KNOWLEDGE FOR ACTION

COMPETING AGAINST

FREE

David J. Bryce Wharton EMBA Competitive Strategy

KNOWLEDGE FOR ACTION

Free Competition Can Threaten Survival of

Established Companies

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• Share of international long-distance now >25%

• Banned by state telecoms across the world

• Record profits last year • Air France with

declining share, losses; now cutting workforce

KNOWLEDGE FOR ACTION

1. Up-Sell (“Freemium”)

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Offer a free version to gain attention and widespread use; then offer a premium product with advanced features for customers willing to pay.

Requirements:

A free product that appeals to a very large user base so that even a low conversion rate of free users to paying customers will generate substantial revenues

or A high percentage of users willing to pay for the premium version

KNOWLEDGE FOR ACTION

2. Cross-Sell

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Offer a free version to gain attention and widespread use; then offer other products for which customers are willing to pay.

Requirements:

A broad product line (preferably products that complement the free product)

or

The ability through partnerships to sell a broad line of products to users of the free product

KNOWLEDGE FOR ACTION

3. Third-Party Pay

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Make the product/service free to generate a community for which you get paid by a third party company who desires access to that community.

Requirements:

A free offering that attracts either many users who can be segmented for advertisers or a targeted group that comprises a customer segment

and

Third parties willing to pay to reach those customers

KNOWLEDGE FOR ACTION

4. Bundle

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Bundle the free product with non-free products and derive revenues from non-free products. Requirements:

Products or services that can be bundled with the free offering or A free product that needs regular maintenance or a complementary offering (helpful but not essential)

KNOWLEDGE FOR ACTION

How to Respond? About Two-Thirds of Incumbents

Get it Wrong

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1. Ignore

2. Launch Free too Early

3. Launch Free too Late

KNOWLEDGE FOR ACTION

Responding to Free

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Business Model Threat

(change business model)

Delayed Threat

(co-exist or delay launch of free

product)

Immediate Threat

(launch free product

immediately)

Minor Threat (monitor situation)

Growth rate (of number of users of the free offering)

Defection rate (of paying

customers to the free offering)

High (5% per year or more)

Low (less than

5% per year)

Low (less than 40%

per year)

High (more than

40% per year)

KNOWLEDGE FOR ACTION

Change Business Model: Deseret Media Response to

Craigslist

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• Salt Lake City one of 50 markets where Craigslist not dominant

• KSL.com Classifieds

• Integrate KSL Television, KSL Radio, and Print (Deseret News)

• Restructure reporter staff – use citizen voices, columnists, and

nationally syndicate content

KNOWLEDGE FOR ACTION

The Challenge of Launching Free

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Obstacle 1:

– The P&L Structure

• Must separate revenue from cost

• Different managers over each

• Take profit responsibility to the top

Obstacle 2:

– The Cost Accounting System

• Must think of marginal not average costs

• Must understand the long-term cost of losing

market share to free competitors

• Beat them back while you can!

P&L

KNOWLEDGE FOR ACTION

Question and Answer

Name of Presenter 11

KNOWLEDGE FOR ACTION