Is "Free" Enough to Make Money?

I received this interesting article today from Thad McIlroy (thanks Thad) who runs "The Future of Publishing" blog. In the article Chris Anderson who earlier made waves with his article - "Free! Why $0.00 Is the Future of Business"talks about the economics of giving it away. While the article is rather short and does not provide any definite new ideas over his previous article about how to make money in the "freeconomy", it does reiterate some of his earlier ideas:

- Just giving stuff away (be it content or software) will not make you money. The Web 2.0 wave of giving it away, building a user base and hoping to get acquired is over. Now companies are having to seriously think about cash flows. Advertising rates at present (Facebook gets only $1 CPM while big media websites get $20 CPM) are not sufficient to help support many of these businesses.
- You need to figure out who is the economic buyer. It's possible that the economic buyer and the user are two different sets of people (as in the case of Google.)
- Or you can try the freemium model (where the minority of premium, paying users subsidize the majority of non-paying users who get a slightly diminished experience.)
- You need to pair up the free part of your offering with an expensive complimentary offering (for example, free Internet + really expensive coffee.)

The last section is particularly insightful for new media entrepreneurs where he says, "the marginal cost of anything digital falls by 50% every year, making pricing a race to the bottom, and "Free" has as much power over the consumer psyche as ever. But it does mean that Free is not enough. It also has to be matched with Paid. Just as King Gillette's free razors only made business sense paired with expensive blades, so will today's Web entrepreneurs have to not just invent products that people love, but also those that they will pay for. Not all of the people or even most of them -- free is still great marketing and bits are still too cheap to meter -- but enough to pay the bills. Free may be the best price, but it can't be the only one."