Views from Phanfare CEO and Co-founder Andrew Erlichson
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Link Bill Gurley on Freemium

Bill Gurley weighed in recently with his thoughts on freemium. He argues that if a competitor can do what you do and offer it for free, then you have a problem. I think his argument follows naturally from Porter’s Competitive strategy and supports the notion that I hypothesized on in my freemium post, that Freemium does not make sense for the differentiated provider.

Looking at the question of freemium through the lens of Porter’s Competitive Strategy, if you are the lost cost provider, you defend your market position by being able to lower prices against any competitor. If a competitor can offer your product for zero and make money, then the assumption is that they now have a lower cost position. Basically, you are no longer the low cost provider.

The differentiated provider protects his position by having a product that is unique in the market place. Consumers pay a premium for that product because they can get it no where else. By definition, if a competitor can offer the identical product for free, then you are not the differentiated provider.

In the Phanfare case, nobody can offer to store your fullsize original images and videos for free and make money long term. Hence, free is not going to be the price of the product.

This entry was posted on Monday, July 27th, 2009 at 12:13 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

  • tslow

    A “differentiated provider” offering a unique product only they offer has been called a monopoly since…well…since forever in economic theory.

    Consumers pay a premium because there is no competition nor price discovery.

    Why we need new terms for the obvious is not obvious.

  • http://blog.phanfare.com erlichson

    I don’t see it. Lexus is a differentiated provide of cars, but they are not a monopoly. Typically, the most buyers find that the low cost provider satisfies their requirements. Only a small % of the market has requirements that are uniquely satisfied by the differentiated provider.

    I see your point that if you define the market as people who have a certain set of requirements, and if there is one player with a product that satisfies the requirements, then in some sense they have a monopoly. But I think that being a monopolist also involves having some systemic ability to exclude others from entering the market to attack your position.

    Looking at Wikipedia, they have the following definition:

    “In economics, a monopoly (from Greek monos , alone or single + polein , to sell) exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it.[1] Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods”

    It is hard to see a minority playe with a differentiated offering as a monopolist. Apple does not have a monopoly on computers because you can buy a computer from other sellers. It just won't have all the featuers that an Apple computer does.

  • tslow

    By your rationales, Windows is a differentiated provider of OS's, as is Apple. But the DOJ still prosecuted Microsoft as abusing monopoly power. Same in Europe.

    All competitors are differentiated. Look at clothing. Different (but similar) patterns every season. Yet the same basic functionality and market appeal runs across mutiple brands. A Lexus has features virtually indistinguishable from its nearest competitors, or if it has one compelling, unique advantage, it will last only a season. That's just first to market, another tried-and-true economic term.

    The only real difference that persists is price. Even Apple knows that (now). In long tail economic measurements, it's the sole factor of differentiation. On price, oil replaced coal even though the engineering was highly “differentiated.”

    A lot of this is simply re-branded, basic economic theory.

  • http://blog.phanfare.com erlichson

    If the ingredients cost more then only someone who is charging more can afford to put those ingredients in. But being differentiated is about continually innovating. If you stop innovating, then you lose the differentiation.

    You either can defend yourself against competitors by arguing that the other product is not equivalent, a differentiated positioning, or you can defend yourself against competitors by always being cheaper and arguing that the products are equivalent enough, the argument of the low cost provider.

    Nevertheless, I grant you that all the ideas from Porter's Competitive Strategy are probably just rehashed formulations of basic economic theory. That is the beauty of academia, constantly reinventing the wheel using different materials.

  • http://blog.phanfare.com erlichson

    If the ingredients cost more then only someone who is charging more can afford to put those ingredients in. But being differentiated is about continually innovating. If you stop innovating, then you lose the differentiation.

    You either can defend yourself against competitors by arguing that the other product is not equivalent, a differentiated positioning, or you can defend yourself against competitors by always being cheaper and arguing that the products are equivalent enough, the argument of the low cost provider.

    Nevertheless, I grant you that all the ideas from Porter's Competitive Strategy are probably just rehashed formulations of basic economic theory. That is the beauty of academia, constantly reinventing the wheel using different materials.

  • http://blog.phanfare.com erlichson

    If the ingredients cost more then only someone who is charging more can afford to put those ingredients in. But being differentiated is about continually innovating. If you stop innovating, then you lose the differentiation.

    You either can defend yourself against competitors by arguing that the other product is not equivalent, a differentiated positioning, or you can defend yourself against competitors by always being cheaper and arguing that the products are equivalent enough, the argument of the low cost provider.

    Nevertheless, I grant you that all the ideas from Porter's Competitive Strategy are probably just rehashed formulations of basic economic theory. That is the beauty of academia, constantly reinventing the wheel using different materials.

  • tslow

    This whole polarization of the market is a good point as the middle class is squeezed towards low-end consumption, but did anyone tell Toyota? They have all ends covered.

    You compete on features and price. Eventually, most features (tail fins excepted) make it into a product. Differentiation is simply a measure of the immediate ROI. Long term (back to Toyota again) companies are successful when they constantly improve and lower prices on the performance curve.

    “Differentiated positioning?” We're #2, so we try harder (Avis). New and improved (Tide). It's just marketing.

    God academia doesn't rehash old theories using new language. That's just facile.

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