- When and how much for attracting free customers?
- How much is such an enterprise worth consisting of free customers?
- How should the organization be set-up to facilitate attraction of free customers?
Have you ever been thinking of how you also can twist your offerings into a free lunch where the wardrobe funds the meal and profits comes from the additional shoe shining service provided during dessert? In this post I will discuss the Customer Journey in the land of the Free. Where the drinks are on the house and the peanuts are on the guy in the bar, make sure you are ready to transform your own business models. Let's start!
There has been a lot of talk about things going free. Numerous attempts over the last couple of years have been trying to find ways of bringing out free products or services. For example Ryan Air have a clear goal of offering free flight service within a near future. Other examples are when operators are offering triple play services where one of the components comes for free if you sign up for all or for an extended contract time. Apple's iPod and iPhone provides an example where an integrated solution consisting of hardware, software and service makes a complete non-separable unit where the low-margin music service is sponsored by the high margin iPod and iPhone. Here Apple is actually doing the opposite - it acts as the ticket and entrance to the party with a hefty price opening the scene giving access to a dream of always available music and video for a favorable price. The value being a working playground of cheap music always available packaged in a must-have design. With iPhone you get always connected where you can interact with the world and install any application of your choice.
The idea of giving something away for free is of course not to out-compete Santa Claus, rather to sell more of something else, like periodic recurring subscriptions, shaving foam, hotel night, what-have-you. The organization offering the free service is trying to switch from something that is viewed as expensive in the eyes of the customer to something that is perceived as cheaper and that has a higher margin. Another reason could be to offer something for free that is needed in order to do the for-pay activity where you get the money back. A flight ticket for free increases the need for hotels, airport transportation, etc. A free mobile phone drives traffic and monthly fees.
Anyway, what I planned to discuss in this post is the value of a customer and how that can affect the entire customer journey. Inspiration is taken from many sources, one being Detective Marketing and the other an article in November's issue of Harvard Business Review titled "What Is a Free Customer Worth?". In the examples above organizations are giving things away for free in the hope of making up the loss later in the customer journey. In some cases they have full control of the customer like Ryan Air where they can see during the ordering process how much additional services they are buying. In other cases the business case is built upon statistics on customer behavior and how much they usually spend during the entire journey. In some cases a free customer is made good from how much other customers spend, in this case it is totally unknown from moment of attraction how much this customer is worth.
How will you then spend on attracting this customer? You have to consider direct and indirect network effects on the behavior of your others customers, the ones actually paying for your free customer. When designing such a model there are several areas to relate to and address. These are:
Through-out the customer journey you have to see the effects the free customer have on your entire base of both other free customers and paying customers. How many other free customers will one more free customer attract? And more importantly, how many new paying customers will it attract? This is crucial to get right, since getting this wrong might jeopardize the entire business.
Setting up a compensation model that takes both free and paying customers into account and ensuring that the different departments that handle the different types of customers work well together avoiding sub-optimizing is an important first step.
Then setting up a good pricing strategy fostering a good balance between initial customer attraction and early revenue and the positive network effects of attracting many paying customers. Skimming strategy with high early price to milk the early adopters, Constant strategy with a constant price over time and Penetration strategy with initial low prices to attract many customers and then raising price to increase revenue.
Focus on the value for the free customers you try to attract. Why should they become a customer of yours? Even if they don't transform into a paying customer, what is their goal and value of continuing being a non-paying customer?
How will the entire portfolio of free and paying customers be valued by the market? By making the actual network of customers and their stages in the customer journey clear and well defined it is much easier making the case for Wall-street on what the company is actually worth. Knowing where you are and where you are going simplifies communication internally and externally.
To summarize the above: Free customers can provide a lot of value whether they are supposed to pay later in the journey themselves or attracting other paying customers. The key is to get the model right including direct and indirect customer networks and the compensation and organizational issues serving paying and free customers. By having a clear view on where you are and what you want to achieve it is much easier getting the right pricing strategy and valuation model in place. Good luck with your customer strategy and attraction model.
