HANNAH BATES: Welcome to HBR On Technique, case research and conversations with the world’s prime enterprise and administration consultants, hand-selected that will help you unlock new methods of doing enterprise. Free services and products are in every single place – from purchase one get one free provides  to free workplace software program like Canva and Google docs, and, sure, this podcast you’re listening to proper now. In case your income technique doesn’t embody give aways, these free items and companies can put additional strain on your enterprise. How will you compete? Brigham Younger College professor of technique David Bryce studied give-away methods throughout 26 completely different product markets. He says that firms make personal key errors once they attempt to compete with a free entrant: responding too quicky with their very own free providing, or not responding in any respect. On this episode, you’ll be taught which key components to contemplate as you determine tips on how to compete with a free entrant. You’ll additionally discover ways to refine your personal product combine and contemplate which of your prospects to focus on with free merchandise. This episode initially aired on HBR IdeaCast in Might 2011. Only a observe — we recorded this by cellphone. Whereas the audio high quality isn’t nice, the dialog is. I believe you’ll get pleasure from it. Right here it’s.

SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Enterprise Assessment. I’m Sarah Inexperienced. What do you do when your rivals begin giving freely their merchandise free of charge? That’s the query we’ll be tackling this week with David Bryce, a professor of technique at Brigham Younger College’s Marriott Faculty of Administration. He’s the co-author of the article Competing Towards Free in our June 2011 concern. Dave, thanks a lot for speaking with us as we speak.

DAVID BRYCE: You guess

SARAH GREEN: Competing towards free merchandise is one thing that’s been taking place– you write within the piece– within the digital realm for some time. However now you say it’s spreading to the bodily world. Are you able to give us an instance?

DAVID BRYCE: Sure, effectively, we give a number of examples within the article. And one of many examples we give is GlaxoSmithKline and their battle towards Galderma within the dermatology house. Galderma was basically providing a product in Europe that obtained accepted in the USA and they also introduced that over. And since GlaxoSmithKline had the dominant share within the US market, they determined to basically rebate that product fully within the first yr. So that they had been providing the product with a full rebate. So what that meant was that prospects that had that prescribed by their dermatologists had been principally capable of get that product free of charge. So there are different examples. For instance, Ryanair in Europe is an airline and an instance of an airline that is ready to give away deeply discounted and even free tickets, relying on how a lot extras a buyer desires, resembling, do they wish to fly luggage with them or do they wish to purchase meals on the airline? And in the event that they don’t need any of these issues, they’ll basically get a free ticket.

SARAH GREEN: So are you able to inform me what’s the enterprise purpose for why an organization may wish to give away stuff like that free of charge? Particularly if it’s one thing like an airline ticket that we’re used to paying some huge cash for?

DAVID BRYCE: Effectively, the concept is that there are alternative ways to get income. And traditionally, firms have actually thought that they needed to get the income instantly from the product itself, via the worth mechanism. However what they’re studying is that they now not want to do this. And instance within the digital world is, after all, Google. And all people makes use of Google’s merchandise free of charge they usually don’t actually see that they’re placing out any cash and but Google is that this multi-billion greenback enterprise. Effectively, how is that the case? Effectively, within the case of Google, what they’re doing is that they’re utilizing a third-party pay technique. That basically implies that they’re promoting their entry to their customers to advertisers who wish to get entry. And the advertisers are paying for entry to these customers and that’s how Google is producing income. And so third-party pay is only one technique that firms use. However the notion is that if I get a free product on the market that pulls customers, then basically, I can discover different methods to generate income from these customers. I can upsell them to a paid product, for instance. I might cross-sell some completely different services or products which can be associated to the product that I’m giving freely free of charge. As I stated, the third-party pay technique might be used. Or it’s also possible to even use a bundling technique. So typically, you see an organization like Hewlett Packard who offers away free printer with the acquisition of a pc. And clearly, the patron is paying a worth for the pc, however they’re getting the printer bundled free of charge. And so these are all methods to attract customers or prospects into the corporate, get them utilizing their merchandise, after which generate income in numerous alternative ways, all of that are legit. However it offers the person this nice alternative to get one thing free of charge and helps the corporate too.

SARAH GREEN: I wish to speak somewhat bit extra about this third-party pay technique. As a result of it looks as if increasingly more, we’re placing strain on promoting, particularly to help a number of completely different sorts of companies. However how a lot can promoting actually help? Sooner or later, there’s promoting on every part and don’t folks simply begin to tune out? And is that basically sufficient income to drive the entire enterprise?

