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Here's a free idea on how to raise your business profits
By Wu Jiayin |
August 29, 2009, Saturday
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Print Edition
Print Edition
IF your business wants to make more money, then try giving things away for free.
This is what Chris Anderson suggests in his latest book "Free."
"In many instances, businesses can profit more from giving things away than they can by charging for them," he notes.
This is not nonsense, especially when it comes to the "bits" world of the Internet.
Google, the powerful online search engine, is the best illustration.
Anderson says it supplies online visitors with almost 100 products, almost all of which are free, from "photo editing software to word processors and spreadsheets." Yet rather than suffering from the lack of profit, Google is a US$20 billion firm, more profitable than all US car firms and airlines combined.
Google earns huge advertising revenue from its core products, in particular its search engine, as companies are eager to pay Google to place their ads next to relevant search results.
As Anderson observes: "It does it the way any modern digital company should: By handing out a lot of things to make money on a few."
Many online gaming firms also profit from such a pricing model.
The industry offers most games for free, but makes lucrative profits in such ways as selling virtual assets and blending paid ads into the games.
No wonder Anderson predicts that in the online world, free is certain to become an increasingly popular sales strategy.
Besides foreseeing the trend toward free among online firms, Anderson puts forward an even more aggressive idea: Giveaways are becoming a business imperative that even companies selling physical products will have to accept and use.
While it will take time to prove how widely the idea is applicable, there are already some successful real-life examples.
Comcast, the US cable company, for instance, gave free digital video recorders to nearly nine million customers. By charging a US$20 installation fee and a US$14 monthly fee, it recovered its costs and made profits over time.
In his book "The Economic Naturalist," Robert H. Frank also points out a phenomenon: Most taverns in the United States offer peanuts for free to help boost the sales of beer -- their major product.
The reason is simple: Nuts are salty and eating them naturally increases the demand for beer. And beers have a much larger profit margin than nuts.
Though acknowledging the power of free, most businesses that sell physical things tend to play the trick by offering "almost free" things instead of "free" things.
However, Anderson warns that while "free" is attractive to the public, "almost free" has virtually no magic with customers.
"The imposition of a price, no matter how low, typically decreases participation, often radically," he says.
It's true, at least for me.
My Internet service provider phoned me early this week, offering to upgrade my 1MB (megabyte) cable broadband to 2MB as long as I was willing to pay 32 yuan (US$4.7) more next year. I would also be entitled to the use of a 3G mobile phone number for free. Only I needed to pay 200 yuan if I need a 3G mobile phone to use the number.
I rejected the offer. As I rarely play Internet games or download files, 1MB is enough for me. Besides, each of my family members already has a mobile phone, so we have no need for a new one, however cheap.
Actually, I am even considering changing my Internet service provider as another service provider not only charges less for the same 1MB cable broadband, but also offers IPTV (Internet Protocol Television) for free.
To avoid the negative results of "almost free," Anderson gives some highly practical alternatives, say, charging for a different product or service than the one you give for free or charging the third party if possible.
Overall, Anderson makes sense when he says: "In a regime where most of the participants are charging, freeing your content gives you a competitive advantage."
Of course, the premise is that businesses should make sure they can afford the free offers and be creative when adopting this sales strategy.
This is what Chris Anderson suggests in his latest book "Free."
"In many instances, businesses can profit more from giving things away than they can by charging for them," he notes.
This is not nonsense, especially when it comes to the "bits" world of the Internet.
Google, the powerful online search engine, is the best illustration.
Anderson says it supplies online visitors with almost 100 products, almost all of which are free, from "photo editing software to word processors and spreadsheets." Yet rather than suffering from the lack of profit, Google is a US$20 billion firm, more profitable than all US car firms and airlines combined.
Google earns huge advertising revenue from its core products, in particular its search engine, as companies are eager to pay Google to place their ads next to relevant search results.
As Anderson observes: "It does it the way any modern digital company should: By handing out a lot of things to make money on a few."
Many online gaming firms also profit from such a pricing model.
The industry offers most games for free, but makes lucrative profits in such ways as selling virtual assets and blending paid ads into the games.
No wonder Anderson predicts that in the online world, free is certain to become an increasingly popular sales strategy.
Besides foreseeing the trend toward free among online firms, Anderson puts forward an even more aggressive idea: Giveaways are becoming a business imperative that even companies selling physical products will have to accept and use.
While it will take time to prove how widely the idea is applicable, there are already some successful real-life examples.
Comcast, the US cable company, for instance, gave free digital video recorders to nearly nine million customers. By charging a US$20 installation fee and a US$14 monthly fee, it recovered its costs and made profits over time.
In his book "The Economic Naturalist," Robert H. Frank also points out a phenomenon: Most taverns in the United States offer peanuts for free to help boost the sales of beer -- their major product.
The reason is simple: Nuts are salty and eating them naturally increases the demand for beer. And beers have a much larger profit margin than nuts.
Though acknowledging the power of free, most businesses that sell physical things tend to play the trick by offering "almost free" things instead of "free" things.
However, Anderson warns that while "free" is attractive to the public, "almost free" has virtually no magic with customers.
"The imposition of a price, no matter how low, typically decreases participation, often radically," he says.
It's true, at least for me.
My Internet service provider phoned me early this week, offering to upgrade my 1MB (megabyte) cable broadband to 2MB as long as I was willing to pay 32 yuan (US$4.7) more next year. I would also be entitled to the use of a 3G mobile phone number for free. Only I needed to pay 200 yuan if I need a 3G mobile phone to use the number.
I rejected the offer. As I rarely play Internet games or download files, 1MB is enough for me. Besides, each of my family members already has a mobile phone, so we have no need for a new one, however cheap.
Actually, I am even considering changing my Internet service provider as another service provider not only charges less for the same 1MB cable broadband, but also offers IPTV (Internet Protocol Television) for free.
To avoid the negative results of "almost free," Anderson gives some highly practical alternatives, say, charging for a different product or service than the one you give for free or charging the third party if possible.
Overall, Anderson makes sense when he says: "In a regime where most of the participants are charging, freeing your content gives you a competitive advantage."
Of course, the premise is that businesses should make sure they can afford the free offers and be creative when adopting this sales strategy.
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