The Power of Free

One of the most powerful techniques available for customer acquisition is giving away a free product or service. You can see the success of this with companies like Google, Facebook, JBoss, MySQL, HubSpot (with their free WebSiteGrader.com), etc.

One of the most widely read articles on this topic was written by Chris Anderson in Wired Magazine: Free! Why $0.00 Is the Future of Business. If you haven’t yet read this, I highly recommend it as a must-read for anyone that cares about business model innovation.

The trick to doing Free or Freemium business models right is to ensure that the product/service that you are giving away free is of very high value to the customer, which should result in both high customer satisfaction and a likelihood that they will tell others about your product/service, leading to viral effects. The usual temptation is to stop short of this, and take out the valuable features that would make the product interesting and valuable.

The entrepreneurs and executives that I work with fall into one of two camps: those that get this, and those that don’t. The smart crowd that do understand this, realize that in a typical business the single biggest expense is sales and marketing, and recognize that offering a free product/service is an extremely smart way to acquire customers at a low cost that can then be monetized in a different way.

The importance of Footprint or Market Share

Another powerful effect of using the free strategy is that it usually results in a far larger customer base using the free products, who become proponents for your company. This expanded footprint or market share can have a huge effect on the price that acquirers or investors are willing to pay for your company, as they recognize that even though these customers have yet to be monetized, they represent a great potential for future monetization. Twitter and Facebook are two perfect examples of this.

Another less well known example of this would be the recent high priced aquisition of SpringSource by VMWare. In that situation VMWare far over-paid for SpringSource if one looked purely at revenue multiples. But the real value of SpringSource lay in their large base of developers inside of enterprises that were strongly committed to the Spring free Open Source framework. VMWare realized that they could leverage that developer base to monetize a future PaaS (Platform as a Service) offering.

Another way of looking at the importance of footprint or marketshare is to recognize the importance of market leadership. In the tech industry, market leadership is usually self-reinforcing unless the company does stupid things to annoy its customers. Even if you have gained market leadership by giving away a product/service for free, the financial markets and acquirers realize that market leadership is worth a significant premium over niche players that may have more revenue.

The entrepreneurs and executives that fall into the “wrong” camp, are so focused on trying to extract the maximum dollar out of every customer, that they fail to realize that this only leads to very slow (and usually expensive) customer acquisition, and consequently a small footprint or marketshare.

Using Engineering for Marketing

Another way of looking at this kind of business model is that you are using engineering resources to solve the problem of how to acquire customers.

Conventional thinking places the burden of acquiring customers on the people in marketing and sales. A free strategy requires a different way of thinking that usually has to come from a founder or CEO. In the Free strategy, the company is going to shift the expense of customer acquisition to the product development group.

If it is done right, the costs of the few engineers that develop the free product can be many times lower than the costs that would be expended on traditional marketing mechanisms like trade shows, advertisements, etc.

HubSpot’s WebSiteGrader – a great example

A great example of a free service is WebSiteGrader from HubSpot. (If you haven’t tried this, I recommend giving it a try now. It will only take a few minutes.) WebSite Grader has a couple of interesting attributes that are worth studying:

  • It is free of charge
  • It takes very little work by the customer to get some very valuable results
  • It provides its results in the form of a score out of 100. Human beings are very competitive, and when they don’t get a good score, they want to find out how to improve their score. That leads them to wanting to find out more about HubSpot which can help them improve their score.
  • It allows them to compare themselves to their competitors. All businesses care about how they are doing relative to their competition. If they are doing worse, this is a powerful motivator to drive them to change.

Think hard about your audience and whether there is an opportunity to build a similar free web service that would draw them in, and provide great value.

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  • Anonymous

    I’m not getting more comments on my blog. But I think “Comments auto rust removal are the Lifeblood of Blogging”

  • Sdoracle

    Thanjs for sharing this insight!

  • Philip Copeman

    Hi David it has been a few years since I last mailed you.

