Have you ever subscribed to a service because they offered “the first month free”? Have you ever downloaded an app because it is free but then spent more money for the “premium version”? Or have you been surprised when being promised a free iPhone for switching to a new mobile operator?
There is a good chance you have experienced one or all of these situations since “free” can be such a powerful strategy.
It is why we see free – and commonly, the freemium model – used as a popular and effective pricing strategy used by brands and company around the world.
For businesses purposes, “free” does not always mean “free”. As the old saying goes, “there ain’t no such thing as a free lunch.” By offering free or freemium strategies, companies are looking to generate benefits such as attracting potential customers and decreasing the overall cost of acquisition.
Therefore, “free” is actually a pricing strategy designed to influence behavior and share perceptions. This can come by reducing friction to try a product or service. Free can also reduce resistance to monetization due to perceptions of affordability.
Let’s explore some of the advantages of offering free, and smart ways to start applying this strategy.
Advantages of Offering Free
“Free” itself is a great attraction.
It makes customers feel that they can gain something at virtually no cost. Therefore, pricing “free” leads to a broad range of people knowing your product or service and increasing your potential customer base.
Renowned behavioral economics Professor Dan Ariely ran an experiment to test the power of free. Professor Ariely did a test offering two products: a Lindt Truffle and a Hershey’s Kiss. The Lindt Truffle was offered for $0.26 and the Hershey’s Kiss at $0.01. With this offer, 40% chose to buy the Lindt Truffle, and another 40% went with the Hershey’s Kiss.
Now the experimenters decided to drop the price $0.01, where the new prices were $0.25 for the Link Truffle, and $0.00 or free for the Hershey’s Kiss. While the relative difference in price remains similar, 90% ended up choosing Hershey’s Kiss. This is one example of the power of free and how this can influence customer behavior.
Benefit of free: Potential Cost Savings
One benefit of free is the potential cost savings of acquiring or winning a customer.
For many companies, there is an inherent cost to market to- and win- and customer. This can be substantially higher if it requires more customer engagement (marketing isn’t free after all). If the product is offered for free – either as a trial or reduced product – the willingness to try is potentially higher. So instead of spending more to win an unwilling customer at the start of the buying journey, companies can spend more effectively after a customer experience the product and hopefully get value.
To assess whether this strategy is right for your company, consider how well you can stand up to these three tests:
- The Willingness-to-Pay Test: Price is a sufficient barrier for the right customers to use the product. The user will find sufficient value in the product to want to pay after starting to use the product;
- The Efficiency Test: You can make the monetization conversion process cost-efficient enough to achieve profitability; and
- The Payback Test: You can retain customers long enough that marketing investment will be paid-back in sufficient time.
If one or more of these tests do not hold up, then the effectiveness of the strategy may be at risk.
Benefit of Free: Increased Distribution
Another advantage is that “free” itself can be a distribution strategy.
For the free product or service, once it has high quality and offers a great user experience, the existing users will be more willing to invite others to join or have a try.
When done right, organic word-of-mouth spread about the product is some of the best advertising and cost-efficient conversion strategies a company can have.
How Free Is Applied
Freemium pricing is one of the most common pricing models that utilize people’s preference for “free”.
“Freemium”, the combination of free and premium, means offering all customers an essential service as free but charges some customers for an enhanced version or more content. Freemium pricing aims to attract many customers using the free version on offer, where a proportion of these users will be converted to the premium.
Evernote, a popular note-taking app that owns more than 225 million users, is free for anyone to download. Still, you can only access the basic version to simply take notes. However, if you want to enjoy the core features such as forward emails, annotate PDFs, you will need to upgrade to the premium for $7.99 a month.
Companies can also offer the customers free versions for a certain period or limited usage as a “free trial”.
Spotify is one of the world’s best-known music streaming platforms. It offers the customers a month free trial for the premium. After one month of free, the customers can cancel at any time.
Using this strategy, Spotify is reducing friction to signup, and create a separate pathway to get more consumers to upgrade for premium. According to Spotify Usage and Revenue Statistics(2020), among 286 million monthly active users of Spotify, there were 130 million Spotify Premium subscribers – nearly 45% of their active user base.
Among these subscribers, some may gradually get used to the premium version. Some may even forget to cancel subscriptions and, therefore, be kept charged, which happens more often. According to one report in Yahoo Finance, 48% of people forget to cancel a free trial before they’re charged with auto-renewal.
Using Free Effectively
Applying “free” as a pricing strategy can highly increase potential customers’ pool by lowering the barrier between customers and the product.
However, it is also essential to know when and where to offer “free,” or it can end up being a free gift.
One goal of providing free is to attract a broader audience. Therefore, a free product or version must be compelling. Verizon, the U.S. telecommunication company, offers a free phone for anyone to switch to them or add a new line. Even if there will be other costs later on, “free phone” itself is a great attraction for customers (and future revenue).
Suppose you have sufficient top-of-the-funnel traffic, but few of them choose to pay for premium. In that case, your free offer may be too generous, decreasing the willingness-to-pay for a paid or more premium version. In this situation, you may want to consider a redesign of your offer and what is offered for free.
In 2011, the New York Times (NYT) announced a digital subscription plan that gave readers the ability to read 20 articles for free per month. If people wanted more, readers need to buy digital news packages. After launching the digital plan, NYT found 20 articles per month was sufficient for readers – decreasing the number of potential paying readers. By 2012, the number of free articles was reduced to 10; eventually reducing the free articles to 5 today. By assessing willingness-to-pay through reading behavior and pricing research, the NYT found a balance between offering attractive “free” versions and encouraging people to subscribe.
Free is great for customers, and companies using a free pricing strategy must also get an equal exchange. Designing and using “free” effectively can not only bring in new prospective customers, but improve the costs associated with winning those customers.
At its core, the product and service must have value drivers that increase willingness-to-pay. It is vital to make a free pricing strategy work. Absent this, companies may be giving customers a gift that does not give back – and that is a strategy worth reassessing.
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