How to Make Money Giving Stuff Away Free

Posted on March 10, 2005 by Dave Pollard

The Idea: Innovative companies are learning that giving something away free can be good for both the top and bottom line. Unscrupulous companies are abusing it. Oligopolies are wringing their hands and calling it theft, and the end of the world. Is this trend inevitable, and how can we make it work to everyone’s benefit?

The price trend in almost everything, except for oil and other non-renewables, is downward. In some cases this is a good thing: Open Source development of software, and the free exchange of information over the Internet, for example. In some cases it’s not so good: The Wal-Mart Dilemma for example, which trades off low prices for poor quality, third world slavery and loss of Western jobs. In some cases whether it’s good or bad depends on where you sit — File-sharing, for example, which allows new artists to get low-cost exposure or markets, and which hurts both the price-gouging recording industry oligopoly and independent artists who count on modest-price CD and MP3 sales to make a living.

Conventional wisdom is that if you lower the price you have to make up the loss by either cutting costs (by squeezing suppliers and employees a la Wal-Mart) or drastically increasing volume, a la Amazon. But what happens when the price goes to zero — How do you make money then?

The answer is by being innovative, and recognizing that the supply/demand curve is inexorable, and, except when distorted by government subsidy, failure to absorb full external costs, or oligopolistic price-fixing, the price will find its own level. And increasingly that level is zero, reflecting both the lower value that consumers put on most of the mass-produced junk that we’re inundated with, and the lower buying power that consumers have been left with thanks to corporatist exploitation and cowardly lack of government regulation.

If you can’t beat ’em, join ’em. How can responsible, innovative companies give stuff away free, and still make a living? Some new ways are being invented all the time, but here, classified by consumer receptivity, are some of these techniques:

1. Thumbs Down — disreputable methods, some bordering on fraud:

Pyramid schemes: Sign up five other people to buy X, and you get it free. Just don’t expect those five other people to be your friends ever again.
Buy one get one free schemes: Consumers aren’t stupid. They know this means half price when you buy in bulk, not free.
Limited-time free trials: One of the frankensteins of high-tech. This means you have a now-useless piece of software, non-functional link or ‘expired’ online subscription with the vendor’s name all over it, so you can curse them again every time you stumble over it until you get pissed off enough to delete it once and for all. Once you’ve given something away it’s bad manners to take it back.
Free if you’re not satisfied: Yeah, right. Just try and get your money back without investing more in time, effort and aggravation than the product cost.

2. So-So — methods that work sometimes, sometimes not:

Free samples: These are better than limited-time free trials because they don’t persist, on your computer or anywhere else. Once they’re gone, they’re gone, and you know that going in.
Free prize inside: So-called by marketing guru Seth Godin, this is something you give away that’s ‘hidden’ in the product, like the crackerjack prize, or a surprise feature in hardware or software, or the extra video you get with your music CD. If it’s genuinely valuable and not hyped, it’s a good deal. But if it’s not valuable, you’re getting what you paid for it. And if it’s hyped, the consumer will start to suspect that it’s not free — its value has been built into the total price.
Shareware, pay what you want: Free with a guilt trip attached is not free, unless you’re shameless.
Barter: If you’re trading away something that someone else values more highly than you do, to get something that you value more highly than they do, then this is a winner. It rarely works that way, however, and when it doesn’t, barter is just two market transactions back-to-back, with the money reflecting the real (greater than zero) price invisible. All you save is the sales tax, and maybe the environment if you’re buying used instead of new. Which is OK, too. But not free.

3. Ingenious — methods that work:

Information and/or do-it-yourself process free, ‘live’ service extra: We need to learn to do more things for ourselves. I applaud companies that help people do things themselves, and offer to help, at a reasonable charge, if it turns out they can’t do it themselves because they just don’t have the time or the skill. It can be abused of course, if the information or do-it-yourself instructions have landmines in them (e.g. vague, erroneous, or impossible to follow instructions). But it’s usually legit.
Basic product or service free, premium product or service extra: You get what you need to function effectively, a ‘satisfactory customer experience’ free. Add-ons that increase functionality, convenience, or ease of use, cost. Give away desktop-to-desktop VoIP free and charge for desktop-to-landline calls, as Skype has done. Or give away the CD and create a huge appetite for the band’s live $60/ticket concerts. Again, this can be abused if the basic service doesn’t meet minimum functionality standards. But most companies realize the bad PR they will get if they abuse this isn’t worth it.