DAVID BRYCE: I’ve puzzled that query myself. I type of marvel that, are we going to get, finally, to a saturation level the place they only merely isn’t any extra promoting income to go round? And already, we’ve seen some firms hitting that time. So for instance, there’s this firm known as Xmarks who was providing an online browser add-on and instruments for searching. They usually had attracted greater than two million product customers and loads of enterprise capital cash, however they lately shut down as a result of they couldn’t ship a transparent demographic group to advertisers. So basically, there weren’t sufficient advertisers on the market who had been keen to pay for entry to these specific prospects. So right here’s an organization, obtained a free technique, obtained enterprise capital, has obtained two million customers, however simply actually can’t make this work. So I believe your level is effectively taken. I believe there’s a restrict to what number of firms can do that and the way a lot promoting cash is on the market. And I believe increasingly more, a variety of the promoting cash is flowing to firms like Google and Yahoo and different on-line giants. And so it’s getting tougher and tougher for a few of these different firms to interrupt into that.

SARAH GREEN: So what for those who’re on the opposite finish of this and also you’re not providing stuff free of charge? What are your choices if a competitor introduces a product that’s free?

DAVID BRYCE: Effectively, and that is what the article actually is about, is how do you reply to this and the way have you learnt when and what to do? And what we discovered as we seemed out throughout about 26 completely different product markets that we analyzed, what we discovered is that most of the firms actually obtained this improper. They supplied a product too rapidly to reply to a free entrant– so they’d say, right here comes this free entrant, they’d panic, they’d supply free product themselves. And what we might discover is that, finally, that free entrant would die and the free mannequin with kind of go away. And an instance of that’s what occurred within the web wars within the UK again of their late ’90s. You had, basically, an organization known as Freeserve that got here into the UK market with the primary free web supply to UK customers. And the way in which that free web labored is that they’d get the web free, however they needed to pay for the cellphone line. They needed to pay, basically, the cellphone payment. And so it wasn’t actually a free product. And even as we speak, you will have a scenario within the UK the place it’s largely flat-rate pricing, and but Virgin Web got here in and actually tried to repeat the Freeserve mannequin and supply free product. And we simply suppose it was too early for them to do this as a result of about two years later, folks basically backed off of that providing. They needed to principally go to flat-rate pricing within the UK. So on the one hand, you get these firms that may supply free too early when they need to wait it out and both anticipate the competitor or the entrant to self-destruct or anticipate the construction of the market to play out somewhat extra. On the opposite facet, you get many, many firms who merely don’t know what to do and they also don’t reply in any respect. And what we discover in that case is that the free entrant will usually start getting increasingly more market share and kind of shifting in on these firms. And in the event that they don’t reply, they’re going to be in bother. And I believe, once more, going again to the Ryanair case, Ryanair now has extra market share in Europe than Air France and I believe that’s an issue. And Air France wants to determine what are they going to do about this with the intention to keep their market share?

SARAH GREEN: Effectively, it sounds prefer it’s one thing that’s very easy to get improper, sadly– overreact or underreact. How have you learnt that you simply’re getting it proper?

DAVID BRYCE: And so what we’ve developed is an easy approach to consider this drawback. And we’ve most likely oversimplified at somewhat bit, but it surely covers what we imagine might be 70-80% of the components that you could contemplate. And that’s that we have a look at the defection charge of paying prospects to the free providing. At what charge are your personal prospects leaving to go embrace the free product? And for those who’re getting greater than 5% deterioration per yr– 5% loss, if you’ll, in your buyer base that’s leaving for this free product per yr– then we’re saying that’s a excessive defection charge. Decrease than 5% p.c is what we are saying is a low defection charge. On the opposite facet, one other issue is the expansion charge within the variety of customers of the free providing. Normally– not simply amongst your prospects– however typically, how rapidly are different prospects flocking to this free providing. In the event that they’re coming at a charge of greater than 40% a yr, then we’re saying that’s a excessive progress charge within the product. If it’s lower than 40%, that’s a low charge. Effectively, you’ll be able to see that that is forming a two-by-two matrix. And so, if in case you have a really excessive defection charge, your prospects are leaving, and you’ve got a really excessive progress charge amongst all customers coming to this providing, what we’re saying is that could be a enterprise mannequin menace. That’s one thing that you need to reply to not solely with the free product however you’re really going to most likely restructure your enterprise mannequin as effectively in response to that. As a result of basically, that’s going to destroy your organization in most likely just a few years. And we’ve seen this with Craigslist in lots of markets as they’ve are available on the newspapers with this free web promoting. It’s basically destroyed the categorised advert revenues of many newspapers in lots of markets. And there’s been only a few incumbents who’ve been capable of actually retain these revenues and go up successfully towards Craigslist. And we do have an instance within the article of an organization that was in a position to do this– that’s Deseret Media in Salt Lake Metropolis. They principally launched an internet site– ksl.com– that was a web based promoting, categorised advert itemizing sort of web page. And it’s now built-in with all of their properties– tv, radio, and others. And they also have a really vital branding, a web based presence, within the Salt Lake market. And that basically meant that Craigslist was by no means capable of get a foothold in Salt Lake Metropolis. However they’ve needed to do substantial restructuring to their enterprise mannequin itself with the intention to fend off that competitor and save these revenues.

