I’m currently managing director of Content and Business Planning at The Korea Times. Before I took the current position in early 2024, I served as managing editor in charge of both paper and online for over three and a half years. In 2015-2018, I worked as Singapore correspondent covering ASEAN nations.
Firms undergo dramatic change in pricing
‘Free’ emerges as sustainable business model
By Song Ki-hong
Nowadays businesses are giving products away more than ever. With more and more companies adopting “free” as a preferred pricing strategy, free pricing is well on its way to becoming a sustainable business model.
Software and Web-based companies were among the first to blaze the “Free” trail, and their successes have become legendary _ Flickr’s photo hosting; Blogger; Craig’s List; Skype; Facebook; and more. But many think these are just the beginning of a dramatic and fundamental shift in pricing, with more traditional companies already jumping on the bandwagon.
Why Free can’t be ignored
For companies in many industries, it’s tempting to write Free off as a technology industry trend or intellectual exercise not worth serious consideration. But there are a handful of potent forces that are rapidly changing the marketplace.
There is a concerted effort underway by many retailers to shift consumers’ shopping habits from brick-and-mortar buildings to an online experience. Some retailers are even offering services online that were previously considered to be the hallmarks of a great in-person experience ― consider Levi’s “digital fitting experience” for women looking for the perfect jeans.
While these companies aren’t necessarily giving everything away online, this shift is creating a fundamentally different dynamic for companies that have been doing things the same way for years.
Think about all the things you’re able to get for free today that would have cost you only a few years ago ― phone calls, videos, maps, product information, networking for careers, friends, dates and so forth. The psychology of Free is already spreading to products and services that we always assumed would cost something.
Demographic shifts favor Free
Every year we hear of new variations on the theme of how the younger generation has grown up using technology that is still relatively new to older users ― digital media players, social networking and smart phones. While it’s not a technology, Free has a place on the list as well. Younger users are more accustomed to having free access to television programs, music, videos, transportation services and health insurance among others.
A physical product is just the most visible link in a long value chain. And while it’s the only link most consumers really care about, behind the scenes there is a long list of providers and partners who are rethinking how they can work together to offer more value to the consumer.
In the consumer packaged goods industry, for example, where trade promotions rule the day, retailers and manufacturers share point-of-sale data that can open up new opportunities for everyone – not only retailers.
Free strategies target the same fundamental business goals as any other pricing strategy.
There are several reasons companies have embraced Free as a strategy.
There may be no faster way to introduce new products and services than by giving them away. That’s one reason cable companies offer free limited trials of premium content to basic subscribers, for instance.
Build scale and market share
Free can be a powerful way to build a base of users who could be converted to paying customers in the future. But pulling this lever requires extreme caution since it can erode profitability in the short term. Products or services that rely on the network effect to reach critical scale are well-suited to this model. That’s why mobile phone operators began offering free mobile-to-mobile network calling for friends and family.
Free can completely change the game for competitors, catching them off-guard and forcing them to rethink their strategies while you gain market share. Along the way, it opens the door to uncharted market territory.
Information providers already know how Free holds the potential to upend an entire category. Just ask encyclopedia publishers who are still trying to make sense of a Wikipedia world. For nontechnology businesses, Free holds the same potential, even if it’s largely untapped today.
Consumers who benefit from free products or services have a proven proclivity to stick with their providers for the long haul. For an example, look no further than the airline industry, which deployed a loyalty model that has grown into its own cottage industry _ and has been replicated by companies ranging from supermarkets to pharmacies.
Technology, media and telecommunications companies dominate the list of pioneers in zero pricing due to their ability to use the Internet as a virtually zero-cost distribution channel. But companies in more traditional industries are working to find ways to make Free work elsewhere. For example, the Arizona Public Service Company (APS), an energy utility company, created a program that provides free solar panels to consumers in exchange for rich data regarding usage. The insights gleaned from this valuable information will be used to support the future expansion of solar energy products and services.
The Rules of Free
It’s often more about making smart strategic trade-offs. When considering the move to Free, be sure to think beyond the short-term impact on the bottom line and consider what is valuable to your business, in addition to revenue. For many companies, a rich flow of information is one of the most precious resources, whether this comprises consumer insights or research and development input.
Free is about driving value for your entire partner/value chain – not one-on-one transactions
While the moment at which a consumer purchases a product or service is extremely important, there is a broader value chain leading up to that moment – a network of contributors and partners that the customer rarely sees. Make sure that all the participants in the value chain take on their fair share of responsibility — and get their fair share of the benefits — from Free. One of the biggest pitfalls of promotional programs occurs when the program costs one part of the organization or value chain while benefiting another.
It’s not a free-for-all – it’s “free for those who are most valuable”
Many companies have advanced tools in place for identifying exactly which of their customers and prospects are the best candidates for Free pricing. Who’s most receptive? Who would be most profitable? Not all Free customers are alike, and their needs may change over the course of the product life cycle. That’s where segmentation capabilities come into play, allowing companies to tailor their Free sales and marketing strategies to deliver the maximum impact. Without effective, actionable segmentation, the potential benefits from Free become a hope, not a plan.
Free cannot be the sole differentiator
Free must be part of a well-researched, comprehensive program, identifying both expected outcomes and potential unintended consequences. If your company can pull off a Free strategy, so can your biggest competitor. The long-term success of Free depends on the plan that snaps into place after it’s been unleashed. Free is only the opening salvo of a longer-term battle for profitability and market share – not a “fire and forget” program.
Free has a life cycle
Nothing is really free. Companies that employ Free strategies are simply transferring cost and value to different parts of the value chain – or to a different time in the revenue cycle. Recognizing where products are in their life cycle, how fast those life cycles move, and how your product life cycles compare to the competition’s is the required first step in evaluating any promotional activity. As an example, your company may offer a product for free early in its life cycle to drive penetration and market share, expecting consumers to pay for it later, or to pay for a closely related product or service.
If you don’t do it, don’t be surprised when someone else does
Technology firms and information providers have given the broader business world a window into the world of Free, generating valuable insights that can be applied to other companies, regardless of industry. This is not the type of change that evolves slowly, giving companies ample time to respond. The first-mover advantage that comes with Free is strong. If it happens in your industry, it will probably look more like a tsunami than a gradual rising of the tide. That’s why it can pay to begin planning now.
Song Ki-hong is managing director of Deloitte Korea