When it comes to software, one of the wonderful things about it is, there is generally zero cost to add an additional user to an already built system. The effort that went into the system can be magnified many times over in terms of the value it provides to the world. No wonder software developers are such a prized resource!
The write once sell many attribute of software is something I inherently realized, even from the early days of booting from a floppy disk. With SaaS, and now cloud services out there, it is all the more relevant. I recently read the book Free – The Future of a Radical Price by Chris Anderson, which covers this scaling idea from just about every angle: technology, business, economics, society, even history!
The book is an easy going read, enjoyable, insightful, though a bit repetitive at times. It brought clarity to me personally in terms of what is going on when a company ‘gives’ me something, when I buy something, and when I avoid buying something and look for a free alternative.
Free illustrates two economies colliding:
- The atoms economy, like oil, steel, lumber is inflationary.
- As time passes, these goods generally become more expensive in nominal terms (due to the Fed’s policies).
- The price of these goods can also increase in real terms. Oil for example, is growing in demand due to population growth and global modernization.
- The bits economy, like storage, processing power, and bandwidth, is deflationary.
- As time passes, these ‘goods’ become relatively less expensive.
- Moore’s law drives this for processing power, and it also holds true in storage capacity.
- The book argues that these goods don’t just become cheaper, they become so cheap they essentially become rounding errors – too small to even worry about measuring.
When someone reads this blog, the marginal cost to me is zero. If a million people were to read the blog, yeah, a server upgrade would be required, but it would not be 1 million times the cost, it would probably be more like ten times the cost. This is what is putting news papers out of business. Companies like Amazon and Google saw it coming, and positioned themselves to capitalize on the trend by pricing ahead of the curve – good for them.
So, what about software developers, inflationary or deflationary?
I would say our field is inflationary. Demand is wildly increasing, supply is increasing (outsourcing), but with current technology there is no way to get exponential productivity gains out of software developers. The best you can hope for is a team of 10x programmers, but there are no 100x programmers, or 100,000x programmers on the horizon. Besides, when there are more than 3-4 programmers on a team, the communication burden starts to become a drag on productivity.
Computers like IBM’s Watson change the game. When computers start writing software on their own, we’ll have some interesting issues to deal with (skynet?)…
Free removes “purchase decision” stress:
- By making a service free, the number of potential users is maximized.
- When a product is being evaluated for purchase, a special psychological thread kicks in (the reptile brain). From a marketing standpoint, it is nice to avoid that whenever possible.
- The book talks about how huge the difference is. In one study, Hershey Kisses were offered against a superior Swiss chocolate at $0.25 each, $0.01 each, and free. Even though the monetary difference between $0.01 and free is pretty small, there was a huge difference in the consumption of the free chocolates vs the $0.01 chocolates.
Can you make money on Free?
Yes, but not directly. Free can be used to broaden awareness, compliment a paid service, reach more people, and attack the competition. The book has many examples, including Jello-O’s marketing campaign of the 1900’s – one of the first to do a free giveaway.
Free platforms (like League of Legends) that sell virtual vanity items such as player costumes or badges strike a nice balance. They reach the maximum number of users, but then sell perks to the serious users. They can set different prices on different items, and evolve the economy to an optimal level – pretty cool!
What the book doesn’t talk about enough I think, is the downside of free:
- When a product is free, people just don’t value it. They still expect it to work, but in their minds they have no serious investment in it.
- When we buy things, they become part of who we are. As human beings we want to value ourselves through our choices, including the brands we pick. Free products don’t tap into that psychology, except for cheap skates – but they are not potential customers anyway.
- A premium can be had for exclusivity. Free products are by nature not exclusive. For a brand like MIT, which is now giving away free courses online via MITx (but not college credit). They are playing a dangerous game with diluting their own mystique.
Here is my take away – Free is here to stay:
Just like having a URL, a twitter account, a Facebook page, and mobile app – introducing some kind of free offering that differentiates a company is a required element going forward in business. Free is raising the table stakes. Delivering ‘free’ is getting cheaper thanks to the bits economy. However, building a free offering is not cheap. Thus, software developers are more in demand than ever before. It is a good situation for us, pretty frustrating for everybody else.