Free Can Be Expensive
28 February 2008
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The cover story for this month’s Wired Magazine is titled “Free! Why $0.00 is the Future of Business.” (It’s also available online for — that’s right — free.) Chris Anderson, Wired’s editor-in-chief, is the author, and he makes some very interesting pronouncements in his article about the future of free.
Free products have been around a long time. Anderson used the example of Gillette razors, which were routinely given away in order to buy a market for purchasing the reusable blades. But there are plenty of other examples floating around, like the apartment complexes that offer a free month of tenancy for anyone willing to sign a contract, because people love free stuff.
These sorts of giveaways are called cross-subsidies and, as a rule, they’re good for business. But are they good for consumers? A cross-subsidy is a highly effective selling strategy, implying that we might be ending up with stuff we don’t want — at high prices we still have to pay. That free month of rent? The apartment complex doesn’t lose anything: if the apartment wasn’t rented out they wouldn’t be receiving rent anyhow. But that month will cost the tenant plenty. Most complexes will require a lease of a year, and some will ask for a two-year lease. Assuming a nice round rent of $1,000 (not unreasonable if you live on either coast) and the tenant is committed to paying up either $11,000 or $24,000. That’s an expensive free month of rent.
Free only makes sense if you would be getting the item anyhow. Taking on that free Gillette razor is only worth your while if you’re planning to use a disposable razor anyhow — and you still might want to check if another brand is able to offer the long term end of the bargain (also known as the blades) at a lower price by selling the actual razor at a slightly higher price. Think about the math: assume a widget (such as a razor) is free. The piece needed to make the widget go wears out every month, like clockwork. It costs $10. Your yearly cost for owning the widget is $120 and it costs you every year as long as you own the widget.
But what if you paid $50 for your widget to start with, and got a deal on widget parts for $5 per month for the life of widget? That first year, your cost for owning the widget is $110, already lower than the yearly cost you paid for the free widget. And from then on, your yearly widget cost is only $60.
That free month of rent works the same way. The apartment complex may have hiked up their rates $100 per month in order to cover the cost of that initial month. Rather than paying $11,000 and getting a free month of rent, I know I’d prefer to pay for all 12 months at $900 (for a total of $10,800).
How much has free cost you?
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