SARAH GREEN: I’m glad you talked about Craigslist and that instance. As a result of it does appear to me like one of many challenges that I see as somebody within the media business is that folks always misidentify the supply of the lack of income for lots of newspapers. They usually often say one thing just like the person’s not keen to pay anymore. However the reality is that the person by no means actually supported journalism. It was all the time largely the categorised part. So how frequent was that amongst companies that you simply studied– misidentifying their key income?

DAVID BRYCE: Effectively, I believe that’s a typical drawback. I believe a variety of this– and the explanation it’s a current phenomenon– is as a result of we have now the rise of the web. So a variety of this has been promoted by the rise of the web, actually within the digital markets. And I believe what’s occurred within the tangible product markets is that they’ve seemed over to digital they usually’ve seen what’s taking place in digital they usually’ve been rethinking their very own fashions alongside digital traces. And so I believe it’s tough to typically determine that supply of bother.

However I believe that, actually, the problem turns into how do established firms take into consideration their very own methods in ways in which make these methods not change into obstacles to launching free however actually change into facilitators? And we speak within the article fairly extensively about among the obstacles that get in the way in which. As we have a look at the incumbents, we see price accounting methods and revenue heart P&L buildings as being main impediments and obstacles to having the ability to launch free merchandise, it’s just because inside these buildings, you will have merchandise related so intently with their costs that it’s very tough for an organization to conceive of how will we separate that product from the worth, supply one thing free of charge, after which discover income elsewhere? It creates an enormous structural drawback, these methods, and to have the ability to do this.

SARAH GREEN: It’s attention-grabbing. I used to be simply studying just a few days in the past one thing concerning the creator of Instapaper, the app for the iPad, saying that he’s determined to cease providing the free model of his utility as a result of he’s like, why ought to I waste assets chasing prospects who gained’t pay for something? So is that type of the flip facet of what you’re saying? Or does it match into your framework someplace?

DAVID BRYCE: Effectively, actually not everybody ought to supply free product. The purpose you made earlier, there’s little question that there’s not sufficient promoting on the planet to help everybody going to free. And so it turns into a problem of what’s the various? I work with firms and one firm CEO lately informed me, he stated, we didn’t reply– this was years in the past earlier than I used to be concerned– we didn’t reply to this competitor coming in and providing this product free of charge as a result of we principally felt that we had a differentiated place available in the market and that the worth that we had been bringing, prospects had been keen to pay for. Effectively, it’s a guess that paid off. Primarily, the free competitor went away and prospects continued paying for the upper worth added.

So we’re not suggesting that every part on the planet needs to be free. What we’re suggesting is that you need to look intently at these prospects who you might be shedding to free choices and determine what’s the worth proposition that another person is delivering to them that we’re not capable of ship or not capable of ship in a approach that they’re keen to pay for. And that’s the place you need to begin getting inventive about refining your product combine, your product portfolio, serious about which prospects are we going to go after with free merchandise? Which prospects are we going to attempt to keep premium merchandise for? And we must be actually seeing extra of a coexistence, in lots of markets, of those free merchandise, together with extra value-added choices.

SARAH GREEN: Effectively, it’s actually loads to suppose via and I do know that there’s loads within the article to assist folks suppose via it. Dave, thanks a lot for speaking with us.

DAVID BRYCE: You guess. Completely happy to take action.

HANNAH BATES: That was Brigham Younger College professor of technique David Bryce – in dialog with Sarah Inexperienced on the HBR IdeaCast. We’ll be again subsequent Wednesday with one other hand-picked dialog about enterprise technique from the Harvard Enterprise Assessment. In the event you discovered this episode useful, share it with your pals and colleagues, and observe our present on Apple Podcasts, Spotify, or wherever you get your podcasts. Whilst you’re there, make sure you depart us a evaluate. We’re a manufacturing of the Harvard Enterprise Assessment – if you’d like extra articles, case research, books, and movies like this, discover all of it at HBR.org. This episode was produced by Anne Saini, and me, Hannah Bates. Ian Fox is our editor. Particular due to Maureen Hoch, Adi Ignatius, Karen Participant, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and also you – our listener. See you subsequent week.