{"id":557,"date":"2009-09-25T00:15:03","date_gmt":"2009-09-24T12:15:03","guid":{"rendered":"https:\/\/www.deltics.co.nz\/blog\/?p=557"},"modified":"2009-09-25T00:15:03","modified_gmt":"2009-09-24T12:15:03","slug":"the-economics-of-free","status":"publish","type":"post","link":"https:\/\/www.deltics.co.nz\/blog\/posts\/557\/","title":{"rendered":"The Economics of “Free”"},"content":{"rendered":"[Estimated Reading Time: <\/span> 7<\/span> minutes]<\/span><\/span>

I’ve been staggered at the response to my recent post calling for a “Community Edition” (and a “Standard Edition”) of Delphi. \u00a0Even more staggering though was that some people still don’t “get it”, thinking that a free or cut-price version of Delphi will somehow be the financial ruin of Embarcadero.They protest that Microsoft can only do this because they are such a large company with a monopoly that they can exploit.<\/p>\n

So is this a luxury that Embarcadero simply cannot afford? \u00a0I think not and can think of any number of examples where companies in this industry and others use “Free” as a too to drive promotion and loyalty.<\/p>\n

Coffee Shops<\/h2>\n

Where I work there is a coffee shop and a bakery. \u00a0They both offer good quality espresso coffee. \u00a0They both operate a loyalty scheme where for every 5 coffee’s I buy I get one free.<\/p>\n

Incredible. \u00a0That’s giving away 16%<\/strong> of their potential revenue from coffee sales! \u00a0So clearly these must be huge conglomerate coffee shop chains enjoying a monopoly position.<\/p>\n

No, of course not. \u00a0These are owner operated small businesses. \u00a0Very<\/strong> small businesses.<\/p>\n

So how on earth can they stay in<\/strong> business? \u00a0The answer is of course because their margin allows it, but even so, why give up that profit? \u00a0Don’t they need that profit to finance the further development of their business? \u00a0Of course they do, but they also know that they can make more money out of me in other ways. \u00a0Because they know that every time I walk in their store is an opportunity to sell me something else, even if I’m only there to collect the free coffee that I “earned” I might buy something to go with.<\/p>\n

In fact, I’m almost certain to, because I, like many people feel a sense of gratitude and indeed obligation when they receive something for free. \u00a0So they give me a reason to come back and they also go to great lengths to make me feel welcome whenever I do, so that rather than feeling “entitled” to my free coffee I somehow feel that I never-the-less owe them something in return.<\/p>\n

In any business, the hardest part of a sale is getting the customer in front of your products, because if you don’t achieve that then you simply aren’t going to sell them anything<\/span><\/strong>. \u00a0The second hardest part is making them feel inclined to give them your money. \u00a0People don’t (generally) buy things from people they don’t like.<\/p>\n

That’s why sales people try so hard to be your friend. \u00a0In some cases they try too hard and just annoy the hell out of you which of course works against them, but a good<\/em><\/strong> sales person will never make you feel like you’re begin sold to.<\/p>\n

But Delphi isn’t a Cappacino!<\/em><\/strong><\/p>\n

Of course not.<\/p>\n

Give me a free copy of Delphi and I’m not likely to come and buy a sticky bun from you (unless you are a very<\/em><\/strong> diverse sort of reseller). \u00a0I might however find myself needing a database modelling tool. \u00a0Or perhaps a C++ compiler that I need to use for things that a Community or Standard Edition isn’t going to be good enough for.<\/p>\n

If I’ve gotten used to using tools from any other company that offers such things, how likely is it that I’m going to come knocking on Embarcadero’s door first? \u00a0Not very.<\/p>\n

Loss leaders, freebies, deep-discounting… these are all highly effective techniques for selling everything from coffee to cars or even houses. \u00a0Yet some people think it’s not relevant or “deserved” in software?<\/p>\n

So let’s look at some examples from the software world.<\/p>\n

Exempli Gratia<\/h2>\n

How much did you pay to use Google today?<\/p>\n

How much money did Google make<\/em><\/strong> today?<\/p>\n

Anyone that thinks that “Free” doesn’t work really needs to square that circle before they go any further. \u00a0But, Google is admittedly\u00a0HUGE<\/strong> so let’s look at some somewhat smaller examples\u00a0(a further question for the reader: how did Google get<\/em><\/strong> to be so huge?).<\/p>\n

