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PRICING STRATEGY: GIVING YOUR PRODUCT/SERVICE FOR FREE

There are two broad categories for the use of free offers as a pricing strategy. The first one is to offer a "loss leader" product to attract the customer into your sales process hoping that the customer will continue his/her experience with further purchases. The loss leader can take different forms: an existing product/service from our current offer, a complimentary product/service (an app for example), a free trial, etc ... We have a section on loss leaders in this course, so refer to it for more information.

The other one is a business strategy and is very common in the field of apps, social media or other online tools, so it deserves to be explored. The irony here is: how can a company, which offers what it does for free, make money? This question is at the base of several concerns that analysts have regarding Facebook and Twitter, which are two social platforms that went public on the stock market.

Let’s expand on free as a pricing strategy and a business model.

When companies use free offers as a business model, they want to build a database. And it is this database that is the marketable asset for the company. If we take Facebook as an example, the use of their platform is free. This is not where the company makes its money. But Facebook sells access to its database to companies wanting to advertise and reach their market. It is largely thanks to the sale of advertising that Facebook can generate revenues. So the company’s business model becomes: develop a platform, make it known, gain followers and sell access to their database.

The risk is great because all the actions that must be taken from the start to generate income must be financed by the owners. Moreover, there is no guarantee of making this effort profitable in the future.

Is this not a wide spread strategy? The vast majority of social platforms or online applications use the loss leader model (they offer a free version, and subsequently you have to pay for more functions), or the free offer as a business model (do not charge anything for using the application and get income by selling advertising).

Influencers also use free offers as their business model: they offer free content for you to subscribe to their channel, and then sell the following they have gained to advertisers.

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

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

 

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

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