Monday March 9, 2009

Topic: Pricing Models

Reference: “How About Free? The Price Point That Is Turning Industries on Their heads.” Knowledge@Wharton: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2169. March 5, 2009.

It is amazing how business thought develops during periods of massive dislocation. Typically, people rethink the sanctity of their business models, search for new ways to reach critical customers, and look for ways to remain relevant as old markets morph into something completely different. One area that people are expanding into is the area of ‘free”. As an essential aggregator and driver of interest, free has been a long standing component of Internet related business models. One question that you should now ask yourself is can your business benefit from a free offering? In the referenced article the commentator does a great job of explaining some of the history, dynamics, and impact of free offerings. In it the commentator chronicles things such as low cost razors as a leader for more expensive blades; low cost printers for more expensive ribbons, and free software applications as a teaser for higher priced versions and extras. “Indeed, the appeal of “free” has been shown to be so extraordinary that it bends the demand curve. The demand that you get at a price of zero is many times higher than the demand you get at a very low price…” The problem is that if you have a business model with hard assets, schedules, and employees free is not nearly as attractive. The dark side of free is that once that price is set people will never pay more for it. Once what the commentator calls the culture of free is established you can never go back to regular pricing. The same can cause a death spiral to your margins. As a result, you have treat free like a hazardous material; deal with it under special conditions, and keep it contained in areas that you control. Because of the volume of free media content and news, newspapers are dealing with this issue daily and many of them will be eliminated in the near future. They really need a free model that works for them. You probably need a free offering in your toolbox as well. If you develop one, be sure to respect its power. “Successful companies are the ones that appreciate that.” Let me know your thoughts on how you are using free in your revised business models.

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