Is “Free” the Future of Social Enterprise?

What do web 2.0 companies like Facebook and Twitter and base of the pyramid (BOP) enterprises have in common?

Yes, both are awesome. That’s correct, but not what I was getting at.

In both cases, companies are challenged to generate income and become profitable even when most of the value they bring to society must be provided to customers for free or next to free.

You have to stretch your mind a bit to see the parallel, but the similarity (which I had been noshing on for the last few weeks) became strikingly obvious to me as I read Chris Anderson’s new book, “Free: The Future of a Radical Price.”

Take Facebook and Twitter first. In both cases, the service they’re providing to users is offered at no cost. That is, no cost to you. But the fact of the matter is that someone needs to foot the bill for all of those servers. In Facebook’s case, it’s the advertisers (and, eventually, probably other people, depending on how Facebook ends up monetizing its business). With Twitter, it’s venture capitalists (since Twitter does not yet have an income stream) but will eventually need to be someone.

This approach to business is called “cross-subsidizing,” and it happens all around us all the time. Your radio… free. Who pays? Again, the advertisers. Cheap drinks and appetizers at happy hour… pretty darn close to free. Who pays? Everyone who sticks around until after 6:00pm to purchase the full-price versions. 

Social enterprises are also not strangers to cross-subsidies. Aravind Eye Care System is a great example. By charging based on a tiered pricing schedule, Aravind is able to offer both BOP and middle-income customers high quality service at prices that each can afford. Higher margins on services provided to higher income patients allow Aravind to recoup any loss on services provided to BOP customers.

Cross-subsidies indeed come in many forms, and Chris Anderson’s book will tell you all about them, but the bottom line is that the approach allows a business to be funded on the back of certain transactions while allowing others to be free or near free.

Sounds like Facebook. Sounds like Twitter. And sounds a lot like social enterprise.

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