Strategic Planning Analogy #335: Free Lunch?

THE STORY
Back when I was getting my college degree, the economy was bad and jobs were practically non-existent. I needed to find a job to help pay for my education and was not having much luck finding one. I was desperate.

Eventually, I found a job working at a telephone call center. My job was to call people up on the telephone and tell them they had won some “free” magazine subscriptions. After they had accepted the “free” gift, I was to tell them about a small handling charge for setting up the subscriptions. As it turns out, that “small handling charge” was equivalent to paying for a magazine subscription.

Once people heard how much those “free” magazines would cost them, they cancelled the subscriptions.

After doing this job for two days, my conscience told me that selling “free” subscriptions to unsuspecting people is wrong. The lies and deceptions were more than I could take. So after two days, I quit. As it turns out, I was not that desperate for a job.

THE ANALOGY
If you want your business to survive long-term, eventually you have to generate income. And the income needs to exceed costs. Giving everything away for free forever to everyone is usually not a path to long-term prosperity. Somebody, somewhere has got to put money in your pocket.

At the call center, I was telling people they were getting the magazines for free. In reality, that was a lie. These people were really paying for these magazines. All we had done was change the name of what they were paying for, from “subscription fee” to “handling fee.” Call it what you want, but they were still paying for the magazines. I’m sure the call center was also getting money from the magazine publishers who wanted to increase their subscriber base in order to charge more to the magazine advertisers.

So in the end, those magazines weren’t free. The subscribers were paying for them in “handling fees” and the advertisers were paying for them in “advertising fees.” And that was how this call center put money in its pocket even though it was supposedly giving away magazines for free.

There are lots of creative ways to put money in your pocket. There can be sources for your income that have nothing to do with the user of the product (like the magazine advertisers). Because there are lots of ways fund an income stream (from a variety of potential sources), creative revenue sourcing can become a key strategic differentiator and a source of innovation.


THE PRINCIPLE
This is another in a series of blogs on innovative business models. In the last two blogs, we looked at innovation via changing who owns the product/service and where the product/service is offered. In this blog, we will look at innovation based on how a product/service is funded.

One’s initial thought may be that the person who uses the product/service should be the one that pays for it. After all, they are the one getting the benefit. However, as we will see below, that is only one option. There are many other ways to fund a business’ revenues. If you are creative enough in sourcing your revenues, you may open up a whole new business model that creates new growth opportunities. Listed below are a few ways to derive income from people other than by just charging everyone who uses a product/service.

1) Only Special Users Pay Model
Instead of having everyone who uses a product or service pay for it, you can have only certain class of people pay for it—the rest getting it for free. This is often referred to in the online space as the “Freemium Model.” Most people get the basic version of the software/internet service for free, but if you want extra features, you pay for the premium model. A perfect example is LinkedIn. The vast majority of the people using this job-related social networking site are using the free version. However, because free pricing created a large pool of people in the LinkedIn database, the data became extremely valuable to people like job recruiters, who pay money to get a premium version with extra features to access this data.

A similar example is Adobe PDF. They give away the Adobe Reader files for free to establish PDF as the standard way to read protected documents. Then, Adobe charges money for the premium version which allows people to not just read the files, but also write files in PDF. Without the large base of free readers, there wouldn’t be much incentive to write files in the format (where the real money is).

This is not just a digital model. Think about night clubs that have a “Ladies Night,” where women get in free. The reason is similar to Adobe PDF or LinkedIn. If you have a lot of women at the night club, you make the night club more valuable to single men who are willing to pay a premium to be at a place with a greater abundance of single women.

Perhaps there is a way you can segregate your customers, whereby if you give some a free ride, you will create more value for others who will pay a premium for a version of that product/service.

2) The Advertising Subsidy Model
Anyone who has watched a NASCAR race understands the advertising subsidy model. The cars and the drivers are completely covered with advertising logos. Advertisers pay a bundle of money to get those logos on the cars and drivers. Why? They know that a lot of eyeballs are watching the race and they want to take advantage of those eyeballs to get them to like their product.

A large proportion of internet sites use this model. The sites are free to users, but they are covered with advertising. A lot of the traditional media also rely on advertising as a primary source of income (as we saw with the magazines in the story). They are all trying to exploit the eyeballs looking at the media and make a pitch to them to purchase something else unrelated to the media.