    We got to a barrier in our discussion when you said that you can only deal with US based companies. I am still based in Cape Town and intend to continue to be here. I have however expanded TurboCASH Accounting significantly since we last talked, all under my own financing. We have over 110 000 users in multiple markets.

    Two things have made me want to re open a line of communication with you:

    1) The recent entry of Bain Capital into our market (SME Accounting) with the purchase of MYOB.

    2) Press releases of your activities with GrabCad, showing that Matrix will look beyond the US and into Open source.

    Please can you contact me on philip@pinksoft.co.za

    Philip Copeman

  • http://www.cleanersliverpool.org/ Office Cleaners Liverpool

    FREE can be an attention-getter and might induce customers who don’t want the primary offer all that much to sign up anyway. Then, when it’s time to pay, they decide to cancel.
    It’s analagous to pay-per-click marketers (who pay for every click to their website). Maximizing clicks isn’t a good thing if those clicks don’t convert into sales. Similarly, maximizing initial acceptances of an offer may not be a good thing if those customers end up not subscribing.
    Special offers of any kind have the potential to devalue the brand, but adding a free product or service might be less risky than a straight price cut.

  • http://www.forentrepreneurs.com David Skok

    You make a good point. However the best designed free offers have a very low cost to provide the service. As an example, any SaaS service offered for free (provided it doesn’t have high storage costs), should have a very low cost. The benefit of all the free users, even if they never plan to convert, is that some portion of them will act as a viral agent telling their friends about the service. But for this to work, they have to love the service.

  • http://bitnami.org/ Daniel Lopez

    Heroku is another good example of a platform with a free offering that was acquired by an established vendor (Salesforce) to take advantage of not only the technology but the established developer base. It seems to be working out well for them. The Nokia / Trolltech deal did not work out as well, for several reasons. Another good book on the topic that you may want to checkout is “The Mind Share market” by Nicolas Pujol, who used to be a VP at MySQL. It is also extremely well written and organized, which is a refreshing change with so many poorly edited books nowadays

  • http://www.notarypublicpreston.com/ Notary Public Preston

    Great blog entry. I have used the FREE idea in many marketing things. We sell computer hardware and service. We often do a “Double your RAM for free” coupons. Honestly I have had a lower redemption of these than I thought. I also have tired half price things with limited response. I think I will try to do more FREE offers. The question is does FREE with purchase of something else work well also or does that have limited success?

  • http://www.forentrepreneurs.com David Skok

    Free with the purchase of something else will not work as well as totally free. It is going to be viewed as a discount by those who want the free thing. In my experience, only 100% free things go viral. I hope that is helpful.

  • http://www.notarypublicealing.com/ Notary Public Ealing

    free-knowledge community is missioned to create and share informational resources and cultural works in full compliance with copyright laws. When offering works to the world, however, their creators guarantee five freedoms: the freedom to use, the freedom to study, the freedom to copy, the freedom to redistribute, and the freedom to improve those works.

  • http://www.notarypublicbromley-awilson.com/ Notary Public Croydon

    Congress, the media, and many others do not always understand or appreciate the meaning and power of the free-knowledge movement, nor the community that nurtures and supports it.

  • http://www.notarypubliccamden.com/ Notary Public Camden

    I used to get my film developed and printed at a place where they would praise my photos and give me a free 5×7 every time. It wasn’t advertised, but they did it for nearly everyone. Even though the cost of the processing was more expensive than other places in town, that free 5×7 just made me feel like a loyal (not royal) customer.
    I have a family member that will buy beer based on the “free” gift. Regardless of the quality of the beer.
    :)

  • http://www.notarypublicealing.com/ Notary Public Ealing

    What’s with all the serious discussion of the article and the conclusion? It’s plain and simple, unless you are advertising something like free amputations, you will naturally get more people to accept an offer if there is no payment involved.

