Competition Against Free

Which one would you choose?

In two-third battles incumbents made the wrong choice

Why does it happen?

Companies

IgnoreLaunch free too

late

Launch free too

early

Assessing the threat

Three main factorsThe entrant’s ability to quickly cover its

costs

Growth rate of the free offering users

Rate of defecting paying customers

Choosing how to respond

Companies that prevailed

Yahoo, responded to Google’s entry by matching, and then exceeding, Gmail’s free storage offer

Companies that prevailed

Intuit responded to the threat from free rival Mint.com by purchasing it

Companies that ignored the threat

Ryanair, which offers free or deeply discounted tickets and charges for other services, was ignored by all airlines and now has major share in Europe

Companies that ignored the threat

Pandora, provides free radio over the internet and generates revenue by charging for ad-free service and selling access to its user base has taken major

share of SiriusXM

Delayed threat

Microsoft office has long enjoyed a near monopoly and has been highly profitable and except for price-sensitive users its customers have not flocked to the free products

Tried and Tested Strategies

Up-sell

Offer a free version to gain attention and widespread use, then offer a premium product which customers are willing to pay

WhatsApp is currently providing free services in India to increase

user base

Dropbox provides limited free cloud storage space which can

be increased through paid subscription

Requirements for Upsell

Large enough user base to ensure profits with low conversion rate

A high percentage of users willing to pay for the premium version

OR

Cross-sell

Selling fries along with burger

Sell other products that are not directly tied to main product

Requirements

• Broad product line, preferably one that complements the free product

• The ability through partnerships to sell a broad line of products to users of the free product

Charge third parties

Provide a free product to users and then charge a third party for access

to them

Requirements

• A free offering that attracts either many users who can be segmented for advertisers

• Third parties willing to pay to reach these users

Bundle

Offer a free product or service with a paid offering

Requirements

• Products or services that can be bundled with the free offering

• A free product that needs regular maintenance or a complementary offering

Example

Facebook and Reliance together

launched internet.org in India which provides basic

internet facilities for free so as encourage more people to use

internet

Still confused?

Rethink Profit Centers

Main obstaclesProducts must generate a respectable level of

revenues and profits on their own.

the profit-center structure and the

accounting system it employs

Overcoming Obstacles

Profit responsibility managers must be

oversee revenue and cost streams from a

much wider perspective

Give revenue streams and cost

management tasks in separate hands

Building product features and

expanding user base costs should be

separate

Overcoming Obstacles

The distinction between

average cost and actual cost

Cross selling and cross

subsidizing new products to gain market

shareRealizing, additional

products or services adds very little to total costs

These slides were created by Sharang Agarwal, IIT Kharagpur as part of an internship done under the guidance of Prof. Sameer Mathur, IIM Lucknow (www.IIMInternship.com)

Disclaimer