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How to Counter the New Culture of Free

Free is a powerful force in the marketplace; especially online.  A fast-growing, Internet-inflamed “Culture of Free” is leaving more and more businesses in all industries and areas reeling in profit pain.  Companies large and small are seeking answers to a question that once seemed odd:  What can you do when your products or services are more popular than ever, but consumers don’t want to pay for them anymore?

Surprisingly, perhaps, there are some good answers.  Saul Berman, a partner in IBM Global Business Services who wrote the insightful new release Not for Free: Revenue Strategies for a New World (Harvard Business Review Press, Feb 17, 2011), argues that companies in nearly every industry are vulnerable to five profit-piercing threats that have facilitated the culture of free:

1)      High customer expectations for personalization, control, relevance and timeliness

2)      Low cost, saturation-level communications

3)      Bountiful, low-cost band width

4)      Plentiful, real-time data processing power

5)      Rapid-fire technology and competitive innovation

These trends and expectations affect even small local businesses.  Customers now instantly communicate local buying experiences; they expect restaurants, dry cleaners, health clubs and others to offer personalized, relevant offers and experiences.  And they have unprecedented access to price comparison and other competitive information.

Businesses are being forced to squeeze out revenue in new ways as markets shift.  But the changing landscape, Berman argues, creates new opportunities to grow revenues “organically” without expensive advertising or marketing programs, by simply changing your approach.  The key is this:  It’s not about creating killer new products or latching onto the new technology du jour.  It’s about understanding customers and delivering value.

How?  Start at the beginning – with your customers.  But be careful.  Most business owners, entrepreneurs and companies in general still view customers through an outdated mass segmentation lens based on age, income, gender or geography.  Such segmentation is dead; done in by technology.  In its places there’s a new type of segmentation based on how buyers actually behave – how they use your products, services and information.  This in turn sets the table for building revenue in new ways:

1)      Pricing innovation: It’s not just “how much” but also “when.”  No product is free – ever – notes Berman.  Someone always pays for it. So the answer is not to price your product at zero, but to innovate around the amount of money charged, and the point (or points) in time when you require customers to pay.  Successful approaches include: subscription plans, variable pricing, by-parts pricing, bundling, and rental models.

Rent The Runway, launched in late ‘09 by two Harvard Business School students, is a great example of pricing innovation.  The founders (Jennifer Hyman and Jenny Fleiss, shown in photo) took a traditional “buy-only” product (designer dresses) and reinvented it via subscription and “rental model” pricing.  Rent The Runway is a membership site (think “subscription”) that rents designer dresses to members to wear at all of life’s special occasions for less than 10% of what it would cost to buy one.  Women can outfit themselves in a different, cutting-edge designer fashion for every event they attend throughout the year for less than what they would have paid to buy a single dress in the past.

2)      Payer innovation: Sometimes the customer who pays is not the consumer of the product. Berman calls this “let’s have a (third) party.”  Since nothing is free, and somebody always pays, the trick is to think of alternative “somebody’s” who might pick up the tab, or part of it.  A classic example is TV shows.  They’re free to you – the advertisers pay.  Sponsorships and while-labeling are two other examples.  “While labeling allows product companies to sell outside of their traditional market without having to drum up demand themselves.”

3)      “Package” Innovation:   Don’t take “package” too literally. It’s not about the wrapper; it’s about all the benefits and features of a given a product or service.  Today’s most innovative companies are expanding revenue opportunities by changing the form an existing product takes.  There are three basic ways to think about it:

a.       Breaking the product down into components

b.      Integrating different pieces of the value proposition

c.       Extending value in new ways

Understanding the underlying elements of pricing, payer and packaging can help you rethink and reformulate your revenue strategies, and find new ways to keep customers paying today and in the future. For the latest updates, bookmark BizBest, or subscribe to the BizBest news feed.

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