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Freeconomics

A Marketing and Financial Strategy

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Freeconomics Overview: Freeconomics is a term coined in recent years to describe the strategic giving away of goods or services in anticipation of spurring sales in the long run. While the term freeconomics is a product of Internet marketing, the model is actually very old. One of its better known pioneers is Gillette, which built its business model on giving away its patented safety razors for free to spur sales of its proprietary blades. This formula has been copied by Schick and other competitors in the razor market.

Do not confuse freeconomics with freakonomics, which is derived from the title of a book and which describes how economic analysis can be used to understand a variety of social phenomena.

Freeconomics encompasses a crucial strategic issue for product managers, controllers and CFOs across industries: developing pricing structures that attempt to maximize revenues through a carefully designed mix of free (or nominally priced) and fully priced products. The key is determining which customers or products are highly price sensitive and which are not. Examples include (per "How About Free?" in the spring/summer 2009 issue of the Wharton Alumni Magazine):

  • Adobe Reader software being offered free to the general public to make PDF documents a widely accepted standard, while the companies and websites that create those documents must buy the Acrobat software to produce them.
  • Yahoo sponsors fantasy football leagues with no entry fees, but charges for the statistics that are necessary inputs for the participants.
  • Several tax preparation firms lure in clients with free basic online filing, but charge for more complicated returns.
  • Music groups offering "pay what you wish" music downloads. The band Radiohead employed this in 2007 as a publicity move, then offered the same album on CD. It sold more copies than their prior two CDs combined. This is an example of adapting revenue models to new technology.

Tax preparation firm H&R Block started offering to file federal form 1040EZ for free in 2011. While this was not conceived as a pro bono initiative on behalf of low income individuals, it nonetheless can have that ancillary purpose.

The main motivation for H&R Block was the expectation that most people responding to the offer actually would need to file a federal 1040, a state income tax return, or have to file either within two years. All these come with a charge.

Freeconomics Versus Donations: For companies that, due to the recessionary environment, have underutilized staff, donating their time and skills to free work for charities and community organizations can be a wise strategy. Doing so can create goodwill and improve public relations. With the correct projects and pro bono clients, this can generate increased sales when the economy rebounds. Moreover, in all business and economic environments, contributing staff time to pro bono work is a way for firms to reduce cash donations while still keeping up a charitable commitment.

The September 1, 2009 issue of The Wall Street Journal ran an article on this topic. Among the examples cited was that of an electronics firm that undertook, for free, a major project for a church. After the job was done, the pastor thanked the company from the pulpit, which amounted to a highly valuable endorsement before potential customers.

Pro Bono Financial Services: In 2008, New York mayor Mike Bloomberg announced a variety of initiatives, including a campaign by the city’s Department of Consumer Affairs to educate city residents about taking control of their finances, starting with how to deal with debt. Free and inexpensive financial education classes, counseling and workshops were part of the plan. Drawing on this model, financial services firms could consider redirecting some of their charitable giving instead into offering some of their expertise to low income people on a pro bono basis.

Dress for Success: An organization called Dress for Success obtains donated women’s business attire from leading designers and manufacturers, which they then give to jobless low income women who do not have the appropriate wardrobe to dress for interviews.

Free Employee Benefits: Another application of the freeconomics model is in offering your company’s products or services as a free employee benefit. Among other positive outcomes, this can increase employee loyalty to the firm and spur employees to offer positive word of mouth, winning their friends and family as new customers.

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