November 26, 2014

Free Economy? Nothing New Say Business Owners

Caveman - buy one get one freeChris Anderson, author of the Long Tail, wrote a thought-provoking article yesterday quantifying the dollars being made around the “free” economy. He pegs it at $300 Billion worldwide.

I’d say it’s much bigger than that.

In fact, in the stream of commerce, all free things are somehow related to money-making ventures.

You can’t separate them, because there are no products or services that are truly free.

No Such Thing as a Free Lunch

Somewhere along the line someone has to pay for everything. (For purposes of this article, we’ll exclude charity and services among family and friends — let’s talk strictly about business here.)

You may not see it at first glance, but look harder. Someone or some entity is footing the bill for that free product or service.

Small business owners know this at a fundamental level. We know that more money has to come in than goes out. You can’t run a business at a deficit for long.

Business Owners Intuitively Understand the Economics of Free

An event I attended yesterday illustrated this point in clear detail. It was a visioning workshop with 18 women business owners planning to grow their businesses to $1 million in annual revenues.

As each owner discussed her business model in turn, I was struck by how many of those business models included offering something for free. Among the free offerings: seminars, free trials, free samples, buy-one get one-free offers, podcasts, free installation, blogs, ebooks and newsletters.

Sometimes it wasn’t necessarily offering something for free, but offering it at lower than the cost to create it. There the offering was designed to generate leads or attract sales of a higher-margin item — a loss leader.

One business was advertiser-supported. It gets its business costs paid by one party in order to provide something at no cost to others. Also discussed several times were the freemium business models … of say, offering a service level for free along with premium paid levels.

And of course, implicit in many business models is that you pay for one thing, and get something else (technical support or installation or delivery) “for free.”

Each business owner  who mentioned a free offering, tended in the next breath to quantify where and how she would recoup the cost of providing that free product or service. In other words, each business owner intuitively understood: everything must be paid for. Somewhere, somehow, she as the business owner had to find the funds in the business to pay for that free offering. Whether the end customer had to pay for that precise item was a separate issue.

Even the workshop moderator, Norma Rist, essentially worked for free yesterday — but not really. Although everyone paid a small fee of $15 to attend, that only covered the cost of coffee, orange juice, bagels, cups, plastic knives, napkins and the like. Yes, the moderator gave away her time generously, yet, as a businesswoman certainly had to view it as an investment.

Perhaps it was an investment to attract paying clients to her coaching practice at some future point. Maybe it was to enhance her professional reputation through the word of mouth those business owners in attendance will be spreading. Or perhaps she did it simply to enhance the customer satisfaction of, and build goodwill with, several existing clients who attended.

Free is Not New, Not Innovative

“Free” in the stream of commerce is not new and, by itself, not innovative. The difference is that today we’re just more aware of and better at using “free” as a marketing approach.

Today we give business model concepts catchy names like “freemium” so that they are memorable. We discuss them in public venues like the Web. Twenty years ago such an idea would not have been spread so widely and openly.

We may even create more “free” offers. Why? Customers are more savvy and have come to expect certain things to be delivered “for free.”

We’re also more sophisticated today as a business culture. Business owners today tend to realize that the payback for giving something away for free may come indirectly (say, in developing a reputation as a sought-after expert, or building deep loyalty from customers). Or the payback may be deferred until some later date (say, 12 months from now when your “free social networking” company is acquired by a Fortune 1000 buyer).

You have only to look at the number of millionaires — ahem, billionaires — who got rich from providing services and products “for free.” The Google founders, the Skype founders, the Blogger.com founders, and countless Web 2.0 entrepreneurs come to mind. They didn’t get rich because charities gave them money or because the laws of economics changed. They got rich because they found a way to make money while giving something away for free, whether it’s by selling AdWords, or whether it it is by selling their company for millions of dollars, or some other way.

No, the basic concept of free is not new, just our awareness of it and the extent/ways to which we use it in business.

Don’t Confuse Marketing with Being in Business

Business owners intent on making their businesses viable and successful, know that at the end of the day more money has to come in than goes out. Entrepreneurs have known that since time immemorial — since the first entrepreneur caveman offered that “buy-one-woolly-mammoth-tusk-get one-free” offer and expected more sabre-tooth tiger pelts in return.

Tip: you can position an offering to the world as free to the end user. But that’s a matter of your choice of business model and marketing positioning.

