How FREE Could Destroy Your Business
“Free” is a double-edged sword of a word. While on the one hand it’s lovely to hear, trips off the tongue and warms the heart of even the coldest consumer, on the other it can destroy your business reputation, scupper your chances of funding for starting a business, and lay waste to your prospects…see what I mean by double-edged sword now?
This is a post about the wisdom of giving stuff away for free. Is it a valid business strategy, or can it devalue what you offer to a level that could ultimately destroy your business?
Many ventures are launched with the money an entrepreneur has scraped together themselves or with the help of friends and family to start small and grow slowly. Funding for starting a business is what you’ll need if you think a little bigger. But what do investors think about the concept of free? After all, is it not simply giving away the potential profits that you should be sharing?
The social networking model
Funding for starting a business in this area has been flowing out off the business Angel coffers for a number of years now. There seems to be some sort of gold-rush on social networking businesses where investors are willing to offer massive funding for starting a business which has, at the very best, a long-term prospect of returns.
The social networking business model is the best example of an acceptable use of free. They rely completely on volume, without millions of members there’s very little chance that they’ll get anyone interested in paying for membership. Because of this almost all social networking businesses start with a period of free membership. In the early days this then led to much resentment when a fee structure was introduced. But since then social networking entrepreneurs have become a little more sophisticated in their approach. Social networking websites have attracted multi-million dollar investment, but to date not many have seen a profit, not even some of those that are massive global names.
The standard business model
Social networking stands out from the crowd as a business that correctly uses the power of free to achieve its business goals, but what about other ventures? When offering funding for starting a business, a bank, venture capitalist or business Angel will hope that they will see a return within a quantifiable period, so how does free affect this?
How we value a service or product, or the company that offers them, is often down to perception. Quality is usually what will determine what someone is prepared to pay for something, but the perception of quality is often just as important. Marketing, what people say and price are three major influencers of how we perceive the quality and desirability of a service or product, and consequentially, the value of the business that offers them. Therefore to offer your wares for free can sometimes have a very negative effect on perceived quality, just like putting your prices up can sometimes increase the perceived quality of what you are offering.
Those offering funding for starting a business are just as interested in how your customers and potential customers perceive your brand as the facts and figures in your business plan. Image is a very important factor in the success of a business and one that may well determine whether you win the funding for starting a business.
Of course that’s not to say that offering things for free as part of a marketing strategy is always bad. There are some very successful consultancies that rely on offering free advice to prove their skill to you so that you’ll become a paying customer, and the recession has necessitated some price reductions and free offers in many business areas. The word of warning that this blog is hoping to convey is that free is not always a good thing and to make sure that you safeguard your reputation by always factoring in whether free could devalue your brand.
Image © Federgold
