The Power of Free vs. The Power of Paid

Product teams at companies like Meta have the enviable advantage that most of what they build isn't monetized directly (Facebook, Instagram, WhatsApp, and Messenger are all free). Interestingly, the majority of business products are similarly free (everything but ads. There's a suite of tools that power a variety of business experiences).

The teams that build these products get to focus on building long-term valuable experiences for people and businesses rather than focusing on monetizing directly.

However, this comes with its own set of surprising challenges, particularly when building business products.

The power of free

There's a behavioral discontinuity when it comes to free things. We tend to over-value free things and discount costs associated with them. For example, check out a live Golden State Warriors game, and see millionaires in the front row losing their minds over a poorly made free $7 t-shirt shot from a cannon.

This effect was illustrated by behavioral economist Dan Ariely in his book Predictably Irrational. In one experiment, researchers gave people the option to choose between a $10 Amazon gift certificate for free or a $20 gift card available for $7. More people chose the $10 gift card even though the other option provided more value.

Another experiment asked people to choose between a $0.01 Hershey Kiss or a $0.15 Lindt truffle. More people selected the truffle:

Next, researchers reduced the price of both chocolates by one cent. The results are stark and illustrate the odd discontinuity with free:

Being able to offer things for free is incredibly powerful for growth. Consider the early days of Facebook. Signing up was (and is) free. Many curious college students (including me) created accounts even if the value wasn't that apparent. Over time, due to network effects, it became more and more valuable. Today people value Facebook on average at $50-300 per month.

At Meta, we have the incredible luxury that the majority of products aren't monetized directly. That means that product teams can focus on the core value that they're building, and not worry as much about monetizing. But there's a downside.

The downside of free

The inverse of "the power of free" is that some users will try out our products even if they provide low, no, or negative value. This is particularly acute for businesses.

Why is this a problem? It makes it harder for product teams to optimize for business value.

• If you don't charge, it's very hard to measure whether you're creating a valuable tool or not. A business may use a product because it's fun or distracting, or simply because it's free. You won't even know that you're missing a bigger opportunity to build something valuable.
• More perniciously, it makes it harder to align organizational incentives to building business value. Organizations that don't directly drive revenue tend to look at other metrics like number of users, engagement, and retention as proxies for value. Over time, those become Big Important Numbers that get optimized through A/B tests. If you try to launch a new experience that solves for a new need, it will likely tank these Big Important Numbers (which is challenging organizationally). This is a classic Innovator's Dilemma, but it's artificial and you bring it on yourself!

The power of paid

Charging for a business product aligns incentives. Once we exit the realm of free, businesses generally only want to pay for things they value relative to the alternatives. It makes a bunch of things easier:

• Optimize for features that businesses are willing to pay for, rather than features that create engagement or growth
• Offer important enabling features & services that are hard to scale in a free model (like support and customer success)
• Force the organization to consider what alternatives businesses have for completing the tasks that they're building for (if we're not 10x better than "free-ish" pen and paper, many businesses won't pay)

"With our powers combined..."

Ultimately, both free and paid offerings can create outsized value. The best models utilize both. For example, a freemium model enables a business to offer a slimmed version to drive massive adoption, while holding the team accountable to deliver a premium version that businesses value enough to pay for. The critical part is to understand the power (and the downside!) of each model.