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What is the gift exchange economy?

Gift Exchange Economy

Gift exchange is defined as a mode of exchange between companies and consumers where valuables are not sold but rather given away without an explicit agreement for immediate or future rewards. Unlike market exchange, this form of doing business stands out for the following reasons.

First of all, the rules on property rights in these types of exchanges are usually tied to cultural traditions. They are perceived as a common courtesy or even a requirement if someone is aiming to improve their social standing in a community. Also, gift exchanges establish a social relationship between parties, which lasts long after the trade is finalised. Members of this system stay in touch with each other, unlike in the market economy where the contact between parties is often limited to a particular transaction or series of transactions. Gift economies therefore not only serve to create profit for the founders but also to build communities by giving them something as a gift, which will help them to deal with personal or practical issues in their lives.

This economic model, which some in the western world see as quite revolutionary, has been present for quite a while in other societies around the world where the economy was tied to completely different principles. One such instance is known as the Kula ring. It is a ceremonial exchange system conducted in the Milne Bay Province of Papua New Guinea. This gift exchange system involves inter-island visits between trading partners who exchange highly valued shell ornaments. The valuables that are part of this exchange system include red shell-disc necklaces and white shell armbands. As for property rights, the items belonged to everyone within the community of traders. The items, however, never remain in the hands of the recipients for long; rather, they must be passed on to other partners within a certain amount of time, thus constantly circling around the ring. The purpose of the exchange of items is enhancing one’s social status and prestige. Kula valuables are ranked according to value and age, as are the relationships that are created through their exchange. Participants will often strive to obtain particularly valuable, and renowned Kula objects whose owner’s fame will spread quickly through the archipelago.

The idea of giving things away for free has also been proven effective in market economies. In some cases, it helped companies to grow from a small business stage to being major players in the market. In this article, we have listed several companies which successfully applied one of the gift exchange models.

Direct cross-subsidy

In this business model, the funding for a product comes from the profit generated by another product. The aim is to attract customers to a newly introduced offering by giving them a bargain price. At the same time, thanks to the revenue from sales of another product, sellers can keep the costs low.

Apple – Give away free hardware repairs and sell products

Apple provides its clients with in-store free tech support also known as the “Genius bar”. If someone needs a hardware repair they can make a reservation at the Genius Bar inside the store and the representatives or “geniuses”, all with an extensive knowledge of Apple products, will provide a client with a face-to-face consultation to solve their hardware problems. Often, their issue ends up being resolved on the spot.

Freetalktime – Give away free mobile recharge for signing up

The Indian telecoms company does not reward users with loyalty points or cash for signing up with them. Instead, after completing the registration, they provide a user with free calling minutes within 24hrs of completing the registration.

Comodo – Allow free product use for one month

This anti-virus software provider uses one of the most common forms of the direct subsidy approach. The monthly trial enables customers to try out the Pro and Advanced versions free of charge. The company is giving away the full functionality of these programs.

Flightcar – Give away free car parking and sell car hire

The members of the Flightcar community are air-travel passengers. The company gives them the option to park their car for free at their airport parking lots, and in return the company get’s to rent out the car to someone else within the Flightcar community. When the car owner returns to the airport, the car is given back to them with the profit (if their vehicle was rented while they were gone).

Ad-supported (third party subsidises second party)

In an advertising-supported revenue model, the emphasis is put on sales from advertising being a major source of revenue, which enables a company to provide another product free of charge. This business model used to be common mainly for the traditional broadcast and print media industries, as well as for the online media industry. Nowadays, however, it is also being applied in many other industries.

Google AdWords – Advertising revenue subsidises free apps

Google provides self-service to its advertising clientele. Instead of employing sales and account managers, who would recruit a chosen group of customers and sell advertising space, the users can simply take their pick. Thus the AdWords works on the classic economic model of a marketplace where the selling price is determined from fluctuating values of supply and demand. So when the demand for a specific keyword rises, the price of that word goes up as well. Conversely, when the demand decreases, the price falls. Aside from the keywords, another key part of the offering is the location of the adverts. The banner locations, which tend to drive the most traffic, require marketers to bid higher. Thanks to the advertising sales, Google can give away a great variety of applications to their users for free. Some of them which are particularly useful for the advertising clients include Google Analytics or the Google AdWords Tool, which enable the website owners to choose appropriate advertising content.

SoundCloud – Advertising enables users to free account use

This German startup, which has turned into one of the leaders of online streaming, started off as a platform for musicians, indie labels and their followings. Their on-demand music streaming service includes a free tier and subscription model. The new “Premier” tier is an example of an ad-supported free service which, in addition to promoting their work, enables them to earn money. Using this program, the music creators agree to the advertisement being displayed when somebody streams their songs. In return, SoundCloud shares the revenue with the participating authors.

Facebook – Advertising enables connecting with individuals and groups free of charge

Undoubtedly the best known social network, Facebook enables users to create free personal accounts and connect to other friends who are part of the network. Other functions that are offered for free include micro-blogging, chat, archive, interest list, file transfer, etc. Facebook ads are shown to people based on their location, age or interests. Most online advertising relies on “cookies” which track the activity of users to decide which adverts to show on different sites. Facebook Adverts are displayed alongside stories from friends, family, and other personal information that matters to members. By clicking on the advert, customers can also download apps, claim a discount voucher to bring into the shop, add an item to a shopping basket or perform other actions on a company’s main website.

Locanto – Advertising enables free posting of classified ads

This classified ads platform enables users to post free ads in a variety of categories related to a local interest (e.g., jobs, classes, events, jobs, etc., ). An interesting fact about this business model is that both the private ads and the commercial ads are free. Commercial traders though, are obliged to trade under their country’s commercial law. The revenue comes from allowing users to feature their Google Adwords advertising campaign on the site.

