September 12, 2009
There`s no such thing as a free lunch
It`s often said ``There`s no such thing as a free lunch.` Or is there?
To make FREE work one has to apply a strategy so to answer this question we are going to look at various strategies for FREE.
Nothing is for free including time and nothing comes from nothing, free works if there is an underlying strategy behind the business model.
So with that in mind how do companies generate revenue from FREE, here are eight example strategies of FREE?
Strategy 1: FREE The Competitor Reverse Buyout Game
In this strategy a business will build a service delivery model that will offer such low prices (FREE is pretty low) that it inevitably ``steals`` customers from the existing market. As the client base expands, the business incrementally increases in value potential. Eventually the competition will look to acquire the business from the existing shareholders and pay a premium for the unrealised revenue channel.
Strategy 2: FREE Incremental Purchase Program Game
Free for the first unit of consumption and incrementally as consumers buy more they pay for the marginal units consumed, rather than receiving discounts for the more they buy which is the traditional sales / pricing model. In the 1st degree price discrimination curve (depending on the operating leverage of the firm), it is possible to charge only for marginal consumption especially if the operating costs can be deferred or marginal consumption will lift the total units sold high enough to tip or bend the price discrimination curve upwards. Instead of sell one get one free, it`s give one away and sell two because the first tasted so good.
Strategy 3: FREE Alternate Revenue Game
Imagine a firm that generates most of its revenue or has improved economies of scale from its B-product line not it`s prime or spearhead product. Instead of advertising at huge expense, simply give away your prime product to sell your B-line. Other strategies in ARG would include changing the final price of a product to absorb the component and incremental costs thus fooling the consumer to believe they receive some parts for free.
How many companies sell a system for nothing but charge you for the support or maintenance, each new feature thus will attract more support calls.
Strategy 4: FREE The Intellectual Property Game
Attract and bed customers because it`s FREE but build intellectual property in the background. In start-ups the value of the firm is priced from its future potential cash flow especially if the firm is funded heavily through equity. If the intellectual property can find a resale price; it as an asset class will leap from one side of the sign to the other on the price to book ratio, how valuable is that.
Strategy 5: FREE The Classed Society Game
What do you want, first class or economy class? Has anyone seen the difference in price? The spread can be so wide that in fact first class is often carrying economy class however economy class is adding to the volume, contributing to in-viral marketing and allowing for incremental sales.
Strategy 6: FREE The Subsidy Game
Why charge high prices to the private sector when the public sector will pay for it? Charities sometimes and many businesses servicing the community often have tax exemption and subsidies to reduce the cost of goods sold. There are a lot services that are ``near public`` because of heavy subsidisation. This model can if extended, bring down the cost of goods sold to a point that it is negative thus EBIT becomes positive.
Strategy 7: FREE The Reverse Value Added Reseller
Here is a great but possibly ethically flawed model. Reverse engineer the ABC cost model. Instead of charging the customers you charge the suppliers (from buy side to sell side, switch them). Wow how does that work? Imagine we are a firm that endorses or rates companies in the market and companies with the best endorsement attract more clients. We of course give our advice away for free but we charge the companies we rate for the audit.
Strategy 8: FREE The Naked Hedge in Treasury
How many airlines have made profits not from tickets sold but the hedge on the price of oil? Many business models are nothing more than a reverse semi naked hedge, they exist to support treasury. Profit is generated by the future contract sold rather than the physical contract and the physical is used to hedge the future rather than the reverse. A dangerous game no doubt but one that is increasingly becoming popular.
Free works but you need to have a game plan.
Posted by CausalEvents at 02:17 PM
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