I’m a big fan of the work of WIRED Magazine founder and editor Chris Anderson. His most recent book talks about the new economics of ‘Free’ (a.k.a freeconomics) and the shift towards giving away products, skills or services to sell complimentary products, skills or services. Here are examples of a few of the various ‘free’ business models, many will overlap and may even seem similar:
01) Opensource - Develop software and give it away along with the source code. Crowd-source continued development. Sell customization and support services.02) Freemiums - Many ‘web 2.0? companies have adopted this model. For instance sites like Flickr.com, Pownce.com and Mozy.com. Essentially you give away the main product or service and sell an upgrade that offers advanced functionality and features. Flickr’s service is free but to access options like the unlimited uploads and storage that the pro version offers, you’ll need to pay.
03) Loss Leader or Cross-Subsidy - While all ‘free’ business models touch upon the loss leader approach somewhat, this describes a business model in which you give one product away completely free with no strings attached with the hopes that the customer will purchase complimentary products. For instance, if I sell tooth brushes I might give away a ton of toothpaste. Since I now know that you’ll need a toothbrush to use my toothpaste, I can position myself to sell a few toothbrushes. As long as the few toothbrushes I sell also cover the costs of giving away toothpaste, I’m profitable. Remember all those CDs you used to get in the mail from America Online, Prodigy and Earthlink? They gave away a free product, a Demo Cd that came with free software and a trial offer for an internet service. No one actually wanted the software on the disk but the plan was to get you to try the internet services being offered to become a subscriber.
04) Advertising - Google.com is the company best known for perfecting this model. Almost everything they sell as a company is completely free, but they sell you (their users) to advertisers who pay top-dollar to have adds appear on your websites, blogs and ezines.
05) Cross-Capitalization - Spammers are the kings of this domain. They spend a great deal of time trying to figure out ways to get their hands on information, like e-mail addresses, which they turn around and sell to the highest bidder. The group that buys the domains makes money by advertising to you directly from your Inbox. Believe it or not, most print magazines don’t make their money off selling copies. they also don’t make money off of subscriptions. Buy charging some amount, they qualify the buyer to be a member of a certain demographic which is what advertisers use to determine the ‘worth’ of their audience. The magazine publisher isn’t selling a magazine, he’s selling demographics of magazine readers to advertisers.
06) Data-Mining - Some groups donât sell specific personal information but they sell information about you to the highest bidder. For instance trending reports of how you operate your favorite social network is often used by company owners to lure advertising dollars, promotional deals and big sponsorships (re: MySpace). Companies like Hitwise have built big businesses documenting and analyzing trending reports of people on the internet. They then sell these reports to marketers, advertisers, researchers and whoever else wants them.
07) Reputation - Writers, Bloggers and Open-source software developers can sometimes create their own jobs by simply being the expert on a particular niche subject. They may not ever sell or pitch anything directly through the use of their talents but if what they do draws enough attention, people often offer to pay them to consult in related areas. For instance, by becoming a top user on the social news site Digg.com user MrBabyMan created a healthy career for himself as a social media consultant. After building a reputation as a social media guru, people began to pay him for advice on how to improve their social media presence. Wikipedia is another example.
08) Bartering - Trade is the foundation of all the business the world has ever known. Before currency was created to allow trade to move beyond the physical location of the traders, people bartered. “I’ll plow your fields if you allow me to take a portion for my own family.” “I’ll carry this load for you if you give me two of your finest goats.” These days it looks more like this: “You can use our development team if we can use your data center.” Google’s relationship with Mozilla works something like this. Google funds Mozilla, so Mozilla uses Google as the default search engine and homepage.
09) Rewards and Incentives - Something is sold to the customer by promising to give them something extra free. Buy 1 get 1 free is a classic example.
10) Company Credit - Customers who buy a companyâs product or services are sold credits that can only be used for other products or services from that same company. Since these credits canât be traded for cash, people are encouraged to keep using the same brand, over and over again.
11) Subscriptions - When you subscribe to HBO or DsTV, you’re subscribing to a content delivery network via cable or satellite. You aren’t paying for particular channels or movies…all that is rolled into the price of the service. The content delivery network survives because instead of paying mont by month, you’ve paid for several months up front which has given them the infusion of cash they can use to operate. To make this worth it for the customer, you tend to save significant amounts of money buy subscribing for a year versus paying month to month.
Even in the west businesses are afraid of these somewhat unorthodox models of doing business but how about Africa?
Now and Later
There are people here who have come from homes where they literally starved as children managing to get-by long enough to grow up and go to the city and work. A good portion of people here only know the immediacy of ‘now’. When you realize the median life expectancy of people here is below 40, that starts to make sense. It’s only natural that this anxiety for immediate well-being would permeate the business culture here. It’s not necessarily greed, it’s more the uncertainty of what will come tomorrow that makes people react this way.