NOTE: <\/em><\/strong>I am limiting myself to those products I have direct experience of. \u00a0I’m sure others have similar experiences to relate regarding other products.<\/em><\/p>\n


\n<\/em><\/p>\n

WordPress<\/h3>\n

wordpress.org<\/a><\/p>\n

I don’t know how profitable WordPress is for it’s founders or creators. \u00a0One must presume that at the very least they are covering their hosting costs which on it’s own is impressive given the amount of traffic that their hosted blogs carry<\/a>.<\/p>\n

This blog is itself running on the WordPress platform – my stats of course don’t contribute to those WordPress.com stats as my site is hosted by my ISP, not WordPress themselves, as I’m sure is the case for a very, very large number of WordPress bloggers.<\/p>\n

So how does a product like WordPress make money?<\/p>\n

Well, as well as being essentially entirely free, they do have premium services built on top of their free hosted offerings<\/a>.<\/p>\n

But nobody’s going to pay for those right? \u00a0Because we’re all ungrateful free-loaders, right?<\/p>\n

Well, someone is paying for those services. \u00a0My guess is that some of those people will be people who had a very positive free experience with WordPress then found themselves wanting more, and feeling positively inclined toward WordPress were happy to upgrade to these paid for services.<\/p>\n

Much as I imagine, for example, that someone who enjoys learning Delphi with a free version might then wish to upgrade to a reasonably priced, better equipped version (for this to work I still believe that an Edition between “FREE” and “PRO” has to exist otherwise the barrier to paid for entry will still be too high to convert very many free users to paying customers).<\/p>\n

FogBugz<\/strong><\/h3>\n

www.fogcreek.com\/FogBugz<\/a><\/strong><\/p>\n

Again, I have no idea how profitable the FogBugz issue tracking\/project management product is for FogCreek. \u00a0Again, one must believe that it’s making some<\/em><\/strong> money. \u00a0Products that don’t rarely make it much past version 2, and FogBugz has been around long enough to make it to Version 7 – so far.<\/p>\n

And this is perhaps much closer to the Delphi example than WordPress.<\/p>\n

FogBugz is primarily a commercial product offering, available either as an entirely hosted solution on a fixed cost per user monthly subscription basis<\/a>, or as a purchased, self-hosted installation priced per user (with volume discounts)<\/a>.<\/p>\n

I came across FogBugz when I was evaluating issue tracking systems with a view to identifying one suitable for our purposes at my place of work. \u00a0It immediately impressed me as a product, but more than that, the OnDemand hosted product is FREE for accounts with 1-2 users<\/a>.<\/p>\n

I didn’t need to look much further than that – for my own purposes, on my own time, this was perfect. \u00a0I signed up and within minutes had my own issue tracking system up and running.<\/p>\n

But a system to cater for the situation at work had to meet more rigorous requirements. \u00a0It had to be able to integrate with a number of our existing systems and it had to be able to handle the projects and our working practices. \u00a0FogBugz could do all these things but did seem quite basic.<\/p>\n

So my evaluation of other products continued.<\/p>\n

Those other products were all, without exception, far more expensive than FogBugz. \u00a0In some cases they were undeniably far more functional too. \u00a0In some cases they too offered free versions for small numbers of users, however, in these cases the free versions were also functionally limited, in some cases very much so, and the costs once you crossed that “free user” threshold were astronomical.<\/p>\n

But during the course of my evaluation of these other products I was also of course starting to use FogBugz more and more myself and was more and more impressed. \u00a0Every day it seemed I was excitedly sharing what I’d found it could do with my colleagues.<\/p>\n

The long story short (I know – too late) is that we are now going ahead and purchasing a number of licenses for a self hosted installation of FogBugz for our site.<\/p>\n

Giving away one free license to their product (and<\/em><\/strong> I might add, absorbing the cost of hosting the account using that license) has directly led to the sale of a number of licenses for FogCreek, not to mention publicity in my telling everyone who will listen just what a great product it is.<\/p>\n

Did I mention yet what a great product it is?<\/p>\n

A Good Idea Gone Wrong<\/h2>\n

Not all free editions of otherwise commercial software are good examples. \u00a0I came across one today in fact.<\/p>\n

LiquidXML Technologies<\/a> offer a Community Edition of their XML Studio product. \u00a0Despite being a highly impressive and functional piece of software, this suffers from two significant problems however.<\/p>\n

1. The free version is too limited<\/a>. \u00a0It’s virtually unusable as anything other than a fancy XML editor. \u00a0Activating the “Community Edition” actually disables very basic features that would otherwise be available during a 30-day trial period!<\/p>\n