  • http://www.forentrepreneurs.com David Skok

    The reason for the discussion is that if all you do is give something away free and get a lot of customers, you will rapidly go bankrupt. You have to follow this up with a way to convert those people into paying customers, and it turns out this is actually a very hard thing to get right. It requires two great product offers, some careful thought, and usually a lot of experimentation.

  • http://www.notarypublichackney.com/ Notary Public Hackney

    Internet is the way to get enough knowledge for any topic. And your post seems to be the good example for it. as in a single post you have a content which is very interesting and as per as users point of view. I really enjoyed it..

  • http://www.belowtradeprices.co.uk/prep-station.aspx Prep Station

    I agree that Internet is the best way to find any information, related to anything. Even you can find the method to make Atom Bomb, but it needs the person to search it.

    I liked the way you represented your thoughts. Really great.

    Keep posting.

    Regards

  • http://www.notarypublicwinchester.com/ Notary Public Basingstoke

    Hello

    Hi! This is my first comment here so I just wanted to give a quick shout out and say I genuinely enjoy reading through your blog posts. Can you recommend any other blogs/websites/forums that go over the same subjects? Thank you so much! 

    Regards

  • http://www.forentrepreneurs.com David Skok

    Thanks for the positive feedback. Sadly I am not aware of other sites that cover these topics, but I am sure they exist.

  • Angel Hagner

    Hello..

    I have needed this information for so long. Where have you been!!! Thanks 

    Prep Station 

  • http://www.forentrepreneurs.com David Skok

    Delighted to have been of help!

  • ReikiGal

    That is exactly right. And that’s how I found your article. I have a free product and free tips, but I am not following it up with a product that will convert to sales. Therefore, I’m building a list of people who are looking for free information. This is a tricky concept to take action on…thanks for the article.

  • ReikiGal

    The perfect example are game apps. They are free until you get so hooked on them, that if you want to play more, or get additional games, you have to buy the extra tokens. They are a great example of how to give for free and then have backend sales that are quite profitable. And viral apps are the ones that are played with friends. Thank you for the inspiring post! And your comments are valuable as well. I will be reading through your site. thanks!

  • BDS Saas

    David, what are your thoughts about offering a product for “free” if it still takes company resources to assist customers in setting it up and support during usage to make it a successful experience for a customer? In this case, the no-revenue product generates a support cost. Do you still think that enough customers can be converted(this product is public sector which requires an annual budgeting process (Gee, we got it free last year) to make this worthwhile?

  • http://www.forentrepreneurs.com David Skok

    The key reason to do a Freemium strategy is to lower your cost of customer acquisition. However if you have a high cost of support for free customers, you’d want to be sure of a good enough conversion rate to justify the costs of supporting the free users that never convert. Given that you don’t know your conversion rate up front, I’d be inclined to run the freemium offer as an experiment, as opposed to a permanent offer, where you’d get backlash if you withdrew it. So you could offer the free version as a limited time offer, which leaves you the freedom of choice to continue or halt the program at the end of the offer period. Then you have a chance to compare and contrast your Cost of Customer Acquisition (and LTV) with the Freemium, versus your more traditional way of acquiring customers.
    Let me know if this doesn’t make sense in your situation.

  • Sunil Kosuri

    I agree with the analysis…If a company can give away its core product for free and if the product is good enough for at least the low-end of the customer base or non-consumers, it results in disruption. Obviously, the startup should give away the product only if the wide adoption results in building an asset base that can be monetized with through a sale of the company or a revenue generating opportunity through a different mechanism down the road – disrupting existing market for the sake of disrupting it does not make business finance.

    It may appear that this model works more easily in B2C versus B2B. In B2B there maybe a perception that free = poor quality and existing competitors in the market will create F.U.D. among customers regarding a free product. If a startup can take actions to negate this F.U.D. and sustain long enough to overcome the initial customer fears, I believe that truth will prevail the free provider can gain market share and disrupt incumbents.

    Good topic & article…