Indirect Costs of Free Products And Services

If something says it’s free, it’s not. Consumers may not use money directly when they receive something for free, but they pay indirectly in ways that benefit the company.

Here are some examples:

  • Attention: Free online viewing or a product or service discount is provided in exchange for watching an online ad, for example.
  • Bundling: A consumer receives a price offset or even a free product by buying other products in a bundle.
  • Referrals: Companies frequently give away or discount their products or services if consumers attract new customers to the company or endorse their products. This is the basis of the Friends and Family promotions used by a number of retailers and cell phone companies, for example.
  • Financing: Financing terms often offset purchase prices. For example, monthly payments may be waived for a few months at the front end of a long-term vehicle lease. A variant of this is the mail-in-rebate (MIR), where companies obtain the consumer’s money now in exchange for information and a rebate later.
  • Information: Companies may seek something other than money in exchange for providing a product or service without charge. Information is most commonly sought, e.g., information about the customer, the product or the purchase experience. Starbucks might say, “Tell us how we did today and we’ll give you a coupon for a free coffee.”
  • Company money: Like Canadian Tire, some companies create their own money as part of their business model. Some online games also use company cash. On YoVille, a customer would use Yocash to buy a kitty, say; on Farmville, Farm Cash or Facebook Credits are used to buy virtual things as players cultivate their farms, buy animals and harvest crops and trees.
  • Points: Points are collected by consumers in exchange for purchasing and these points are then exchanged for goods and services, sometimes when these would otherwise have gone unsold or unused, such as hotel rooms in non-peak periods.
  • Product upgrades:  Companies often use revenues from premium versions of the product to enable the less well-featured products to be given away. This frequently occurs in the software application sector. Rovio’s well-known Angry Birds game is provided for free, for example, but customers pay if they want a Mighty Eagle or an ad-free version. Apps that take people into virtual worlds often provide the game or experience at low or modest cost but charge for digital enhancements, such as a special digital weapon in an online war game.
  • Recycling: Consumers may be encouraged to repurchase by taking back their end-of-life, partially used or recyclable products in trade for discounted new ones.
  • Systems, collectibles, samples and comps:  Companies subsidize the sale of one product in order to achieve sales of other ones, especially when the product that is given away is part of a system that would benefit from the use of other products. Examples include giving away or discounting razors or ink-jet printers to make money on the blades or cartridges. Another variant of the system is the collectible, where consumer behaviour is triggered by beginning a collection sequence, with early goods given away, discounted or bundled to secure ongoing sales of later ones by the collector. Samples are also a well-known approach to stimulate trial and adoption, and examples are to be found in many consumer goods industries. Complimentary products are also often given away to stimulate trial and change behaviours when the desired relationship is a valuable one and the cost of the product is modest in relation to the value of the relationship.
  • Time:  Time is an offset where a company gives away or steeply discounts its product or service in order to secure future business, and seeks future sales to offset current sales. Time is also an offset when companies use mail-in rebates to provide future rewards for current purchases. The market pricing of some products is such that the rebate coincides with the projected price of the product, as is the case for some aging technology products that experience substantial price declines when new models are introduced.
  • Work: Companies exchange work a consumer does, such as a requirement to log in to a website, for example, for something the consumer is likely to value. Consumers often complete two codes (called “captcha” codes) prior to logging into a secure area of a website. One code is required for security and authentication. The other serves to make text readable where machines have already tried unsuccessfully.
  • Only pay shipping: Get the product free, you only need to pay for shipping. Meanwhile the shipping cost is inflated to cover the cost of making the product plus a margin.