2. The cost of the cheapest paid-for version of the product is far too high. \u00a0Certainly the product is very pretty and very capable, but there are cheaper tools that are almost as good – in some cases entirely free<\/strong> tools.<\/p>\n

This product proves that “FREE” is not a guaranteed sales tool.<\/p>\n

I never said it was easy. \u00a0But it doesn’t have to be difficult, and it certainly is not impossible.<\/p>\n

The Ubiquitous : “Miscellaneous”<\/h2>\n

Commercial software made available in a free edition is a sales technique that can be found in just about every corner of IT, and is perhaps most evident in the “serious” tools space where we find the likes of VM Ware and Perforce. \u00a0Even Oracle for crying out loud!<\/a><\/p>\n

I’ve not compiled a hugely extensive list of examples, I admit. \u00a0But then I’ve not deliberately sought to\u00a0find these examples. \u00a0They are ones that I have had direct, incidental experience of in recent months\u00a0or years.<\/p>\n

In fact, when I think back much further than that, I think it’s fair to say that “free” software is in fact a relatively new phenomenon, and one that has proven very successful for those that have done it right.<\/p>\n

I hate to say it, but now that the initial excitement has worn off,\u00a0Embarcadero are starting look like a bit of a dinosaur compared to the other players in the market.<\/p>\n

I think it would be interesting to compile a list of what we think of as successful software products that are available in free editions. \u00a0By which I mean free and freely usable, i.e. without any onerous restrictions that essentially renders them as little more than trial editions that aren’t practically usable for their intended purpose and which are unlikely to give a positive user experience that might tempt someone to purchase the paid-for version.<\/p>\n

Some people have asked “Why should we get a free\/cheap version of Delphi?” or suggested that Embarcadero can’t afford it.<\/span><\/h2>\n

I suggest that it’s actually the other way around.<\/p>\n

We should ask “Why shouldn’t we have a free\/cheap version of Delphi available?” and that Embarcadero simply cannot afford not<\/strong> to.<\/p>\n

Ask Not For Whom The Bell Tolls…<\/h2>\n

By way of footnote, I found it interesting that another blog recently used a part of this quote<\/a> – the subject of the post was also discussing the need for a free\/cheap edition of Delphi. \u00a0It struck a particular chord with me.<\/p>\n

This very famous quote comes from a poem by John Donne<\/a>, one time rector of a church in a small village in Bedfordshire in the UK called “Blunham”<\/a>. \u00a0There are two pubs in that village (at one time there were 8!). \u00a0If you are ever in the area do stop by The Salutation<\/a> and say hi to the current landlady (Vicky) and the regulars.<\/p>\n

Tell them “Bill” sent you – my wife and I took a career break and ran that pub for nearly two years before we emigrated to New Zealand where we resumed our careers in IT and accounting respectively.<\/p>\n

What’s the point?<\/p>\n

Well, as is common practice in the pub trade in the UK, I would regularly invite a customer to “Have this one on me”. \u00a0It cost me the profit on a pint, but the customer would more often than not return the favour, except of course that they would also join me, repaying my lost profit on one pint with profit on two (or possibly more if others joined the round).<\/p>\n

Mostly that practice is about fostering a sense of community and friendship, not generating cold, hard revenue – but the two go hand-in-hand more often than you might think.<\/p>\n","protected":false},"excerpt":{"rendered":"

[Estimated Reading Time: <\/span> 7<\/span> minutes]<\/span><\/span> I’ve been staggered at the response to my recent post calling for a “Community Edition” (and a “Standard Edition”) of Delphi. \u00a0Even more staggering though was that some people still don’t “get it”, thinking that a free or cut-price version of Delphi will somehow be the financial ruin of Embarcadero.<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"jetpack_publicize_message":"","jetpack_is_tweetstorm":false,"jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":[]},"categories":[4],"tags":[],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p1TKYv-8Z","jetpack_sharing_enabled":true,"jetpack-related-posts":[{"id":529,"url":"https:\/\/www.deltics.co.nz\/blog\/posts\/529\/","url_meta":{"origin":557,"position":0},"title":"New Delphi Upgrade Policy – Get in QUICK!","date":"16 Sep 2009","format":false,"excerpt":"If you are using any version of Delphi that is more than 3 versions older than the current version (i.e. Delphi 2005 or older, as of today), the days of upgrading to the latest version will soon be over. 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