When you purchase a new computer, the initial screen can be full of free trial versions of software (from which they eventually want you to buy full versions). This is referred to as “Spamware.” Software companies are so willing to spend money to be on that initial computer screen that both the manufacturers and retailers of computers are fighting to get that money. Some retailers will wipe off the spamware installed by the manufacturer and put their own spamware on the computer before selling it.

Perhaps there are ways to put advertising into your business model in ways that have not been done before.

3) The Bundling Subsidy Model
When you bundle items together, you can sell one piece of the bundle for virtually free, because you are making sufficient profit on the rest of the bundle. For example, some stores sell computers at a loss, because they know that if they can bundle enough other goodies with the computer (like extended warranties, printers, ink, cables, software, etc.) the net bundle is profitable.

Mobile phone carriers often bundle in a free cell phone, provided you sign up for a long contract (long enough to pay off that cell phone in the monthly fees). Movie theaters keep ticket prices low by charging a small fortune for popcorn and soda (and make a profit on the whole bundle).

In these cases, the user ends up paying for everything by overpaying for one piece in order to underpay for something else. However, you may find strategic partners who want to become a part of your bundle and will put in part of the subsidy in order to get into your bundle (because they know they will sell more as part of your bundle than on their own). You can have different vendors bid against each other to get into your bundle (or pay to participate).

Of course, it can also work the other way. You can create a new model by unbundling. Some phone carriers do not subsidize the mobile phone. As a result they can charge a lower price for monthly service. Just because the industry does it one way does not mean you cannot do it the other way. We talked more about the bundling model in another blog.

4) Greater Good Subsidy Model
Sometimes you can get someone other than the user to pay because they see a greater good in subsidizing the purchase. For example, governments pay for all sorts of things used by customers because it is seen as a public good to do so (like health insurance). I see all sorts of commercials on TV selling motorized chairs for people with disabilities. The commercials brag that the chairs are free to the user, because they get the government and insurance companies to pay for them.

Charities (via the people who donate to them) also pay for a lot of items which are then given away for free (often to the poor who cannot afford them) because it is a good thing to do.

Employers will often provide on-site daycare, health care facilities, and cafeterias at a subsidized rate because they see the greater good in employee hiring, employee retention, getting employees to work longer hours, or in reducing health care costs.

Perhaps you can find a way to get money from employers, charities or the government instead of from the customer, because you can prove “a greater good” will come of it.

5) The Insurance Model
In the insurance model, people do not pay for their individual use of a product and service. Instead, they pool their money with others. When they need the service, the money is paid out of the pool. The customer hopes that they will put less into the pool than they take out in services.

Insurance is common for things like health and life and automobile accidents. But why stop there? Now you can get insurance on your pet’s health, insurance against identity theft, insurance for auto repair, and legal assistance insurance. What other things could you convert to an insurance model?

6) Bad Person Punishment Model
Sometimes, you can paint someone else as “the bad guy” and force them to pay for your costs as a form of punishment. This is common in the legal profession, where lawyers will take on your case for free and get paid via the damages paid by the “bad guy” you are suing. By why stop there?

In Canada, there is a 21 cent surcharge placed on every blank recordable CD sold. Why? Because blank recordable CDs are portrayed as the bad guys since they encourage the illegal downloading of digital content. This surcharge is then distributed amongst “the victims” of illegal downloading.

Many are clamoring to do the same to food companies that sell products with too much fat or salt. They want a bad health tax put on them to help pay for the health consequences of poor eating. They’ve already done it in a way with cigarette manufacturers, getting them to pay for their unhealthy product. Some are pushing to tax news content on the internet to subsidize print media.

Maybe you can find someone to paint as the Bad Guy (and paint yourself as a victim) and get the bad guy to pay your costs for you.

SUMMARY
Don’t automatically assume that your income has to come from all the people who use your product/service. There are lots of other options, including premium customers, advertisers, bundle partners, government, employers, charities, insurance pools, and bad guys. If you think creatively about your business model, you may find a way to revolutionize your industry by funding it in a new way.

FINAL THOUGHTS
There’s an old saying that there is no such thing as a free lunch. Well, if you are creative in your funding model, you can create a free lunch for some, just so long as you find someone else to pay the bill.