Chris Anderson, Wired Editor-in-Chief, has written a new book called Free! Why $0.00 is the Future of Business and will be giving it away for free.
Using the example of King Gillette, Anderson details the discovery of the disposable razor, giving it away free through banks ('save and shave' campaigns) and creating a new business model with profits coming from the sale of the blades.
Free works when it is funded by a recurring sale from another source, such as buy the game console cheap and spend big bucks on the games or buy get the cell phone free but pay for the monthly service.
Free also works when it is supported by ads and sponsorships. Almost all of Google's products are free because they are supported by advertisers. And Google has used that business model to great success through the dot com bust and a down economy.
But then compare that to the opposite end of the spectrum, premium products are commanding premium prices. Companies like Whole Foods are demanding, and getting, top dollar for the experience of being in the store.
Products are getting top dollar for the perception that they are made better and are healthier than the others in the category. Think about $5 Kashi cereal compared to Post at $2 and $6 organic milk compared to $3 store brand.
There are two paths in the woods. Which one will you choose?