Competing with Free

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by Emily Hogg

When businesses are faced with competition who are offering free products, things can get messy.

Three BYU business professors wrote an article in the Harvard Business Review which gives advice to companies who face such competitors.

The professors found that a company in this situation should start to change their business model if they lose at least 5 percent of their customers in one year to their new competitor, or if their competitor is growing more than 40 percent a year.

Business Professor Nile Hatch, co-author of the article, said if the conditions are right, the threat of free products to existing companies is substantial.

“We would not suggest immediately offering free products or services in response to free entering a market,” Nile said. “Sometimes the free product does not require a response because the quality of the free product or service is not good enough.”

David Bryce, a business professor and lead author on the piece, said many of the company examples they found in their research were current, and these companies provided tangible and/or digital products.

“Pandora is an interesting case,” Bryce said. “Pandora is now looking at going public. This is bad news for companies like SiriusXM who might have been able to make a pitch to buy them before they go public, as Microsoft just did with Skype.  Now Pandora will continue to grow, probably at a rate of over 40 percent per year and competitors could begin losing at least 5 percent of their customers to Pandora.”

Bryce said if this happens competitors will have to change their business model or eventually die.

“To respond, what competitors should do immediately is offer a ‘freemium’ product, where they give away a free version of their services and then charge for an upgraded version of that service,” Bryce said. “Some people say you get what you pay for and if it’s free you can’t get much, which might be partially true. There are not enough advertising dollars in the world for everyone to offer a free product.”

Hatch said he doesn’t think this new business model of offering free products will go away.

“From their beginning, they have always been a threat,” Hatch said. “The big question is if free will spread to everything. The answer is probably not. There are a lot of products that are not suited to be free because their costs can’t be covered through other resources. I don’t think it is likely they will take over everything, but we are seeing this model take over things we didn’t anticipate not long ago.”

Hatch said there are some advantages to this emergence of free products, especially to students.

“One advantage is that it is a relatively low-cost way to find out if the product is right for you as a consumer,” Hatch said. “It also makes it easy to abandon the product if it doesn’t suit you. Many students today have grown up with free and expect that many products should be free.”

Hatch said many free products, especially software, are so good they are being adopted even by corporations and government agencies.

“For existing firms competing with free is a scary process, but for consumers it’s a wonderful thing if the product or service is good,” Hatch said.

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