Wise business owners never forget that there’s a price to be paid for every single thing a small business provides — if you want to stay in business and provide a living for yourself and your employees.

15 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

15 Reactions

  1. Offering free products or services is a great way to attract customers and clients. I am more likely to purchase from a website that offers free shipping or a free product with order. Does anyone add a shipping and handling fee, in addition to normal shipping fee, to conteract the freebies you offer? Do your customers notice the s&h fee and object?

  2. We must be noodling on the exact same thing, Anita. Today, my post was all about Yaro Stark’s Free Line funnel and the idea of understanding that free is really nothing more than customer fly-paper. It’s purpose is to give customers a sample or taste of what they COULD have – if they were interested enough.

    I love the free-line funnel concept because it forces you to outline all the things you can offer and then segment those things in a way that will give people something for free – while also charging for things that have real value.

    Where I struggle – as I’m sure many others do – is figuring out what is truly value-added for the customer to the point that they will pay for it. The most common critique I have from my blog is that there is too much “free” information. But it doesn’t seem that way for me.

    How do you determine what to give for free and what to put behimd the firewall for a fee?

  3. Yes, I agree with you on the fact that offering free is one of the popular marketing ideas and it is definitely not a new idea. No doubt, business owners focus on how to maximize their profit. However, it does not matter whether each and every free is being paid by someone or not. The main thing is that people still get interested to the products that are offered with something free.

  4. some people are making money not off customers but off investors.

    Most of the ‘free’ sites are done to get traffic, and then sold off to investors who think that they can convert all the traffic to profits or some other objectives.

    However, there are some products that are benefitting from the combined effort of many individuals who are offering the services for free and not seeking financial returns — efforts like open source software are able to compete with commercial software by appealing to the sense of community, or altruism, or harvesting the collective hate of people for a product or company to accomplish it.

  5. I agree that offering something free is still very appealing to the client. Even consultants may invoice the first six hours of work at $1200, then subtract $600 as a new client discount. The client is so happy to receive the unexpected discount, that they are ready to order $600 more work.

  6. There Ain’t No Such Thing As A Free Lunch” – Robert Heinlein.
    http://www.answers.com/topic/tanstaafl

  7. Free or sample products and services as stated above have been used for a long time. I have seen it best used to lessen an inital product or service purchase risk especially for new products or services or entering a new market.

    That said anything given away needs to costed and the extra volume needed has to be calculated to ensure margins are not eroded. This also include’s a person’s time in in the service business.

  8. While consumers are all winners where the “for free” business model obtains, the same cannot be said of all of those making the offer. Some, and I suspect it is a very small minority indeed, may make it big if they survive long enough and build enough traffic to attract large outside investors, or can generate substantial advertising revenue; many more however fall by the wayside. Overall it is an extremely risky business model.

  9. Very good article, Anita. In a sense, almost every business gives something for “free.” When a grocery store gives you free bags, when a business sends out free newsletters, when the gas station gives you a free oil check and washes your windshield (oops, showing my age on that one!)… And what about “free” TV in the days before cable? Everything is new, and nothing is new.

  10. I worked for Pearle Vision during that day (late 80’s) when we started the buy one pair of glasses get the second pair for FREE. Of course nothing was free as you had to pay for the first one, but we were one of the few companies that offered a reasonably large selection of nice looking frames and so many people did get a second pair free. We called it a loss-leader – something to get the people in the door. It was all based on our founder, Dr. Stanley Pearle, who began in retail optics in the day when glasses were still just a medical purchase. He offered a guarantee that provided FREE replacement of frames and lenses if they broke within the first year. That was unheard of and many scoffed at this radical practice. But Dr. Pearle understood the value of being in business for the long haul. He knew that by giving away something for free – you began a relationship with the customer that would hopefully last for the life of their eyes.

    Although the BOGO concept has been muddied with the reality of “add-ons” to the free pair that aren’t so free – in the examples mentioned in your article, Anita, I believe many of those offering FREE stuff do so – not just in the hopes of reaping financial benefits in the short term, but in the belief that by offering VALUE FOR FREE upfront – you begin to foster a life long relationship that will eventually turn into cash.

    Or am I just Pollyanna?

  11. Anita,
    I just realized that many of my comments at the new FREE Economy book and post were already covered better here at your original post. Oops!
    http://smallbiztrends.com/2009/07/the-free-economy-debate-battle-of-the-gurus.html
    TJ

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