What Does “Free” Mean For Retailer Pricing & Profits In This Digital Era?

"There are many economies -- ones of status, time, information and more -- and the trick is to get people to trade their money for one of them," says Chris Anderson, best-selling author of Free: The Future of a Radical Price (2009). The book examines the advantages of a strategy where products and services are initially given to customers for free, and how businesses can meet these challenges to profit more in the long run. I'd like to add a note about the importance of competitor price monitoring, so retailers always know where they stand in the competitive market and can identify patterns in the market and at competitors' for viewing trends over time.   

In this video -- a must-see for anyone who has anything to do with pricing -- presented in 2010 at the RSA (Royal Society for the encouragement of Arts, Manufactures and Commerce), Anderson outlines a dramatic new change in the way he sees our economy functioning… how different companies use the free-to-premium, or freemium models, to not only make money, but often keep customers at a higher rate than fully-paid services: 

 The main issues addressed by Anderson include, what are the underlying economics of "free" -- and how do you get people to pay for things? We are now in an economy (digital) where marginal costs are zero, so should retailers compete on volume? Should retailers compete on price?

And what are some of the different aspects of "Free"?

Free. Freemium. Sampling, i.e. give away the free, simple version of your software sample, and when it's time to upgrade, the customer will have to pay; and Piracy, which is kind of a forced sampling, i.e. If people are going to use pirated software, Microsoft says let it be our software, so when people do buy, they'll be accustomed to this system and will want to continue using it.

Anderson says you have to find out what business you're really in, e.g. are you selling software or selling service, i.e. diminishing risk of problems in someone's work? Microsoft has figured out that its space is NOT the software. Rather, people are buying peace of mind. They're paying for risk-reduction business, time-saving, not software business. That's how these providers compete with free.

What does free mean for newspapers? Newspapers have learned (or are quickly learning) to give away the front page and exclusive information (free) to get the audience; to get the traffic, and then the newspaper can charge for the very specific information that readers want. This is Anderson's concept of "Give away the head, the popular part, and sell the tail" described in his book, The Long Tail: Why the Future of Business Is Selling Less of More. The book argues that products in low demand or that have a low sales volume can collectively build a better market share than its rivals).

Takeaway Nuggets:

* Figure out what you're selling (time, better quality, less risk, benefit, status).

*The goal is to have the user evolve into a paying customer.

* Figure out what your freemium position is and how much each part is worth.  

 * Cast the broadest possible net with FREE, then reel in the customers that will pay for what interests them most.

* The narrower the niche, the more you can monetize it.

* Upsell customers on things they value. They're your evangelists, they'll tell others.


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Gilon Miller, CMO

About Author

Gilon is a seasoned marketing, sales and business development executive with over 15 years of experience in the software and Internet business. He is the Founder and CEO of GuruShots. Previously, Gilon was the CMO of Upstream Commerce, VP of Marketing at iMDsoft and Director of Global Marketing at SAP. He earned an MBA at the MIT Sloan School of Management and a BS in Electrical Engineering from Tufts University.
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