September 15, 2010

Where applicable

Filed under: business,internet,marketing — Erik Dobberkau @ 08:41

Over the last few years it seems free has gained a lot of traction as a pricing model. Free software, free online services, free e-books — and of course the free samples of physical products you’re presented with at every turn. Free has turned the default strategy to gain market share. But is it?

In his (appropriately named) book “Free! The Power of a Radical Price” Chris Anderson points out that all economies gravitate towards abundance. We will always produce as much as we can and try to sell it at maximum profit. To maximise profit, we find cheaper components and manufacturing, giving a decrease of marginal cost, i.e. the cost difference to make one more piece, which ultimately drops to zero (if rounded down). To gain market share, products and services also become ever cheaper until they also are free at some point. This is obvious in the digital domain (a digital copy doesn’t produce any marginal cost), but it also happens in the physical world — you don’t pay extra for long-distance calls, for example.

But in the physical world, most free is calculated into the price of products that must be paid. This (cross-)subsidization can also be found in the digital area, when you have free software with limited functionality, and you have to pay for the full version. Or free personal editions, but enterprise versions must be paid. Anderson calls this versioning “Freemium”. Basic versions are free, premium editions must be paid.

To be concise, I will also add the third model of how free is being financed, which is by a third party. In practice this is sponsoring or advertising: Advertisers pay a TV station to get air time, and the viewer gets both the programme and the ads without paying extra. (By the way, charging viewers for HD delivery is no business model for the future. Handling files on hard drives is cheaper than handling video tapes.)

So how do you use this to gain market share? It depends on your market. Not all markets are the same. What you need is attention. But neither is all attention the same. Getting noticed is not enough. The crucial question is: How pressing is the problem that you service or product can solve? If it’s not, a free offer is of no use because it’s not relevant. The point is that free itself is not necessarily a conversion mechanism, no matter how valuable the product or service is. This is a common mistake among marketers who rely on free only, believing that once people see how good it is, they will buy it. In fact, it’s the other way round: The more people need something regardless of actual value, the more likely they buy it regardless of cost.

That said, free does not spare you the effort of promotion. It is merely step 2. Step 1 is to find people who need it. Then you can promote the free offer. And if you get no response, you should put it back and focus on something else. Don’t cancel it entirely, just put it at the bottom of your priority list — it might well be that you’re just too much ahead of your time. The wrong thing to do is to put more and more value and effort into something nobody wants (yet).

No Comments

No comments yet.

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.

Powered by WordPress