Peter Krišťák, 18.08.2015

If it does not hurt for free ...

…or what we can a farm teach us about smart free giving

During our pricing workshops, my colleague Václav says that an offer for free works like a “magic wand”. It is an offer that turns even the most rational thinking customers into unreasonable ones. Moreover, this all happens without them even noticing. American author and psychologist Dan Ariely described this phenomenon using neat experiments in his book Predictably Irrational.

WAIT… we will not make any profit if we start giving away our products and services for free! Common sense says (and it has been proven) that customers will not be loyal forever and will not prefer our products and services just because they received a gift once. How should we use this “magic wand”?

“Free” as a smarter discount

The most simple and secure use of the “offer for free” is increasing the quantity of a product or service instead of increasing its price. Research and real life experiments of Prof. Akshaya Raa have shown that customers will always prefer an offer that says “for free”. For example the offer “buy two, get one free” is in economic terms the same as “33% off”. But customers bought 73% more of the product in total sales per same period when it was presented as “getting for free”.

“Free” as a surprising offer

A more challenging use of the “offer for free” is to use it as a differentiator from your competitors’ offer. Meaning that we get rid of a price of some natural or for customer relevant part of a product that the market typically charges. The resulting effect gets stronger when we’re the first in the market with this move. And it doesn’t mean that we need to be the low cost leaders in the market. On the other side, this move can be easily copied by our competitors and can lead to a price war that cannot be reversed. Good examples of this strategy telecom companies who constantly come up with new tariffing approaches or e-shops that start delivering for “free”.

 “Free” as an acquisition strategy

The most challenging use of the “offer for free” is acquisition of new customers. In our digital age when huge companies like DropBox, LinkedIn, Skype and Gmail celebrate success “freemium” seems like the perfect strategy. The idea behind it is simple: we offer a part of our product for free to as many customers as possible. Customers will “taste” a part of our product and if they like it, they will buy the rest of it. Great idea, though in reality it doesn’t work that well.

A good discouraging example is a company called Chargify. It provides an online service to help businesses manage their recurring-revenue customers. In 2009 they launched a “freemium” offer that almost pushed them to bankruptcy. They were simply not able to convince their “freeriding” customers to use also their charged services as well. Later they decided to abandon “freemium” and charge all of their customers. "The decision to move away from freemium was the best business decision we ever made," said later Lance Walley, co-founder and chief executive officer of Chargify.

Analysis: Why “freemium” fails?

There are several reasons though most important are the following two: 1) It is not easy to correctly identify, which part of the product should be offered for free. If we offer too much, the customers will not need our charged services as well. If we offer too little, the customers will not “taste” our product enough and will not be able to start to like it. 2) People in general are economically thinking creatures, who simply will not pay for something they can get for free. They need a strong impulse for a purchase or have no other options than start paying.

Learning: To give away for “free” or not?

Of course there are few very well working “freemium” strategies out there. A great example with a genial pricing strategy is a mobile app called HayDay. I strongly recommend exploring this game to anyone enthusiastic about pricing as much as I am. You will find a whole bunch of traps with masterfully crafted psychology that threaten your credit card in the form of “in-app purchases”. I luckily managed to delete the game after playing it for a few hours and - not voluntary - losing some 14 EUR. It absolutely is not a coincidence that its creator - Finnish company called SuperCell - is one of the most successful mobile app creators of today. HayDay and one more successful game bring them around 2 million USD daily (!) and they still continue to grow quickly!

The verdict: Sure, give away for free but with care. If you need to provide a special offer to your customers, go rather for quantity increase than a percentage reduction. If there are several prices connected to your product or service, outrun your competitors by being the first one who will get rid of one of them. If you think about using “freemium” strategy to acquire new customers, look first for expert advice, or better go for the safer “free trial” or “money back guarantee” options.

Peter Krišťák

Author is partner and founder of Pricewise

He specialises in pricing and revenue management

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