Freemium (Core product is given for free while premium functions are paid)

Combining the words ‘free’ and ‘premium’, in this business model a company gives access to the core product for free, to a large group of customers, and offers premium (paid) products to a smaller portion of this user base.

Spotify – Users can listen to songs, podcasts and videos for free

Spotify is a music streaming, podcast and video service. It enables users to select tracks to play by artist, album, genre, playlist, or record label. The free features allow the user to listen to music while connected to Spotify through the internet, while the premium version allows playback even when not connected to the internet. The company gives away a free trial of the Premium service so users can make a comparison between the two and possibly become more motivated to opt for a paid version.

Evernote – Project management system with full use of the program for free

This virtual workspace app, which can be used on mobile, tablet and PC platforms, enables users to organise and keep track of their project work. The program allows users to write and collect ideas in notes and notebooks, which can be shared among several users. Using Evernote, project team members can collaborate on projects in real-time without having to switch to various platforms as Evernote synchronises all of them. Unsurprisingly, the app has gained a loyal network of users, especially self-employed individuals with a busy lifestyle. The free product enables users to clip information found online, share files, take part in discussions and synchronise content between phones and PCs. The Plus and Premium options help users who are already familiar with the basic functionalities to modify notes further, save various types of files into the notebook, work offline and have more control over the shared information.

Skype – Free calls within the network

This calling system enables audio and video calls and the ability to call landline numbers worldwide. The free part of service includes the calls to other users within the Skype network. Calls that combine traditional landline telephones and mobile phones (SkypeOut) are charged at low rates, undercutting telecom charges. Additional features include instant messaging, file transfer, video conferencing and PSTN termination.

HighWire – Free scientific articles for researchers

This ePublishing platform allows researchers to have free access to full-text articles, titles and back-issues. Some of the articles are only offered for a limited time, though. The paying parties are publishers and libraries. The online publishing clients, which include independent scholarly publishers, societies, associations and university presses, get self-service administration tools, a publishing community and expert service & support from this content ingestion system. Libraries can benefit from functionalities such as setting up alerts relevant to your research and receiving notifications when authors of interest are published or mentioned.

Gift economy (people give away things for non-monetary rewards)

This particular business model is based on altruistic principles. In other words, the aim of giving something away for free is supposed to help build a relationship and not merely make a transaction for profit. The giving party receives indirect benefits in the form of respect in the community that can help them in times of need. It can also create an ‘in-debt’ feeling in the minds of the users who then feel obliged to support it for moral reasons.

Wikipedia – Free knowledge sharing by everyone, for everyone

Wikipedia is a free, open content online encyclopaedia created entirely from user-generated content. “Wiki”, is a server program that enables anyone to edit website content through their Web browser. The contributors, who are members of its community, are known as ‘Wikipedians’. Anyone registered on the site can create a file about a variety of subjects and upload the information.

In addition to the encyclopaedia, the Wikipedia Foundation also runs the following free services:
Wiktionary, a dictionary and thesaurus
Wikibooks, a collection of free texts and books
Wikiquote, a collection of quotations
Wikisource, a collection of free source documents
Wikiversity, a collection of free learning materials
Wikispecies, a directory of species
Meta-Wiki, which coordinates all the other projects

Seats2meet – Free use of office space

The idea came when the owners of meeting catering company – Meeting Masters – observed that they always had space for some extra people. They decided to offer it for free and even added free coffee and lunch because the kitchen would provide for 150 users anyway. The little idea grew into a large-scale coworking project, and the network now includes 1737 free workspaces and 301 meeting spaces in 6 countries. This project is an example of the “potlatch” principle. A potlatch is a ceremonial feast, which is a form of exchange designed to create a positive relationship between two parties and was an integral part of many archaic economies. The word comes from a native North American dialect term meaning “to give away” or “a gift.”

Linux – Free customization of purchased software

This operating system is one of the products of the open source movement. Its authors freed their product from legally enforced copyrights because in their view it hampered innovation. The Linux software is, therefore, a product with no restrictions for alterations. The users are free to customise and innovate it as per their preferences once they buy the product. Also, the company is unrestricting the further distribution by secondary parties and are not claiming any of the secondary profit.

Quora – Free advice and knowledge share

Questions you ask on Quora are distributed to a vast network of people, from experts and authorities to regular folks with relevant knowledge. The answers are then archived and organised so they can be accessed by anyone else with the same question. Quora is a safe space online for people to read, write, and share.

References:

  1. http://www.slideshare.net/MartinWesthead/direct-cross-subsidies
  2. http://smallbusiness.chron.com/advertisingsupported-revenue-model-mean-63332.html
  3. http://culttt.com/2013/11/13/analysing-adwords-business-model/
  4. http://www.freemium.org/what-is-freemium-2/
  5. http://www.hongkiat.com/blog/free-business-model/
  6. http://internetbusinessmodels.org/wikipediabusinessmodel/

Other references:

http://micro-startups.com/50-business-models-built-on-free-download-the-audio-book-free/
http://www.ucl.ac.uk/~uctpshu/falk.pdf – experiments with gift exchange
https://en.wikipedia.org/wiki/Gift_economy
https://en.wikipedia.org/wiki/Kula_ring – example of society that used GE
https://www.facebook.com/business/products/ads
http://www.ecommerce-digest.com/skype-case-study.html
http://whatis.techtarget.com/definition/Wikipedia
http://highwire.stanford.edu/publishers/

Malinowski, B. (1922). Argonauts of the Western Pacific: An account of native enterprise and adventure in the Archipelagoes of Melanesian New Guinea. London: Routledge and Kegan Paul.