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PRICING STRATEGY: GIVING YOUR PRODUCT/SERVICE FOR FREE

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There are two main ways to use “free” as a pricing strategy. The first is to offer a loss leader to attract potential customers with the objective that they will continue their experience with purchases. The loss leader can take different forms: one of your products/services, a complementary product/service (an application for example), a trial, etc. We have an article on loss leader products, see it here. But we will give here the basic information.

The strategy of loss leaders is to offer your potential customers something free (or significantly discounted to be very attractive) to convert them into customers.

Often, a strategy is best explained using examples. One of the industries that use this strategy is grocers. Each week, a flyer gives the specials at your favorite supermarket. One week it will be carrots, another week milk, etc. The idea is to offer a sufficiently attractive discount to attract consumers to the store for their weekly grocery shopping. Amongst the purchases, of course, there will be loss leaders, but the supermarket hopes the consumers complete their purchases with the other necessary products at a regular price. So, in our case, the carrots will have served as … carrots, enticing the consumer into the transformation process.

Another example? The personal printer industry. In terms of value, the printer is sold at a very low price (Often below $200 for several name-branded models). The idea is that once a customer buys a printer of a certain model, the company will then have a "captive" audience for the refills, which are sold for $20 and up, depending on the model and the brand. It is at least 10% of the value of the printer only in a cartridge. Over the lifetime of the printer, several cartridges will be purchased this way. Making the sale of the printer profitable.

In the training industry, we often see the first module of a course being offered for free. This will interest people, and hopefully, get them to continue their training with the following modules which are sold.

So, this is the first way that “free” (or discounted) can be used as a marketing strategy to attract potential customers and try to convert them into customers.

The other is at the level of a business strategy, and it can be found in the fields of online tools, social media, training, information, or influencers. Thus, it deserves to be explored.

But the question is, how can a company offering what it does for free, make money? This was the concern of several analysts before Facebook and Twitter, among others, went public. So, we will talk about free as a pricing strategy and business model.

When companies use free as a business model, they generally want to build a database of users to monetize later. And the number is important here. We are not talking about a few thousand, but tens or hundreds of thousands or even millions of users for this database to have significant value. If we take Facebook as an example, the use of their platform is free for users. This is not where the company makes its money. But it comes from advertising money spent by companies and professionals on its platform. It is the main source of income for Facebook.

So here is the business model: develop a platform, make it known, gain a following, and monetize these followers with advertising. The risk is great because most of the actions taken before starting to generate income will be financed by the owners. Moreover, nothing guarantees that the strategy will be successful.

Is this strategy only for big companies with a stock market aspiration? No. Many options are available to make “free” possible and profitable as a business model. Here are a few.

Advertising revenue

Possibly, the most popular platform for this type of revenue is YouTube. You are producing content, you created a channel on YouTube, and managed to get the minimum number of subscribers required to start advertising? Then, you can earn income through the placement of ads in your videos. According to many content creators, this type of income is only a small portion of what they make, but it is part of it. Some influencers fall into this business model: they offer free content for you to subscribe to their channel or podcast, and then monetize this traffic by renting the access to their followers to advertisers.

Also, there are opportunities to monetize your traffic through programs like Google's "AdSense". This program allows you to display advertisements on your website if you have reached a certain traffic volume. You then become a Google ad "partner”.

Not all advertising income is from ads. There are other options:

- Sponsorships: a product/service could be the sponsor of your channel in exchange for a sum of money. Generally, the host of the channel will make this announcement.

- Product placement: having a product that is revealed during a video. This visibility can be sold based on the volume of subscribers to your channel.

- Trials: you can try out a product/service with your subscribers. And charge for this service.

- All other options.

Donation platforms

Some platforms facilitate donations to support creators. Perhaps the best known is Patreon, but it is not the only one. I use PayPal, and this platform offers the possibility of having a “donate” button on your website. The idea here is to offer value-added content to your subscribers, and in exchange, they give you voluntary monthly amounts in the form of a “donation”. The amount can be symbolic, like $5, $10, etc. But if you have a good number of subscribers, these sums can add up.

The subscription model

Not “free” as a business model strictly speaking. This option could be included in the use of “loss leaders”. On the one hand, you offer free content. Then you offer an even richer experience in your “subscription” section. This is the model that several online newspapers use. Free content, then, when you have reached a certain number of articles, you must pay or register. Some tools allow a subscription system. Platforms like Locals can be used.

Is it common to find these types of pricing strategies? The vast majority of social media platforms, apps, some video game companies, some media outlets, influencers, and some training companies use the loss leader model (a free version, and then you have to pay for more functions) or “free” as a business model (do not charge anything but make your investment profitable by selling advertising).

It is therefore a strategy that is much more common than we think.

If you have questions or comments, do not hesitate to contact me

 

Stéphane Elmaleh-Riel, B.Ed., MBA
Marketing consultant