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How 'Free' Can Be Profitable
By: Smart Profits Report   Thursday, January 08, 2009 5:31 PM

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According to the BBC, Chris Anderson has a groundbreaking new way of conducting business.

His bold claim is that the costs in the digital world are so low that companies centered around the web can offer products for free while still making a profit. In his scenario, it’s a win-win situation for both the corporations and the consumers.

Anderson is so confident in his proposal that he’s written a book on the subject, entitled “Free: The Future of a Radical Price.”

Of course selling that idea comes against two immediate barriers. The first one is the business world itself. Any executive worth his or her salt is going to question the idea. After all, offering free products to customers means no immediate profits. It means that people could take advantage of the situation, taking more than intended or estimated, and it means at least an original loss of revenue.

Now any executive worth his or her salt also knows that free products can also be a great sales tactic. They can utilize BOGO sales where consumers are lured in by a “free” purchase with the purchase of something else. (That, Anderson argues appropriately, isn’t really free though. It’s merely the appearance of such.)

Or instead of discounting by another name, companies also offer consumers a taste of any product, and there’s the chance they’ll think its good enough to spend money on. We all know how that works. It’s why perfume counters always have a plethora of testers on it, and Costco (Nasdaq: COST) has tables set out with tasty samples.

So sales teams do understand how “free” goods can still be profitable, but it can still be a tricky sell and not just to the business world. Consumers themselves might bargain shop, lie, cheat and steal in order to pay no price at all, but they’re oftentimes immediately suspicious if a company actually hands them something. Because if it’s legally free, than either it isn’t worth anything or there’s some catch; those are the automatic two assumptions that the savvy consumer comes to.

But they can be trained to think otherwise, as evidenced by Google (Nasdaq: GOOG), which provides a free web-based search service but is still exceedingly profitable. Or Yahoo! Inc. (Nasdaq: YHOO) which offers plenty of free games but charges for a select few.

That’s the kind of free Anderson is talking about: the kind where “you give away 99% to sell 1%.” And that is a free that just might sell.


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The above story is the opinion of the author only and it does not reflect iStockAnalyst opinion. Further, the author is not personally advising you regarding the suitability of the story for your investment needs. In no event iStockAnalyst will be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from or arising out of, or in connection with the use of this information. Please consult your investment advisor before making any investment decision.
  
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