How can a Software Developer in Uganda afford to give away his product when he’s got three kids and a wife at home with an empty refrigerator? ‘Free’ is a luxury of the Western market where time, wealth, broadband and education are abundant. Does this mean it can’t work in Africa? I don’t think it does.
A Ugandan friend of mine, a developer, has embraced the ‘opensource’ model mentioned above. He makes classroom management software for schools and kiosk software for grocery stores. It’s all proprietary software that he builds in-house. To encourage businesses to adopt his software, he gives it to them, charging little to nothing for the actual software. He will charge significantly for any sort of customization or service call. His venture is successful enough that he’s now employing other Ugandans to install the software and answer service calls when he’s not available. ‘Free’ can work in Africa just like it can anywhere else.
A Tale of Two Taxis
Many businesses chase immediate cash instead of things like customer loyalty and dependancy. they seem to operate to operate under the impression that their actions won’t catch up to them, and they probably won’t…until there’s a competitor.
Iâve heard a number of stories about how one mobile phone provider here in Uganda (they recently changed their name) would abuse their customers to no end. Then one day they realized their users were leaving in mass numbers for a few newer competitors that were cheaper, more reliable and more attentive to their needs. Now the first company has rebranded itself in an effort to improve itâs reputation with the public and win back that business.
The important thing here is not what’s going on but why. Companies here are often ‘reactive’ instead of proactive, waiting until they’ve chased people away before they attempt to improve. All too common among the entrepreneurs here is the eagerness to chase a few quick dollars instead of looking at the ‘bigger picture’. I’ll give you a simple example…
I don’t have a car so I have two main special hire taxi guys on call that I use for all my trips around town. Taxi 1 and Taxi 2.Taxi 1 is young and ambitious. I can tell he wants to make money. He’s punctual, he’s a safe driver and somewhere along the line and he gets me to where I need to go quickly. His english is great, his car is reliable and he knows the city well.
Taxi 2 is a little bit older buts also ambitious. His stage is farther away so I know it will always take him longer than Taxi 1 who’s staged just down the street from my house. He’s also relatively punctual and a safe driver. He’s not the best with his english, which often leads to misunderstandings, but he’s polite and offers great service.
Now, initially I used Taxi 1 a lot for the apparent advantages he had over the other guy but I began to notice that his pricing was irregular. Sometimes the same trip would be 10,000UGX to get to a place but 15,000UGX to get back. He’d quote me high on trips that I took everyday with other drivers, so I knew the going rate was cheaper. Even after weeks of hiring him to drive us, he still pulls the same tricks to get more money. If I protest he’ll come down a bit but he still makes the first offer high, something usually reserved for the taxis you haven’t built a relationship with. He seems to forget the fact that he’s not the only game in town.
Taxi 2 has his disadvantages but he never over quotes me anything. In fact, he seems to price by an internal meter or rule book. He simply goes for what’s fair instead of what will get him the most money in the moment. There’s no foreigner-tax, it’s just good business.
Taxi 1 may not know it but he’s doing himself a huge disservice. If he didn’t go ‘high’ with is prices, I wouldn’t feel like he’s ripping me of and he’d get much more of my business. Instead, he’s reacting for the moment because he knows I probably have more cash than his normal clientele. But I can’t trust him. Instead of doing the smart thing in order to keep my business, he tends to just go for the quick pay off. It’s short sighted.
Needless to say Taxi 2 has won all of my business as a result and Taxi 1 will never get a call from me again. It’s simple economics. I will spend my money where I feel I’m being respected and I’ll look out for a business that looks out for me. I think that understanding generally transcends cultural barriers.
That story illustrates the mentality that undermines ‘Free’ as a business model in Africa. Delayed gratification seems to be a foreign concept to Taxi 1. Taxi 2, however, understands that although he could continue to fend for himself by attempting to get the most out of every single passenger, it might also be in his best interest to keep the clients who do pay well coming back for more. Taxi 1 wants as many customers as he can possibly get to pay as much as he can possibly get out of them. Taxi 2 charges everyone the same, does a good job and people like me latch on. Now he’s building up loyal clients. In the long run he’s probably making more than the other guy, too.
At the same time, to be fair to Taxi 1, bidding is generally part of the culture here. And itâs that part of the culture that can work against simple business practices. When given the choice between money now or more money later, smany people here are blinded by the short term. But itâs important for me to point out that this comes out of the necessity to meet basic needs. To eliminate this mentality, the overall economic conditions of these markets must improve.