4. You Tell Me — new methods not yet proven:

Money back if you don’t use it: The other day I heard a radio commercial for insurance that gives you your premium back if you don’f file a claim during the year. If you don’t, and you renew for another year, they keep the premium and apply it to that second year, so they effectively have one year premium to invest forever, and they make their profit by that investment. Their premiums are probably higher than the normal insurance company rates, but once you sell the car or house you get it back, so who cares? I suspect that if you have a claim they drop you like a hot potato, and that, because you forfeit the premium if you do, the number of claims is probably lower and the likelihood of anyone putting in a small claim is low. But it still sounds too good to be true. Anyone know about this? Is there a catch?

What am I missing? What other innovative or devious ways are companies using to give people something for nothing, and still make a living? Is this the wave of the future? Think of the essentials of life: food, clothing, energy and shelter. How could we give people a comfortable level of all three, for free, in a way that would allow the producers of these things a reasonable income? And if we did, would people get lazy and stop working? Would this necessarily be a bad thing? Or would they be inspired by a personal moral code to invest some time and energy to give something back, free, in return?

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14 Responses to How to Make Money Giving Stuff Away Free

David Parkinson says:

March 10, 2005 at 15:48

Don’t forget the increasingly popular use of your customers as advertising agents. Cheap t-shirts splattered with your logo, promotional use of your company’s name on donated sports or computer equipment, and the most pernicious strain of all: giving free or cut-rate soda to schools in return for exclusive access to students’ captive gullets and a promise that your largesse will be loudly trumpeted.
Syzygy says:

March 10, 2005 at 16:37

Apparently Walmart prices aren’t all that low: http://www.mydd.com/story/2005/3/7/17936/90375
Marc Orchant says:

March 10, 2005 at 16:45

Dave:You’re totally off-base in your characterization of shareware and you do a big disservice to the hundreds (thousands?) of small software developers who use this model to distribute their software. What you’re describing is more accurately called “donation-ware”.Shareware is *not* pay what you want or think the software is worth. Shareware is generally a model that provides a trial period during which you can freely evaluate a fully functional software application. When the evaluation period is over you either can longer use the software or critical features are disabled and it reverts to the core functionality of a free version.The company I work for has used this model for 10 years to distribute our software applications and we in no way have achieved the success we enjoy by guilt-tripping anyone. I’d really appreciate it if you would adjust your post to be more accurate.FWIW, I also take minor issue with your treatment of Seth Godin’s Free Prize concept. In his book and blog posts on the subject, Seth provides many examples of the free prize being something other than a tangible premium. Sometimes it’s an unexpected and welcome “extra mile” effort by a company or individual to make a remarkable experience.I love your writing and you are a constant source of inspiration. This time I feel that you need to check a couple of your facts a little more carefully. The post is spot on aside from these two points.
gregor@hober.com says:

March 10, 2005 at 17:05

What you are missing is the pure form of your argument: Give it away for free and expect nothing in return. Are you truly giving something away if you are expecting a return? Giving and investing are two different things. For instance, Dave obviously spends a lot of time and care on this very blog. The reader is asked for nothing in return. Yet I will bet you that Dave’s birth-to-death life experience has been enhanced in many ways on the physical, emotional and spiritual planes in both direct and obscure ways. I wonder if we all have an inner communist that can identify those who have from those who need. On a societal level, we often think of those who need taking from those who have in negative terms. Our old people want all of our money. Medicare recipients want to live free off the system. But we still feel and identify situations when those who have set out what they’ve got to those who need, freely, on a take-it-or-leave-it basis. And on a deep level we react positively to those people. But you could never put that in a spreadsheet or one of those fancy organizational charts.. :)
Dave Pollard says:

March 10, 2005 at 17:41

David: Excellent points, especially the bribes paid (free stuff given) to agents to secure lucrative contracts with end-customers. James Surowiecki has written about this, and fortunately the NY Atty-Gen has been prosecuting these con artists.Syzygy: Great link, thanks. Marc: Sorry you took offense, but I think the problem here is the ambiguous definition of shareware. I’m using the Wikipedia definition which is “Typically shareware software is obtained free of charge by downloading, thus allowing one to try out the program ahead of time. A shareware program is accompanied by a request for payment, and often payment is required per the terms of the license past a set period of time (although some consider this requirement to cause the software to be not shareware but a demo)…When features of the software are disabled for non-payment this is known as crippleware”. What you are describing, by this definition, is not shareware (where payment is on the ‘honour system’), but what Wikipedia calls a demo version or crippleware (which I less cruelly call “limited time free trials” products). So no, your software doesn’t lay a guilt trip on people, it’s just annoying to people who try it and decide it isn’t worth buying. I respect your right to market your product this way but millions of computers are littered with the carcasses of software whose ‘critical features are disabled’, and I personally don’t think this is a very effective or creative way to market software. As for Seth’s concept, I say in my post “If [the free prize] is genuinely valuable and not hyped, it’s a good deal.” I don’t see how that’s different from what you’re saying. The fact I warn about the possibility of abuse of this (e.g. useless features for which the buyer ends up effectively paying, like 80% of the features in today’s cellphones) does not detract from the fact that Seth is right in identifying this technique as an excellent way, when it’s done properly, to improve the user experience at no cost to either producer or customer.
Greg says:

March 10, 2005 at 18:47

I suppose you’re including open-source software (or anything) in your “ingenious/methods that work” category, though it’s actually a little different. The product itself is free – the “support” and/or addons are either do-it-yourself or paid. And this is a very viable business model, though not quite what you described.As for shareware, I’m going to side a bit closer to Marc. I subscribe to a dozen or so paper magazines (so retro, I know). My study is littered with the carcasses of past issues, and it’s annoying to have to stack them up again when the cats knock them over, until I’m motivated enough to get rid of them. But….the value I received from them makes it worthwhile to dispose of them – it’s still a net gain.For me, shareware has worked the same way. Over the last 20+ years I’ve downloaded and installed thousands of programs, many of which I tried and didn’t use. In the early 90’s I probably downloaded or installed close to 30 HTML editors, for example. I use one of them, still, even though I’ve tried a bunch of others since.What shareware has allowed me to do (besides watching the download indicator for a really long time)was to compare the features in a variety of tools that produced the same result, and discover a) which features I really wanted; b) which tools actually included the features I wanted, rather than relying on reviews and or marketing datasheets; and c) which interface was most productive for me personally. It’s also allowed me to grab a tool for a one-off job when it was economically far more productive to get the tool, use it, and uninstall it than to use the wrong tool or do the process manually.The “annoyance” of trying a product that doesn’t work is more properly akin to the “annoyance” of an experiment that doesn’t work. The educational value of shareware is substantial and a tangible benefit to the person who knows how to use it for learning. For that reason alone, I’d disagree with your point there.
Stephen Hinton says:

March 11, 2005 at 02:15

what I think you are missing from the analysis – which by the way is excellent in its breadth and depth – is that a lot of what we enjoy as free or cheap is the result of us using nature’s energy-packed gift of oil, instead of muscle or animal power. (One gallon of gas gives the equivalent of 600 hours of work).To even think “free” may be a sidetrack. For one thing as oil prices rise, and they must do as exploration is finding less and less, what we take to be eternal “cheap and easy” truths – large sale farming, Wal-Marts, jumping in the car to go anywhere etc, will not be available to us. In fact, economy as we know it will start to unravel without oil.The other side-tracking element of the argument is what exactly is money? Many are questioning the role of the current currency system in the post-oil world.For an idea of the money-less society see http://porena.blogspot.comFor more about oil try http://www.lifeaftertheoilcrash.net/ and for money try http://www.reinventingmoney.com/
lugon says:

