Prof. Sangkyu Rho discusses how to make money in a free economy. He explains that while some think information goods have no value due to zero marginal costs, there are still monetization opportunities through cross-subsidization models where some users pay to subsidize free users. Key strategies for information goods include versioning products for different market segments, bundling, and involving third party payers through advertising or sponsorships to capture value despite zero marginal costs.
5. 버는가?
(How to Make Money in Free Economy)
2015. 4. 6.
Prof. Sangkyu Rho
Graduate School of Business
Seoul National University
http://www.slideshare.net/srho/how-to-make-money-in-free-economy
6. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Who’s Sangkyu Rho?
• Profession:
– 서울대
12. from 2013 to 2014
– Blogger since 2013
• Interests:
– Data Knowledge
– Social Network
• Contacts:
– srho@snu.ac.kr
– www.organicmedialab.com
– Facebook: sangkyu.rho
– LinkedIn: Sangkyu Rho
– Twitter: @srho77
13. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
How to Make Money
Google,Amazon, Facebook, …
• 0.000…1 × ≈∞ = Big Number
Reality
• 0 × ? = 0
Solution
• Revenue (Monetisation) Model: What part of product/
service to charge to whom, and how?
3
15. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
“Information wants to be FREE”
5
Economic
Zero marginal cost (MC=0) All Information
No value at all in some cases SNS with 0 users
Social
Free sharing Wikipedia
Free copying Piracy
Psychological Free as anchor prices Free app vs. $1 app
Strategic Free as weapons Kakao Talk
16. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
How is Free Possible?
Cross Subsidization (교차보조)
• Someone is paying for me.
• “There ain’t no such thing as a free lunch!”
6
17. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Cross Subsidization
7
To From Example
Free Product Paid Product 미끼 상품 (Loss Leader)
Free Now Pay Later
공짜폰, 무료 체험(Free trial),
부분유료화(Microtransaction) 게임
Free Users Paying Users
Freemium(Evernote),
Pay WhatYou Want (Radiohead)
Free Side (Party) Money Side (Party) Traditional Media, Google Search
Free Market
Non-monetary
Market
Gift Economy (Wikipedia, Linux),
Barter Economy (Google 411)
http://organicmedialab.com/2013/04/30/there-is-no-free-lunch/
18. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Free as a Strategy
8
Free
(무료)
Money
(유료)
Experience
(체험)
Network Effects
(네트워크 효과)
Reputation
(평판)
Scale
(규모)
Device/Platform
(기기/플랫폼)
Consumption
(소비)
Attention
(방문)
Organic Media Lab, 2015
19. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Information Goods(정보재)
Anything that CAN be digitized:
• News, Music, Movies, Books, …
• Operating Systems, Productivity Software, …
• Social Network Services, Market Places, …
Value not in the container but in the contents,
… and contexts
9
20. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
3 Components of Media
10
http://organicmedialab.com/2013/03/21/3-components-of-media/
21. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
정보재의 특징
Marginal Cost (MC) of Information is 0
Information is Soft
Information is Experience Good
Piracy of Information is Inevitable
11
22. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Issues in Information Goods
Transactions
How to package information goods
How to price information goods
How to promote information goods
How to manage intellectual property rights
12
23. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Free or Not for Free?
Free as a Strategy
Value-based Pricing
Versioning and Bundling
Help from Potential Customers
Maximizing User Experience
13
24. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Marginal Cost of Information is 0
14
Quantity
TotalCost/Revenue
Cost of Information Goods
Cost of Physical Goods
Revenue
Q*
Organic Media Lab, 2013
25. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Implication of MC = 0
Free version
Unlimited supply
Economies of scale
NOT Cost-based approach, BUTValue-based
approach
15
26. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Value-based Pricing
Forget cost per unit when MC=0
Focus on value (revenue) maximization
Learn users’ willingness to pay by
experiments
• Versioning bundling
• A/B tests
16
27. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Economics ofVersions and
Bundles
Goal:Value
Maximization
Price discrimination
[Pigou, 1920]
• Personalized pricing
(Perfect)
• Group pricing (Direct)
• Versioning (Indirect)
17
Quantity Demanded
Price
10,000
20,000
10,000 20,000
Organic Media Lab, 2013
28. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Versioning
Different versions for different market
segments
• Offer versions tailored to the needs of different
customers (e.g., quantity, quality, functions, capacity…)
• e.g., Cable TV, Freemium (Free + Premium versions)
• How many versions?
18
29. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Quantity Demanded
Price
10,000
20,000
10,000 20,000
Organic Media Lab, 2013
Group Pricing
A different price for
each group (e.g,
Student versions)
Why?
• Price sensitivity
• Network effects
• Lock-in
19
30. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Personalized Pricing
A different price for
everyone
• Know your customers
• Personalize your
product
• Differentiate your prices
when possible
e.g., Google Adwords
20
Quantity Demanded
Price
10,000
20,000
10,000 20,000
Organic Media Lab, 2013
31. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Bundling
A special form of versioning in which two or more
distinct products are offered as a package at a
single price. (e.g., Microsoft Office,Amazon Prime)
Bundling increases the value extracted from the
customers by reducing the dispersion in their
willingness to pay
21
Word Excel
Cheolsoo 150,000 100,000
Younghee 100,000 150,000
32. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Revenue Models
Packaging
• What to pay for
Payer
• Who’s paying?
Pricing
• How (much) to pay
• When to pay
22
33. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Revenue Models of Music
23
Packaging Payer Pricing
CD 10 songs Consumer $ 10/CD
iTunes 1 song Consumer $1/song
Melon
All you can eat
in a month
Consumer $5/month
Spotify All you can eat Advertisers $15 CPM
34. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Packaging (Versioning)
Fragmentation
• Individual songs (Apple iTunes)
• Microtransaction games (Nexon Maple Story)
• Selling the parts (e.g., Ringtone,Amazon AWS)
Versioning
• Freemium (Evernote, Hulu, even Microsoft Office)
24
35. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Packaging (Bundling)
Bundling
• Office Suite (Microsoft, Google Apps)
• AllYou Can Eat (Netflix, Spotify)
• Mixed Bundle (Amazon Prime)
Extension
• Add service (Apple iPod + iTunes)
• Add product (Amazon Prime + Kindle Fire)
25
37. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
3rd Party Payer (Advertising)
Container:
• Newspaper — TV — PC — Mobile
• Text — Image — Audio —Video
Contents:
• Commercial — Infomercial — Information
Context:
• Irrelevant/Independent — Keyword — Social Network —
Location — Activity — Intention
27
38. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
3rd Party Payer (Advertising)
Performance:
• Impression — Click — Sale
Participation (Mediation):
• Passive — Interactive — Active — Money Making(?)
28
39. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
3rd Party Payer (Sponsorship)
Product placement
Contents sponsorship
Crowd Funding
29
40. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
“Information wants to be
FREE”
30
41. (CC BY-SA 3.0) Sangkyu Rho, SNU Business School
Recommended Readings
Chris Anderson, Free, Hyperion, 2010.
윤지영, 오가닉 미디어, 21세기북스, 2014.(
http://organicmedia.pressbooks.com)
Shapiro Varian, Information Rules, Harvard
Business School Press, 1999.
Saul Berman, Not for Free, Harvard Business
Review Press, 2011.
31