Here is a paradox. The most popular app in the Apple store, Candy Crush Saga, is free. The game's maker, London-based King, hasn't disclosed revenue numbers, but its holding company, Midasplayer International Holding Co., is widely reported to be planning an IPO soon—suggesting it thinks it can make money, or at least convince investors that it can.
But if free can be so lucrative, why has the newspaper industry, large parts of which have been giving away content for years, been ravaged?
Likewise, the music industry, which didn't so much give its content away free as have it stolen, saw revenues more than halve in the decade from 1999, from $14.6 billion to just $6.3 billion, according to a Forrester Research Inc. report.
Speaking at The Wall Street Journal's recent Tech Cafe, former investment banker and commentator Nicholas Lovell, author of the recently published book "The Curve," said the answer lies in two things: getting away from the idea that giving stuff away is inherently bad, and understanding how digital goods can be worth different amounts to different people and maximizing the opportunity for people to give you their money.
Mr. Lovell's book shows a hockey-stick curve on a graph, which shows how most of a company's customers are willing to pay them nothing, while a tiny number are prepared to pay a lot.
Companies should use this curve to help them do three things, Mr. Lovell writes.
"1) Find our audience; 2) use all the tools at your disposal to figure out what is important to them; 3) let them spend anything from a little to lots (and I do mean lots) of money on things they truly value."
Giving stuff away builds your audience; finding out who is using it, and how, is the way you figure out what is important to them. It is that third stage, what Mr. Lovell calls "the superfan" strategy, that lies at the heart of making money out of free goods. In the games industry, for example, superfans have "in-app purchases," things you can buy to make your progression through a game faster.
According to a King representative, "all our games are designed so that they can be played genuinely free. However, we generate revenue by charging a small amount to those who wish to pay for extra lives or for other 'boosters' that allow them to progress more quickly through the game. At scale—and we have more than 100 million daily players—all those 69ps and 99 cents add up."
Other industries will have different superfan strategies. The trick is to work out what they are.
Mr. Lovell pointed to King Arthur, a major U.S. brand of flour. The company doesn't give flour away, but it does have a free cooking helpline. "Then for superfans they have an e-commerce site which sells higher-end products, kitchen equipment, etc. And they have this headquarters in Maine where people turn up to do advanced culinary courses."
According to Per Roman of Stockholm-based investment bank GP Bullhound AB, what is behind Mr. Lovell's book is more evidence of the increasing importance of marketing in the enterprise, triggered by the growth of social media and the consequent need for organizations to maintain a continuing relationship with their customers.
"When we look at the enterprise today it is all about interaction with customers. Interaction leads to trust, and trust leads to premium values," he said.
Nor is Mr. Roman the only one to have spotted this sea-change. In an earlier interview Sohaib Abbasi, CEO of Informatica Corp., told The Wall Street Journal that "the purpose of computing was all about how do I optimize transactions—in [human resources], in finance, in sales, etc. Now it is all about how do I facilitate interactions in order for me to optimize brand management. This is a significant change, from business productivity to brand management.
"In the world of interactions you are trying to anticipate and influence things that will lead to an eventual transaction," he said.
Mr. Roman wasn't completely taken on the idea that the Curve represented a panacea. It can be a profitable model if applied with skill, but it may not be the best for creating long-term customer loyalty he said.
"Take Minecraft," he said, talking about the game produced by Stockholm-based Mojang AB, which has sold almost 12.4 million copies. It defies Mr. Lovell's thesis. Users pay a single one-time fee (there is no free strategy and no in-app purchases).
"In the short run they [Mojang] have left a lot of value on the table," he said. But he said the company was more concerned with giving its users a great experience than extracting the maximum revenue from its players, a strategy that would help win consumer loyalty and dramatically reduce the cost of acquiring players for any forthcoming games they may choose to develop.
Mojang didn't respond to a request for comment.
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