(Stanford BUS-21)Martin Westhead

Mastering Marketing

Model: Direct Cross Subsidies

How to make money by giving things away

Overview

Direct cross subsidy model (Tied) Examples

- Ryan Air- Comcast- Controlinveste

Business Models

Direct cross subsidy

Price/Quantity Size rectangle = revenue Model assumption:

Price ($/Q)

Quantity

PA + PB

P(A+B)

QA + QB Q (A+B)

Revenue products combined > Revenue products

separately

P(A+B) Q(A+B)>

(PA+ PB) (QA+ QB)

Red Area > Blue Area Cost model is directly tied to sale

Free Cell Phone

Free Cell Phone: postpaid mode

Paid Cell Phone: prepay model

Subscribers get free phone Subscribers pay for their phone up front

Generally more expensive phones

Generally cheaper phones (cost sensitive customer base)

Multi-year contract with termination fee

No contract: usage only

Ryan Air

London -> Barcelona - $20 (£10)

Ryan Air CEO wants- All flights all seats free

Cut costs Ramp up ancillary fees Higher fares on popular

days ($100)

Ticket Price ($20)Checking 2 bags ($30)Ad revenue per hour ($1)Subsidy for more ex-pensive flight ($5.50)Credit card handling ($6)Priority boarding ($4)Bottle of water ($3.50)

FREE DVR

9 million free DVRs Hidden fees

- $20 installation Monthly subscription

- $14 p.m.- Break even in under 18

months

Up-sell other services

- Internet $43 p.m.- Pay-per-view $5 each

Free silverware

Leading media company in Portugal

Jornal de Noticias - 120th Anniversary- 60-piece silverware set- Regular pieces during

the week- Serving pieces on Sat

36% increase in circulation in 3 months

More give-aways Free toolbox with tools

- 177 pieces- 20% 3m

Free DVD every Sat- Coupon in Friday paper- 47% increase 2m

Free Dinner plate set- 19 plates- 70% increase 4m

Free language course- 11 languages - 48 disks- 22 books- 2 boxes- 63% increase 4m

DIRECT CROSS SUBSIDY BUSINESS MODELS

Direct Cross Subsidy Business Models

Give away services, sell products Apple Store Genius Bar tech

support

Give away products, sell services Free gifts when you open a bank

account

https://www.bncbank.com/files/BNC_Gift_List_2014.pdf

Example gifts

Direct Cross Subsidy Business Models

Give away software, sell hardware

IBM & HP’s Linux offerings

Give away hardware, sell software

Game consoles (e.g. XBox) Not technically free but below

cost

Direct Cross Subsidy Business Models

Give away cell phones, sell talk time

Cell phone carriers

Give away talk time, sell cell phones

Free night and weekend plans from same carriers

Give away the show, sell the drinks

Music, comedy clubs, strip clubs

Give away the drinks, sell the show

Casinos

Direct Cross Subsidy Business Models

Buy one get one free

Grocers / Supermarkets

Free gift inside Cereal

Direct Cross Subsidy Business Models

Free shipping orders over $25 Amazon

Free samples

Supermarkets, Perfume counters

Direct Cross Subsidy Business Models

Free trial

Magazine subscription SaaS products

Free Parking

Malls, Movie theatres

Direct Cross Subsidy Business Models

Summary

Direct cross subsidy model (Tied) Examples

- Ryan Air- Comcast- Controlinveste

Business Models