I just read an article from the New Yorker which was written by Malcolm Gladwell. The article was entitled, “Priced to Sell, is free the future?” Gladwell discusses the trend for service and product pricing to be steadily moving toward free.

An experiment was conducted by an M.I.T. behavioral economist Dan Ariely, the author of “Predictably Irrational.” Ariely offered a group of subjects a choice between two kinds of chocolate—Hershey’s Kisses, for one cent, and Lindt truffles, for fifteen cents. Three-quarters of the subjects chose the truffles. Then he redid the experiment, reducing the price of both chocolates by one cent. The Kisses were now free. What happened? The order of preference was reversed. Sixty-nine per cent of the subjects chose the Kisses. The price difference between the two chocolates was exactly the same, but that magic word “free” has the power to create a consumer stampede.

Currently the business model of the internet has been revolving around the idea of free content. With companies like Google, Facebook, Youtube, Craigslist, etc, services or access to information are provided for “free” and revenue is created through advertising. Is this really working? Take for example, as Gladwell details, the YouTube example. Everyone can say that it is a viral marketing phenom. But let’s take a closer look at the numbers. “Distribution is now close enough to free to round down. Today, it costs about $0.25 to stream one hour of video to one person. Next year, it will be $0.15. A year later it will be less than a dime. This is why YouTube’s founders decided to give it away. The result is both messy and runs counter to every instinct of a television professional, but this is what abundance both requires and demands.”

Furthermore, “…an estimated seventy-five billion videos will be served up by YouTube this year. Although the magic of Free technology means that the cost of serving up each video is “close enough to free to round down,” “close enough to free” multiplied by seventy-five billion is still a very large number. A recent report by Credit Suisse estimates that YouTube’s bandwidth costs in 2009 will be three hundred and sixty million dollars…YouTube has had to buy the rights to professionally produced content, such as television shows and movies. Credit Suisse put the cost of those licenses in 2009 at roughly two hundred and sixty million dollars…Credit Suisse estimates that YouTube will lose close to half a billion dollars this year.”

My point here is that YouTube is able to amass a large user base, millions upon millions, however, what does it cost to bring those users in? Free is great for the users but in the case of YouTube, half a billion will be taken as a loss. As a consumer we all want things to be free. We are lazy, we want stuff instantaneously, and we want the newest and coolest. However, as a business, unless you love the world so much as to take you out of business, free is unrealistic. Revenue has to be made. However, it makes sense that YouTube consistently takes the hit here because as the operational costs go down (cost for bandwidth and storage space, in 1961,  a single transistor was ten dollars. In 1963, it was five dollars. By 1968, it was one dollar. Today, Intel will sell you two billion transistors for eleven hundred dollars—meaning that the cost of a single transistor is now about .000055 cents.

How are you pricing your technological services and products?

Check out a video about the Free business model.