direct cross subsidies
DESCRIPTION
In this lecture we draw on material from Chris Anderson's book "Free", to examine the first Model of Free: Direct Cros Subsidies. Direct Cross Subsidies are old world free, in which the price the customer pays (now or later) covers the cost of the freebie.TRANSCRIPT
(Stanford BUS-21)Martin Westhead
Mastering Marketing
Model: Direct Cross Subsidies
How to make money by giving things away
Overview
Direct cross subsidy model (Tied) Examples
- Ryan Air- Comcast- Controlinveste
Business Models
Direct cross subsidy
Price/Quantity Size rectangle = revenue Model assumption:
Price ($/Q)
Quantity
PA + PB
P(A+B)
QA + QB Q (A+B)
Revenue products combined > Revenue products
separately
P(A+B) Q(A+B)>
(PA+ PB) (QA+ QB)
Red Area > Blue Area Cost model is directly tied to sale
Free Cell Phone
Free Cell Phone: postpaid mode
Paid Cell Phone: prepay model
Subscribers get free phone Subscribers pay for their phone up front
Generally more expensive phones
Generally cheaper phones (cost sensitive customer base)
Multi-year contract with termination fee
No contract: usage only
Ryan Air
London -> Barcelona - $20 (£10)
Ryan Air CEO wants- All flights all seats free
Cut costs Ramp up ancillary fees Higher fares on popular
days ($100)
Ticket Price ($20)Checking 2 bags ($30)Ad revenue per hour ($1)Subsidy for more ex-pensive flight ($5.50)Credit card handling ($6)Priority boarding ($4)Bottle of water ($3.50)
FREE DVR
9 million free DVRs Hidden fees
- $20 installation Monthly subscription
- $14 p.m.- Break even in under 18
months
Up-sell other services
- Internet $43 p.m.- Pay-per-view $5 each
Free silverware
Leading media company in Portugal
Jornal de Noticias - 120th Anniversary- 60-piece silverware set- Regular pieces during
the week- Serving pieces on Sat
36% increase in circulation in 3 months
More give-aways Free toolbox with tools
- 177 pieces- 20% 3m
Free DVD every Sat- Coupon in Friday paper- 47% increase 2m
Free Dinner plate set- 19 plates- 70% increase 4m
Free language course- 11 languages - 48 disks- 22 books- 2 boxes- 63% increase 4m
DIRECT CROSS SUBSIDY BUSINESS MODELS
Direct Cross Subsidy Business Models
Give away services, sell products Apple Store Genius Bar tech
support
Give away products, sell services Free gifts when you open a bank
account
https://www.bncbank.com/files/BNC_Gift_List_2014.pdf
Example gifts
Direct Cross Subsidy Business Models
Give away software, sell hardware
IBM & HP’s Linux offerings
Give away hardware, sell software
Game consoles (e.g. XBox) Not technically free but below
cost
Direct Cross Subsidy Business Models
Give away cell phones, sell talk time
Cell phone carriers
Give away talk time, sell cell phones
Free night and weekend plans from same carriers
Give away the show, sell the drinks
Music, comedy clubs, strip clubs
Give away the drinks, sell the show
Casinos
Direct Cross Subsidy Business Models
Buy one get one free
Grocers / Supermarkets
Free gift inside Cereal
Direct Cross Subsidy Business Models
Free shipping orders over $25 Amazon
Free samples
Supermarkets, Perfume counters
Direct Cross Subsidy Business Models
Free trial
Magazine subscription SaaS products
Free Parking
Malls, Movie theatres
Direct Cross Subsidy Business Models
Summary
Direct cross subsidy model (Tied) Examples
- Ryan Air- Comcast- Controlinveste
Business Models