We live in an age where pretty much anything you want can be gotten for Free. It’s possible to get free websites, free accounting software, free graphic design software, free newspapers, free legal advice, free Wifi etc, the list goes on and on. The thing is, how can you continue to be successful when your competitor or a new market entrant decides to offer what you do for free? This post is all about Competing with Free.
The first thing to really understand is that there is no such thing as FREE, the majority of times the item being offered for free is simply a benefit from cross subsidy, i.e. the costs of providing the free service is being picked up somewhere else. For example, you may get a free printer when you buy a new PC, the cost of the printer is being subsidised through the margin on the PC. The cost of the Free legal advice is being covered through the membership subscription you bought. This is what is known as a bundling strategy, i.e. you bundle up products and services in such a way that one or more of them can be advertised for free.
Another example of FREE not really being free is on the internet for example with both google and facebook. So whilst your searches on google are free and your use of social media sites such as facebook appear to be free the fact is that they are using a 3rd party pay strategy. You get to use their services for FREE, however, you have to give them the ability to sell you as a consumer to their advertisers. With social media sites such as Facebook your personal data is a massive asset to them, they know not just your demographics (i.e your age and location etc) but your psychographics (i.e. your likes and dislikes) so much so that Facebook stock price has risen from an initial offering of $38 to over $170 in the 5 years since the IPO. Your data is something they are willing to pay for through the provision of something that you see as FREE.
So how do you compete with FREE. Free can help you or hurt you, whatever you do you must have a strategy to manage it and this comes down to your uniqueness. David Bryce writing in the Harvard Business Review a few years ago proposed the following Matrix which can help with putting Free into context.
Assessing the Threat
Competing with Free Threat Matrix
The seriousness of the threat posed by a new entrant offering a FREE product hinges on three factors:
- the entrant’s ability to cover its costs quickly enough
- the rate at which the number of users of the free offering is growing
- and the speed with which your paying customers are defecting.
So if the Free offering is gaining a market share of less than 5% a year and the market growth is low (i.e less than 40% a year) then rather than dashing off your own competing Free offering then you should just monitor the situation, on the other hand if the defection rate to the Free offering is more than 5% a year and the market growth rate is high, i.e. more than 40% then there is an existential threat to the business if the business model is not changed.
Four Tried-and-Tested Strategies for competing with Free.
The first thing to think about when competing with Free is your product or service and the level of differentiation, if you’re unique then you don’t really have a competitor with Free. A well differentiated product will always beat Free.
1. Up-sell
Introduce a free basic offering to gain widespread use and then charge for a premium version.
Requirements
- A free product that appeals to a very large user base so that even a low conversion rate of users to paying customers will generate substantial revenues
or
- A high percentage of users willing to pay for the premium version
Examples
Virtually every iPhone / Android app uses this strategy. The tactic is to offer a free version of the product to consumers and a premium version to the business market, as Adobe does with its Reader software. Skype, which offers free computer-to-computer calls and charges for add-ons, succeeds with up-selling because it has more than 400 million users, many of whom become paying customers. Flickr, the free photo-sharing site, has a much smaller user base and a low conversion rate. That explains why eBay paid $2.6 billion for Skype, and Yahoo paid less than $30 million for Flickr.
2. Cross-sell
Sell other products that are not directly tied to the free product.
Requirements
- A broad product line—preferably one that complements the free product—
or
- The ability through partnerships to sell a broad line of products to users of the free product
Examples
Ryanair offers roughly 25% of its airline seats free but cross-sells a variety of add-on services, such as seat reservations and priority boarding. Once on the plane, the customer is sold food, scratch-card games, perfume, digital cameras, MP3 players, and other products. (Ryanair employs a second strategy: charging third parties for in-flight advertisements.) Specialty pharmaceuticals company Galderma rebates out-of-pocket costs for Epiduo, a prescription acne gel, and cross-sells other skin care products.
3. Charge third parties
Provide a free product to users and then charge a third party for access to them.
Requirements
- A free offering that attracts either many users who can be segmented for advertisers or a targeted group that makes up a customer segment
and
- Third parties willing to pay to reach these users
Examples
Google and most social media sites such as facebook, twitter, linkedin etc, which charge companies to advertise to its millions of users. It’s worth noting that this strategy doesn’t always work. Finnish telecommunications company Blyk, which offered 200 free phone minutes a month to 16-to-24-year-olds who fill out a survey and agree to receive ads. Blyk then sold access to and information about them. Blyk folded in 2009 as it couldn’t generate enough advertisers to cover its cost. Generating users does not guarantee success.
4. Bundle
Offer a free product or service with a paid offering.
Requirements
- Products or services that can be bundled with the free offering
or
- A free product that needs regular maintenance or a complementary offering
Examples
Here the “free” effect is largely psychological—the customer must buy the bundle to get the free product. Think of Hewlett-Packard, which often gives away a printer with the purchase of a computer.
Banks are increasingly bundling free services, such as accounts and free accounting software, with paid services, such as investment accounts that require minimum balances. But the bundled product doesn’t have to be related to the free one. Banks also give away iPods, iPads, and other products to customers opening accounts.
Over the next few years many businesses will have to learn or adapt to compete with Free, the newspaper industry is currently undergoing a massive transformation as a result of Free competitors (i.e The Metro) and Free offerings of news on the internet. They’ve tried paywalls and that hasn’t worked very well, the next step may well see some of our more famous titles disappear altogether.
I hope that you’ve found this article interesting and useful If you want to know more about how I can help you grow you business, or just want a chat with me, why not come along to the business success academy in September. (Click Here) to find out more.
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