A recent airline ticket experience led me to think about freemiums and freeconomics. Freemiums refer to the basic, free part of a paid service, e.g., internet subscription services. A good example is LinkedIn where many of its 90 million users take advantage of the free service to establish networks and communicate within them. A smaller group pay for a value-added service.
Freeconomics is the idea of making money by giving things away. The classic example is razors and blades. Give away the razor and sell the blades at a premium. The less pithy economic term is cross-subsidy, where one thing can be free if you pay for the other. Free downloads and paid concerts is a more recent example of this concept.
How does the cost of my recent airline ticket relate?. My gross airfare to and from Dublin was zero – zero Pounds Sterling, zero Euros, zero whatever. But the total cost of the ticket was £117.85. It made me realize that there are good freemiums and bad freemiums, both that impact on corporate strategy, which is my area of interest. This ticket was an example of a bad freemium.
Let me explain this ticket in a bit more detail.
Cost Breakdown of Aer Lingus Return Ticket – LGW-DUB
Airfare £ 00.00
Internet handling fee £ 10.00
Tax and Charges £ 57.85
Golf clubs £ 50.00
This approach made strategic sense the first time, for example when RyanAir was pushing free and £1.99 airfares. But that idea is no longer fresh. I was taught in 10th grade grammar that “Every sentence gotta make sense”. The price breakdown above makes no sense.
With freemiums and freeconomics, I get something of value for paying nothing. It may be a basic social networking service, a few free music downloads with an invitation to a paid concert, entrance to part of an exhibit, and so forth. But with this airline ticket, there is nothing I receive that is free. I can’t fly for free because I have the internet handling fee and of course the taxes.
As intelligent strategic thinking is one of the things we focus on, I would postulate that there really has to be a deal here for this type of pricing to make any sense. An internet handling fee of £10 isn’t a deal when we know that we are saving airlines money on reservations agents. Think ATMs as a precedent.
Referring to a credit card fee would make more sense, given we are all starting to understand credit card costs better and are given choices ranging from less expensive (EFT and debit cards) to more expensive (Amex). This fee would vary with the type of payment used – from nothing to around 4%.
There still is room to charge a bit more for the base ticket while still keeping it a great deal. Would my behavior change for a £4.99 fare each way? I doubt it. Finally, I won’t deal here with special charges here, as I deal with it in our blog about competitive discontinuity in the ski industry which speaks to these charges (http://bit.ly/frGMMl )
By not having this a la carte pricing make intuitive sense, companies are sending a subliminal message to check out competitors that take a simpler pricing model, e.g., British Airways in the UK and Southwest in the USA.
The moral of the story is to not to be too smart by half. Freeconomics works great but be prepared to back it up with a true offer. For example, why shouldn’t a walk-on airfare with no luggage be exceptionally cheap while add-on services apply to anyone who doesn’t want plain vanilla. Companies need to think clearly to get these concepts right.
By the way, I felt that the Aer Lingus deal was too good to be true and checked on British Airways fares. This time they weren’t better, but there will be a time when they are.