now most Internet companies will use such labels, and there are too many alternative products to choose from, so simply mentioning free is no longer a reason to impress users. However, some companies are still stuck in the illusion that "free services can disrupt the entire industry", but they reduce their thinking and creation of other unique values ​​of their products.

We must break the single-factor thinking mode and not simply assume that the success of a company is due to free services. Every company’s success has its own unique historical opportunities and its own resources.

An important foundation of the free model is that it can attract a large number of users. If free cannot help you attract a large number of users, there is a big problem with this model itself.

Challenge 3: There are fewer and fewer areas that can be disrupted for free

In the early days, the fields that were able to grow rapidly through free services were actually those fields where the Internet could quickly reduce costs and improve efficiency, such as communications, social networking, news, music, and video. The opportunities in these fields have basically been divided up by giants.

In areas where there is fierce competition now, such as the Internet+ project, there are many non-Internet parts, which cannot be directly subverted by making them free.

Challenge 4: Some fields cannot survive even with a large number of free users

Here is a question you may want to think about: why is most of the content on video and audio platforms free, while most of the content on e-book platforms is paid? What is the difference between these two types of platforms?

Video and music applications have long online time, high opening frequency, and a large user base, so they can support a free model and make profits through advertising and membership.

But the number of people who like reading is relatively small, and among those who want to read, only a small number of people will actually spend time reading. Among this small number, only a small number of people use electronic devices to read. Among this part, many have low usage frequency and short usage time due to busy work, interference from other apps, and fragmented time. If there is no charge for content, the operation of this platform cannot be supported at all.

In addition, people who want to study have relatively high requirements and do not like low-level advertisements. Would you like to insert an infertility ad into your Kindle? But it is still acceptable to appear in Toutiao today . It is almost impossible to make a profit through advertising on e-book platforms.

Similarly, online education products also face this dilemma. Learning is a more niche and less frequent demand than entertainment. If the entire platform is free, it will be difficult to motivate the platform and teachers, and it will ultimately be difficult to succeed.

The biggest inspiration from this incident is that when designing a business model, we must consider the coverage, usage frequency, and usage duration of the product platform itself, and whether it can support the operation of the entire platform and ultimately make a profit. If you can't, don't use the free model.

Challenge 5: Continuous free product quality will be affected

It’s not to say that free products will necessarily have poor quality. WeChat has a very good experience, but we must realize that in some industries, if there is no good economic return, the quality of the delivered products will be affected.

To create an excellent product, you need to hire excellent talents, use top technology, provide thoughtful services, etc. Costs are required everywhere.

In the film and television industry, if there is no profit in the long term, it will inevitably affect the enthusiasm of the industry for creation. The booming box office in recent years has also, to a certain extent, stimulated more people to enter this industry and create excellent works.

The same is true in the field of education. If a teacher cannot get a good return, it will inevitably affect the teacher's commitment to the content in the long run. If an education company can get good economic returns, it can afford to hire better teachers to develop courses, giving users a better product experience.

At the same time, with the upgrading of consumption, users have gradually developed consumption habits, and they are also paying more attention to quality and experience.

Challenge 6: Some products do not have a good subsequent profit model

Some products cannot trigger subsequent monetization from users, so the product itself becomes of little value because it is free.

For example, Moji Weather, which has had hundreds of millions of users for a long time, has actually had a very difficult time in its exploration of monetization in recent years. Weather applications have strong tool attributes. Users only need to check the weather and will not stay for long. There is also a lack of other social scenarios when checking the weather, and there is no possibility of value-added services for members. Weather apps are also highly substitutable, with a large number of similar competing products that offer great user experiences. If a product is advertised with a poor user experience, the user uninstall rate will increase immediately.

Including the field of smart hardware that Zhou Hongyi reflected on, except for mobile phones, most smart hardware cannot become traffic entrances. For example, smart speakers, smart lights, smart bicycles, smart rice cookers, and smart toilets are not like mobile phones. They can become a traffic entrance and then be monetized. If the product itself is not profitable, it has almost no commercial value.

Challenge 7: Capital no longer easily pays for the free model

The long-term free model is very happy for users, but for enterprises, it means long-term cost investment.

Before making a profit, much of the past investment came from capital transfusions. Based on the five challenges mentioned above, if the team fails to create unique products and business models, they cannot rely on the "money will be realized after having users" to attract investment .

Charging for profit is not a bad thing, especially in some niche areas where the user base is not large enough. It is not necessary to wait until the number of users reaches its peak before charging. It is necessary to test the user group's willingness to pay in advance.

The free model is not completely failed and there is still room for its development, but creating unique product value and business model is the key to competition in this era.

Finally, let me quote a sentence to conclude today’s thinking:

Ten years ago, if you provided services for free, others would watch you die. Today, if you provide services for free, Tencent, Baidu and Alibaba will help you die. Times are changing. If you don’t think about what you’re going to do next year, you won’t be able to survive. -- Jack Ma

Mobile application product promotion service: APP promotion service Qinggua Media advertising

The author of this article @飞鱼船长 is compiled and published by (青瓜传媒). Please indicate the author information and source when reprinting!