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How To Profit From Data From Free Software
Ever wondered why Instagram is free?
Thomas Varekamp
October 28, 2022
“if you don’t pay for the product, you are the product.”
Instagram generated an estimated $47.6 billion in revenue in 2021 while being a free product.
How is that possible?
Businesses are generating a lot of profits from giving away free software. For many, the way they earn money is not clear.
There are two options:
They sell the data for $
They use data for advertisements that sell you products or services
There are two different business models for this:
Business model 1: Completely free
These kinds of products are completely free. Data collection fuels the primary business model for free software and web services. More on that later.
Business model 2: Free, but with extra paid features
This is also called freemium, which means that there are different tiers in the product. For example, Spotify has a free version where you can listen to music with ads, and a paid premium version which does not have ads.
The main idea is to give consumers a preview of the product so they can up-sell the premium version later.
Generally, a free product will come with ads to earn money and at the same time collects data on its users.
Why free products?
Businesses have been offering free products and services for decades. It is not something new. Yet, data collection and analytics data have exploded over the past years.
These free products gather data on the consumer and use it to create more profits for the company.
The benefit of a free product is that it allows for the smooth spreading of a product to a wide range of consumers. This results in more data generated.
What data is collected and where does it come from?
Almost everything that is trackable is being collected. For example, customer behavior on the app, the location, demographics, and more.
There are two ways to profit from this:
1. Selling advertising space
Many companies generate a profit with free products through advertising.
Examples are Google, Facebook and Twitter. On each of these the users are a potential buyer for other businesses that offer goods or services. The data that they generate is very valuable for those businesses.
Take instagram for example.
Everything you like on Instagram gets saved.
“A picture says more than a thousand words”.
Based on your likes, comments and who you followed etc. Instagram can create detailed customer profiles of behaviors.
Based on your behavior on the app, Instagram knows what you like. They use this information to show you advertisements that might be interesting to you. Other companies that want to sell products and services pay Instagram for this advertisement space.
2. Selling collected data
Some internet businesses are able to generate revenue through the collection of data and selling it to other companies.
Data is gathered and stored on the users that make use of free products. For example, this data can be used to help e-commerce companies improve their marketing campaigns. Combining this information from different sources creates a detailed picture of the customer. I call this data "other data" for now.
How can you leverage other data?
Other data refers to data collected from non-traditional sources, such as web browsing activity and social media posts.
Businesses exist that collect this data and resell it. Especially in the investment industry, this data is used widely to predict market movements and gain large profits. By 2022, investors estimate to spend more than $3B+ a year on buying other data.
One example is particularly interesting. Avast is a popular anti-virus program that collected data on its users. They started a subsidiary and sold this data to other companies. Users had to opt-in to the data collection (this means it was voluntary), which resulted in a 180M+ business. Later they decided to shut this down due to the controversy of collecting and reselling data.
Companies usually use data to improve the customer experience. This has mutual benefits for both the business and the customer. Businesses can create better products, while customers can use a good product.
It is important to remember that the use of consumer data is as old as the grocery store loyalty card. It is not a brand new idea of the internet. The main difference is that in an online world there are much more touch-points to come in contact with ads, as opposed to once a week at a physical grocery store.
Data collection in the metaverse
Currently, tracking is limited to our online behavior. If we go for a walk outside without any digital product, no data is collected.
However, with the rise of full digital worlds, everything can be tracked. This will create other avenues of data collection that can be useful for businesses. This will be an interesting development.
So what can you do with this in your business?
In the future, data will be the most valuable asset in the world. My advice would be to prepare for this.
Tips:
Look for data in your company that might be of interest for other companies. Identifying this data can lead to additional revenue streams. Just be sure to not sell personal information.
If you do not have the data for your business challenges, look outside of your company and see if a different party offers it. Buying data and using it for your operations can be a great competitive advantage.
If you enjoyed it, please forward this email to friends who want to know more about data in business.
See you next week!
Thomas