I'm Ben Gruber

2013 / 26 August

When You Are the Free Lunch


‘FREE’ – An Undercover 4 Letter Word in StartUp Vernacular

Recently, while promoting my scavenger hunt bar crawl business, I offered a series of FREE crawls for both of our two core offerings. One of the options flourished while the other ended with a bunch of happy customers but with a lot of the business’ time and money spent with no monetary reward in return. I wanted to know why one prevailed and the other failed, so that I could apply the concept in future applications.

Quickly, here is my analysis. Our first offering is a Group crawl. With this type of crawl, one person signs a group of their friends up for a special occasion, most often for birthdays, bachelorette, and corporate parties. So we gave away 5 or so of these to friends, family and couple of companies we know well. The result has been consistent. They all loved it. However, we have yet to see a single instance of a referral from the any of them.

We also offered 30 free tickets to one of our Open Crawls. Our Open Crawls are sold by individual ticket not by group.  The result of the FREE tickets on this second offering was a huge success. We sold out the crawl – with a solid portion coming through referrals by the FREE ticket holders.

What gives? I think the answer to this quandary is simple. Giving away the Group crawl for FREE drove away potential revenue on two fronts. Front 1, by giving away FREE group crawls, we created a situation where people could not directly refer their friends (as paying customers). Why couldn’t they refer them? Because they had already invited them to join their crawl which was free. This is in contrast to the FREE tickets given out on the Open Crawl. These individuals each wanted a friend or two to come with them (that’s humane nature). And since those friends could not come for free, and because the person did want the FREE ticket to go to waste, this resulted in ticket sales.

The second reason the FREE Group offering was doomed from the start is because we were giving away the service at the very moment that incentive to buy was at it’s highest. For our Group Crawls, customers almost always have a particular event that they want to crawl for whether it be a birthday or a pending wedding. The looming date of the event and the social pressure to throw a fun party is a strong force that can lubricate buying friction. So in essence we were trading a potential buyer in the short term, for the hope that we could generate more than one event booked in the future, when this rare moment rolls back around. In general, when this type of product-market combination is in effect, I do not see this being a recipe for success.

 

Creating a DOs and DONTs Roadmap for FREE Offerings

After uncovering what in retrospect appeared to be an obvious roadmap as to when and where to offer my bar crawl service for free, I decided to think back over my years of startup work and see if I could develop a broader framework that could help across many types of businesses. In reflecting, I reminisced about the 20 or so startups that I had been involved with from food products, to web services, to consulting practices and I can say without a doubt that as a part of each and everyone of our marketing strategies, we thought it was a necessity to give away the product or service for FREE. If we could just get it into the customer’s hands or get them to use our service, we would get just the right feedback and it would create just the right echo effect that would reverberate throughout the world and everyone would come crawling to us. Sound familiar?

Before getting into some of the specifics, I want to make clear that this is not for all businesses – especially ones that are by nature free. Also, I am not advocating hoarding your product or service during the development process. Close friends and family typically have already ‘pre-paid’ for the product prior to launch by dealing with your stress and bad moods. Plus, you do need some initial feedback where possible. The real area of debate is when you get to the next ring of customers and beyond.

 

Anatomy of a Product or Service That is Right For FREE

DO Pull Out the Rug

Initially giving away your product for FREE works well when your product is difficult to disengage with. In other words, the lion share of the value of your product is not realized in one use (like my bar crawl service). This model comes in slightly different variants from a ‘free trial’, to the ‘freemium’ approach, to the ‘crack model’, but they all share the same basic idea. Get the user hooked on your product and then tell them that they can not use your good or service again – until they pay. A great example is Dropbox. They give away the first bit of server space for free. So you start pilling documents and pictures on to their service and by the time you run out of space, you are completely reliant on the service and it becomes very difficult to move your files elsewhere.

Again, Don’t go “Pull Out the Rug”, unless your product or service has entrenched value that makes it hard for users to just pack up and move out.

 

DON’T Mess with Consumables

This one is simple and is nearly the opposite of the Pull Out the Rug example. If your service or product’s full value can be consumed in a short period of time or in one use – it is usually best to refrain from free give aways (there are exceptions below). Customers are smarter than you think. They will use you (and your product) and spit you out before you have a chance to collect. So you are losing a customer who might have paid (as in my Group crawl case above).

 

Amazing Products/Services, Go Viral

One of the most common reasons to give your product away for free is so that the customer will try it, absolutely love it, and go tell all of their friends about it – and all those referrals end up buying a boat load of what you are selling. Unfortunately unless your offering has the right attributes, this will probably not happen. Your product or services needs to have both of the following characteristics. It must be viral by nature (have a great social pass along value) and it must be something that is needed by many people, often. In the case of my bar crawl service, even though it does have viral potential (who doesn’t like telling their friends about a good night out), it does not have the second case needed – a reason to buy it soon after hearing the news of how great it is. By time that person’s birthday comes around, the service is gone from their mind. Unfortunately, immediacy is part of the key.

If your product or service does not have both of the characteristics needed here, do not give it away.

 

DON’T Cannibalize Your Potential Sales (AKA ‘Why Buy The Cow When You Get the Milk for FREE’)

This has happened to companies I have been involved with many times over the years. We are eager to get a new client or customer in the door and we do not want to gamble and see if they will pay for the product upfront. So, we give it away for FREE. They end up loving the product, but have no need for it again. This was true of a web development company where I worked. We would do a website for a client for free in hopes that we would be their agency of choice when the next project rolled around. Well, in most cases it a new project never came up, and in the cases that it did and they wanted to work with us, we had already devalued our services to a point where it was impossible to make money on the future projects.

 

Defining Success and Testing

In order to truly evaluate successful FREE giveaways from epic failures, you need to set parameters and expectations. In my view, too many startups play the long view too long and give too much weight to overarching concepts like Brand View Exposure, which are better left to big, established companies. I know, giving your product away can feel good in the short term because people are using it. But most of the time it costs time and money and the ‘views’/’useage’ it generates are not worth much to you unless they generating more ‘views’ or more dollars in the foreseeable future. So, in cases that do match any of the frameworks above, start by giving away a little for free, and closely monitor a couple of stats very closely.

The most important statistics to measure are referrals that result in sales and referrals that result in sign ups. They are basically all that matters. If the free giveaway drives a lot of people to your product or service, but none of them want to buy or sign up, then it doesn’t matter. Note, this can happen a lot of the time with FREE offerings because the referrer was unable to judge if the product or service was actually worth it (cost vs value), since they did not actually experience the cost element. This can result in weaker referral of the product or service even when they really loved it. Anyway, this data should be measured with in a short period of time. It is easy to justify in your own mind that the FREE give away will eventually result in sales and that you just haven’t given it enough time. Believe me, I have held out with hope for years in some cases. In reality it is better to bite it in the butt early. In most cases, if you did not see any referral conversions in two months, it isn’t going to happen or you will be out of business before it does (“In the long run we are all dead” – John Maynard Keynes).

 

It’s Just a Frame Work to Think FREE Through

Each business has it’s own unique inputs and parameters so there is no way to know when to use FREE and when to shy away from it. Hopefully I have helped shed some light on typical cases where it works well and where it does not. And at the very least, I hope that I have helped move away from the default that FREE is always a good idea when launching a product.

So whether you think about it as,“There ain’t no thing as a free lunch”  or  “If you think you are eating a free lunch, you are the meal” or “When You  Give Away Your Product For Free – You Just Got Worked,” it is a tactic worth some real thought.

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