I installed Skype on my computer the other day. Now I can have instant, direct communication with business associates, family and friends in Switzerland, Holland and California. What a great invention and – unless I want enhanced service – it is free, except for the equipment I had to purchase. The camera sits on top of my computer screen, and I can shut it off for privacy. I think that is great.

The installation came at the right time: I was just reading Chris Anderson’s recently published book, Free: The Future of a Radical Price, which describes many instances of free services and how they evolved.

The author cites the Encyclopedia Britannica, which grossed more than $650 million in 1991 through door-to-door sales at more than $1,000 per set. Within five years, Microsoft’s Encarta was selling for $99 – and the venerable Encyclopedia Britannica had lost almost half its sales. Now Wikipedia is offering information for free, Microsoft has discontinued Encarta – and the Encyclopedia Britannica is available as a premium online service for $69.95 a year.

“Free” has two antecedents in the Latinate languages – liber (with few or no exceptions) and gratis (without charge or recompense) – but their meanings have been fairly well-blended in modern English usage. This has marketing advantages, according to the author, but also introduces ambiguity and has caused some speakers to use the word gratis to underscore that something is truly without cost.

Model examples
The book cites many excellent examples how an item offered for free generates interest in the product and can create revenue streams through supportive advertising and services. The author divides free models into four categories:

Direct Cross-subsidies. This is any product that entices you to pay for something else, like “buy one, get one” promotions.

The Three-party Market. This is a free exchange between two parties but advertising supports the media – such as radio and television.

Freemium. The word, coined by venture capitalist Fred Wilson, describes a common web business model. For instance, a service like Flickr is free, but users can “trade up” to the enhanced features of Flickr Pro for $25 annually.

Non-monetary Markets. From the 12 million entries on Wikipedia to classifieds on Craigslist to the secondhand goods on Freecycle, everything is free to everyone. This model is supported by advertising and is growing by enhanced reputation and greater attention by the public. Google is another example of a non-monetary service that has grown into a tremendously popular source of information.

Valuable commodity
The book cites examples going as far back as 1838 to support the argument that, in competitive markets, prices fall to marginal costs. Today, markets are causing marginal costs of products and services to fall close to zero. As a result of these pressures, Anderson writes, zero is becoming the inevitable end point. Particularly if they are digital, many products or services will eventually be free – but this will, in turn, make other products and services more valuable.

Technological advances have paved the way for free services, and today’s customers are coming to expect them of retailers. As a result, merchants should be careful not to overuse the word “free” – it is too precious a commodity.