March 11, 2005 at 05:43

Andrius Kulikauskas and David Ellison-Bey wrote this.
Rajiv says:

March 11, 2005 at 08:43

Here was a very innovative proposal that I think can work very wellhttp://www.firstmonday.org/issues/issue4_6/kelsey/index.htmlWe introduce the Street Performer Protocol, an electronic-commerce mechanism to facilitate the private financing of public works. Using this protocol, people would place donations in escrow, to be released to an author in the event that the promised work be put in the public domain. This protocol has the potential to fund alternative or “marginal” works.In this paper, we consider a very simple and common approach to funding the production of public goods such as advertisement-free radio and television stations and impromptu music performances in public places. The artist offers to continue producing their freely-available creations so long as they keep getting enough money in donations to make it worth their while to do so. We discuss social, financial, and technical arrangements that can make this approach work fairly well, though we don’t believe it will ever provide a complete solution to the problem of paying creators for their creations. We primarily discuss the way a specific instantiation of this idea, called the “Street Performer Protocol,” might work.
mrG says:

March 11, 2005 at 09:48

I have one more, but I don’t know if I can articulate it. Good examples are service clubs (Lions, Rotary, Masons &c) and to some extent, some of the “Free Software” (eg GPL) projects.it goes like this: You give for free, expecting nothing in return directly, but you do keep in touch. The ‘free’ thing also requires co-operation and collaboration and this builds a network of people who now know something about each other, they know details extraneous to the product simply by virtue of having worked together for a long period of time.Then, what goes around, comes around. Having helped before, when you need help, you’re not embarrased to hint, and because you now have a network of contacts and an inventory of their special qualities, you can step outside the ‘official’ market-channel network to contact them directly, and they, of course, can also contact you.This is the mechanism I see most often in the “Sourceforge” sort of Free Software, even if the software itself does not work very well or the project is not managed very well, the act of collaboration introduces people, forges relationships, and I have personally experience and seen other cases where those personal relationships have developed into business relationships.Unfortuntely, I’m no Seth Godin, so I don’t have a sexy name for this effect, but considering the method has been in use since the days of the Acropolis and likely long before, I suppose it doesn’t really need a sexy name :)
Mike says:

March 12, 2005 at 06:25

Dave, if and when you visit the washington, dc area, drop me an email and come visit and I’ll give you a free dinner.
Dave Pollard says:

March 12, 2005 at 13:15

Thanks, everyone, for the additional ‘free’ ideas, and the comments about when ‘free’ really isn’t. Something just rubs me the wrong way about methods that require reliance on human ‘charity’ — which always seems to imply that you are giving someone more than what they offer really provides in value. And perhaps blogs are another example of giving something away ‘free’ — what I have received in return for this ‘gift’ is enormously valuable to me, far more valuable than anything I received from a customer or employer. And Mike, thanks for the invite, which I will take you up on if I’m there.
John Maloney says:

March 13, 2005 at 12:19

Hi –This discussion is rather pedestrian. It seems people are trapped in some naive 20th century, transaction-oriented time warp. The exploitative tone is unsettling
Bob McHardy says:

March 17, 2005 at 11:02

Just a note about the Get your premiums back if you don’t use the policy. Having spent 10 years in the insurance business I know that this is not new. You actually pay a premium price for what they call “return of premiums”. I believe what you heard was an add for Critical Illness insurance that is running in the Toronto Market right now. The insurance company actuaries are experts at calculating how much money they must collect from policy holders in order to pay out expected claims based on the instances of heart attack, stroke, cancer, etc. If you buy the “return of premiums” option, generally, there is a stipulation that you must keep the policy in force for a minimum period of time (usually 10 years) before you qualify for return of premiums. They also know that many people will ‘lapse’ their policies before 10 years and the insurance company has paid no claims and gets to keep all that money. Every premium dollar they collect is pooled and invested and any claims are paid out of this pool. Their is no real magic here and it is all legit and very affordable.