On The House

Do The Math

Giveaways can be considered a simple expansion of pricing policy all the way down to zero. But charging nothing for something can build your market so powerfully that sales actually multiply. Assume, for instance, you get 40 percent of your revenues from selling a product. The other 60 percent comes from selling upgrades, add-ons, service, training, manuals, consulting and the like. If giving away your product results in twice as many users, who then purchase twice as much of your related offerings, sales will grow 20 percent.

Of course, this isn't going to work for every business. If product sales generate half your revenues, then revenues may stay the same even if users double. If 60 percent come from product sales, then this model predicts revenues will decline. And if your number of users grows by less than 100 percent, revenues may shrink drastically.

Just because you start giving away products and services for free doesn't guarantee you'll gain users, either. You must have a good product that meets a definite need. Plus, you have to be able to market it well and provide competitive customer service. Ideally, this will allow you to establish a brand and build a powerful market share from which you can then derive substantial profits.

But giveaways remain an exceptionally aggressive and risky strategy-one that, as more companies attempt it, becomes riskier all the time. If a giveaway doesn't capture market share, the strategy fails and likely destroys the company. Giveaways can also obliterate a market's pricing structure, resulting in lower total sales for everyone. When several competitors offer giveaways, usually only one survives. Says Evans, "It's a bet-the-company kind of gamble."

No one expects giveaways to become the most important means of competition, but the lure of becoming the next Microsoft, which has a stock market valuation of half a trillion dollars, keeps the competitors coming. "The logic is that there's a huge [pot] of gold at the end the rainbow," Evans says. "People think, 'If we do this right, we can be the next Microsoft.' "


Next Step

  • Open Sources: Voices from the Open Source Revolution (O'Reilly), edited by Chris DiBona, Sam Ockman and Mark Stone, explains the free software business model in the words of well-known practitioners. Fittingly, you can read it for free online at: www.oreilly.com/catalog/opensources/book/appb.html.


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This article was originally published in the June 2000 print edition of Entrepreneur with the headline: On The House.

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