Selling for Free

First off, my apologies for going MIA. I know it’s been a while since my last blog post but believe me when I say that I’ve been itching to get back to writing. Anyway, let me tell you about what is intriguing me these days – Companies giving away stuff for free! Now who does not like free stuff? Just the mere mention of the word FREE brings a twinkle and shine in people’s eyes. “Buy One Get One Free”, “Free beverage with your Meal”, “Free movie premier”, “Free first month of Subscription”, “Free software downloads”, and the list goes on and on. But like they say – There is no such thing as a free lunch.

Giving stuff away for free is nothing new but there has been a lot more of it going on lately. And it’s happening in more and more places and in a lot more creative ways. So what is driving this trend? How are the companies expecting the consumers to respond and how do companies expect to benefit from these campaigns? Finally, is this concept only good for specific industries and businesses or does everybody stand to benefit from giving free stuff? I will try to answer these questions in the context of two industries – Retail and High tech.

Let’s first look at the Retail industry. The recent quarterly earnings reports issued by the major retailers are a real good indicator of what is going on at the ground level. Sales have dropped, again, along with other typical retail industry metrics like same-store sales, sales per square feet, average customers per day, weekend, month, categories sales, etc. Earnings and savings are becoming ever more precious, day by day. Consumers are just not willing to pay what the retailers are asking for. And then there is the ever growing competition from online-only retailers and store-branded products. Even though the firms are continuing to rationalize their fixed assets and operations, they still need to make money.

You’ve tried putting up the SALE sign but that too is not working as much you would like it to. So the only way you are going to get the customer to show up at your door step is by hanging a carrot in front of them. By the way, this cannot be a weekend only or seasonal strategy! Retailers have to do this on an ongoing basis because that is what everybody else is doing. Even a single bad day or weekend of sub-par sales could dramatically change the top and bottom line quarterly outcomes, and you do not want to be the person responsible for the change in strategy. Of course, while you are on the free-giveaway binge, you want to do it in style and need to do it in a manner that does not dilute your brand(s). You need to carefully decide how much and what should be given away for free.

In return for the freebies, the companies are hoping that the consumers will start showing up at the stores more regularly, will “consume more”, and will spread the word. In essence, the retailers expect the consumers to reward them for their generosity. They also hope that the average purchases made at the stores are more than adequate to defray the cost of the freebees. Companies that have embraced this strategy have been reasonably successful. On the other hand, companies that have stayed away from giving free stuff have either struggled to survive or have already filed for bankruptcy.

Let’s now take a look at the dynamic and fast paced high-tech industry. Nobody can doubt or question the strides this sector has made over the last 5 years and one is only limited by their imagination when it comes to what this sector will do over the next 5 years. But when you look at sales figures, these guys are aren’t doing as bad as their retail friends. “Why?” you ask. Because of a couple of simple reasons. High-tech companies are on an innovation high where they just can’t launch products and services fast enough. On top of that, the relative advantage of their products over the old versions or competitor products is fairly obvious, unlike when comparing typical retail goods like clothes, shoes, fashion accessories, etc. Coming back to the freebees, there is a whole new movement going on in the high-tech sector. The Apples and Googles are giving away software for free, hoping that the lead adopters and innovators will play with it and create cool, new applications and solutions. They are banking on the effect of Network Externalities to raise the level of diffusion, adoption, and awareness of their products. As more developers and engineers download the new, free software, a bigger and more creative variety of applications will come to the market, which will in turn push more consumers to adopt the innovation. Another example that comes to mind is the Wikipedia, which relies on positive network effects to growing its scope and reach.

Bottom line is that giving away stuff for free does make a whole lot of good business sense, especially in the current macroeconomic conditions. All you need to do is be smart about it and find ways for the consumer to pay for the freebee with their time and effort, not their money. People these days have a very little of the latter but a lot of the former two resources.