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The Free World

Turning a profit by giving away products and services? Priceless.
by GEOFF WILLIAMS - June 2009

Published in Business :: Business

ILLUSTRATION BY PETE RYAN

SOME THEATERS IN THE 1930S HAD "DISH NIGHT," where everyone who bought a ticket received free dinner-ware - housewives collected entire place settings that way. Banks used to give away gifts to anyone who opened a new account - toasters, blenders, even luggage. Today, new business models that involve giving things away seem to be growing.

In February, Denny's offered a free Grand Slam breakfast just after the Super Bowl. And earlier this year, Nickelodeon Family Cruises, the popular children's network's answer to the Disney Cruise Line, let parents travel for free. Or consider Google, which offers an array of free services to the public while earning its income from advertisers.

But why do companies give things away for free? "You may want the public to sample your product or service in order to get new sales," says Linda Bishop, author of Selling in Tough Times. "Or perhaps you're trying to identify hand-raisers, those interested in possibly purchasing."

While most promotions are strictly to turn a profit and attract new customers, some companies have other motivations as well. For Denny's, the promotion - which cost roughly $5 million and included a Super Bowl ad - was also a way reintroduce the company to the public. (CEO Nelson Marchioli felt the restaurant chain's image was not what it used to be.)

The result? By their estimate, Denny's garnered $50 million in free publicity and at least broke even, since diners bought drinks and sides to go along with their free meals.

Whatever you give away should be a loss leader - something you're selling below cost or at a loss that will likely bring in more sales. For example, Denny's didn't give away the T-bone steak and eggs - and people still showed up and bought add-ons. After all, a free meal is a free meal, even if it isn't the most expensive.

Another possible motive to give away a product or service is to jump-start a brand-new business. In 2004, Lee Little built a prototype of a customized GPS-enabled technology that he felt would be perfect for national parks, zoos, historic sites and the like. But nobody wanted to be the first to spend the money on the service because there was no proof that it would actually attract more visitors.

Little decided to offer his product free of charge to the Martin Luther King Jr. National Historical Site's bookstore in Atlanta, which gave him the credibility he needed to bring in national clients. Today, his 15-employee company has raised more than $2 million in funding and is growing 300% a year (he won't disclose revenues). The GPS-touring product is currently being used at 23 sites, including zoos in Dallas and San Francisco as well as stalwarts like Shenandoah National Park in Virginia and Death Valley National Park in California.

Sometimes, you may have no choice but to embrace the free, or freer, model in order to stay ahead - even if it's not part of your original business plan. When ParkingSpots.com debuted in February 2008, it charged everybody: those looking for parking, those posting their spots and the commercial properties.

Co-founders Aynsley Deluce and Matthew Ball quickly realized they were competing with classified websites like Craigslist, which had many free parking space ads. So they stopped charging people looking for parking, and in December 2008, decided to only charge commercial parking lots and property owners. Revenue finally started to come in, and ParkingSpots.com has been growing at 30% a month and is expecting six-figure revenues by the end of the year - modest, but better than nothing.

"Consumers expect free," Deluce says, "and no matter how great your service is, if it's available on the web somewhere for free, you're barking up the wrong tree."

Deluce alludes to an interesting point: Is there such a thing as being too free? One day, will customers refuse to pay for anything? Only time will tell. But, for now at least, many companies are finding that they can give things away and still make money in the long run.

Glossary of Freeconomics

There's more than one way to give away a product or service.

THE FREE TRIAL: Businesses offer a free service for a certain amount of time, allowing potential customers to sample it before purchasing. This shows you're truly confident in your business.

THE FREEMIUM MODEL: Businesses offer services for free, but charge for additional, more advanced features. The business social networking site LinkedIn.com is a good example: Basic membership is free, but if you want to use other features that may better link you to professionals you want to meet, then you pay a monthly membership fee.

FREE TO THE CONSUMER: These are services paid for by advertising: Think Google, online newspapers and Hulu.com, where you can watch TV and movies after first viewing some commercial messages.

CROSS-SUBSIDIES: A product is offered for free or at a lower cost in order to entice the customer to buy something else. For example, a market puts milk on sale knowing you will leave with other, more costly groceries. Or an iPod is free, but only if you buy a brand-new computer.

Published in Business :: Business

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