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The Power of Free




This post is part of my series An Analysis of 5 Business Models.

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, 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.