What happens to your business model if limitations are removed or flexibility added ?

Listening to the now freely available audio version of Chris Andersons book “Free” I realized that this is not about whether you charge for your product or not, but has a far more fundamental implication for all owners of a business model.

As Chris has outlined in his book there are many different ways to make money based on “Free”. The challenge for any business however is to pick one and before that start thinking about the business model.

This reminds me of the time when the legislation of shop opening hours was changed in Germany from a very limited model (Monday through Friday, 7.00 to 18.30, Saturdays, 7.00 to 14.00) to an extended one (Monday to Saturday 6.00 to 20.00). With the previous hours it was possible to open the shop almost all the available time or at least there were the standard hours of 9.00 to 18.30. Now, suddenly shop owner were forced to make decisions. Should we open later so that it would be easier to close later? Does it make sense to open until the last possible time? When is actually the best time for our business? How to organize shifts in line with customer demand? Especially owners of small or mid-sized shops had to make decisions here and you could clearly see that they were not used to this kind of business (model) thinking.

Now with “Free” as an option or competitive threat, the same kind of considerations are suddenly necessary, where previously the model was simple: you sell a product and the customer pays for it.

Business models for Location-based services and advertising have been discussed for the last decade and the “standard” example is: someone walking in the city and getting messages, ads, promotions from shops, bars or restaurants or information about friends close by. Most likely in most cases this will be annoying, e.g. when being late for a date or in a hurry to catch a bus.

Now here comes along a new set of location-based social services like foursquare, gowalla, brightkite, etc. Instead of using any automatic location update mechanism they use “check-in” for the user to actively trigger the change of her location information, e.g. when entering a bar, restaurant or home. Additionally they have concepts for social networks, friends and bonus, loyalty programs for partners like bars, restaurants, shops.

The essential part of the service, however, is the “magic” moment of the “check-in” at which the user actively engages with the service. At this point she is ready to receive updates about friends as well as messages and information about interesting points at this location. For example leaving the plane in an unknown city I would be ready to get recommendations for cool restaurants or bar. This is the point where advertising could be added without being annoying and ignored. The same approach that makes ads so efficient in Google search.

So the key for the business model for location-based services is not knowing the location of the user, it is getting the user in a state where she is willing to accept messages.