competing against free
TRANSCRIPT
Competition Against Free
Which one would you choose?
In two-third battles incumbents made the wrong choice
Why does it happen?
Companies
IgnoreLaunch free too
late
Launch free too
early
Assessing the threat
Three main factorsThe entrant’s ability to quickly cover its
costs
Growth rate of the free offering users
Rate of defecting paying customers
Choosing how to respond
Companies that prevailed
Yahoo, responded to Google’s entry by matching, and then exceeding, Gmail’s free storage offer
Companies that prevailed
Intuit responded to the threat from free rival Mint.com by purchasing it
Companies that ignored the threat
Ryanair, which offers free or deeply discounted tickets and charges for other services, was ignored by all airlines and now has major share in Europe
Companies that ignored the threat
Pandora, provides free radio over the internet and generates revenue by charging for ad-free service and selling access to its user base has taken major
share of SiriusXM
Delayed threat
Microsoft office has long enjoyed a near monopoly and has been highly profitable and except for price-sensitive users its customers have not flocked to the free products
Tried and Tested Strategies
Up-sell
Offer a free version to gain attention and widespread use, then offer a premium product which customers are willing to pay
WhatsApp is currently providing free services in India to increase
user base
Dropbox provides limited free cloud storage space which can
be increased through paid subscription
Requirements for Upsell
Large enough user base to ensure profits with low conversion rate
A high percentage of users willing to pay for the premium version
OR
Cross-sell
Selling fries along with burger
Sell other products that are not directly tied to main product
Requirements
• Broad product line, preferably one that complements the free product
• The ability through partnerships to sell a broad line of products to users of the free product
Charge third parties
Provide a free product to users and then charge a third party for access
to them
Requirements
• A free offering that attracts either many users who can be segmented for advertisers
• Third parties willing to pay to reach these users
Bundle
Offer a free product or service with a paid offering
Requirements
• Products or services that can be bundled with the free offering
• A free product that needs regular maintenance or a complementary offering
Example
Facebook and Reliance together
launched internet.org in India which provides basic
internet facilities for free so as encourage more people to use
internet
Still confused?
Rethink Profit Centers
Main obstaclesProducts must generate a respectable level of
revenues and profits on their own.
the profit-center structure and the
accounting system it employs
Overcoming Obstacles
Profit responsibility managers must be
oversee revenue and cost streams from a
much wider perspective
Give revenue streams and cost
management tasks in separate hands
Building product features and
expanding user base costs should be
separate
Overcoming Obstacles
The distinction between
average cost and actual cost
Cross selling and cross
subsidizing new products to gain market
shareRealizing, additional
products or services adds very little to total costs
These slides were created by Sharang Agarwal, IIT Kharagpur as part of an internship done under the guidance of Prof. Sameer Mathur, IIM Lucknow (www.IIMInternship.com)
Disclaimer