Freebie Marketing

Freebie marketing, also known as the razor and blades business model, is a business model wherein one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as supplies (inkjet printers and ink cartridges, "Swiffers" and cleaning fluid, mobile phones and service contracts) or game consoles (accessories and software). It is distinct from loss leader marketing and free sample marketing, which do not depend on complementarities of products or services.

Though the concept and its proverbial example "Give 'em the razor; sell 'em the blades" are widely credited to King Camp Gillette, the inventor of the disposable safety razor and founder of Gillette Safety Razor Company, in fact Gillette did not originate this model.

Development

Free gifts

A free gift is one for which the giver is not trying to get something in return, or one which does not cost the giver, such as when it is discount on resulting sales.

Free lunch

The phrase free lunch, in U. S. literature from about 1870 to 1920, refers to a tradition once common in saloons in many places in the United States. These establishments included a "free" lunch, varying from rudimentary to quite elaborate, with the purchase of at least one drink. These free lunches were typically worth far more than the price of a single drink. The saloon-keeper relied on the expectation that most customers would buy more than one drink, and that the practice would build patronage for other times of day.

Gillette

The usual story about Gillette is that he realized that a disposable razor blade would not only be convenient, but also generate a continuous revenue stream. To foster that stream, he sold razors at an artificially low price to create the market for the blades.

But in fact Gillette razors were expensive when they were first introduced, and the price only went down after his patents expired: it was his competitors who invented the razors-and-blades model.

Applications

Freebie marketing has been used in business models for many years. The Gillette Company still uses this approach, often sending disposable safety razors in the mail to young men near their 18th birthday, packaging them as giveaways at public events that Gillette has sponsored, et cetera.

Standard Oil

With a monopoly in the American domestic market, Standard Oil and its owner, John D. Rockefeller, looked to China to expand their business. Representatives of Standard Oil gave away eight million kerosene lamps for free or at greatly reduced prices to increase the demand for kerosene.

Among American businessmen, this gave rise to the catchphrase "Oil for the lamps of China." Alice Tisdale Hobart's novel Oil for the Lamps of China was a fictional treatment of the phenomenon.

Comcast

Comcast often gives away DVRs to its subscribing customers. However, the cost of giving away each free DVR is offset by a $19.95 installation fee as well as a $13.95 monthly subscription fee to use the machine. Based on an average assumed cost of $250 per DVR box to Comcast, after 18 months the loss would balance out and begin to generate a profit.

Issues

The freebie marketing model may be threatened if the price of the high margin consumables in question falls due to competition. For the freebie market to be successful the company must have an effective monopoly on the corresponding goods. (Predatory pricing to destroy a smaller competitor is not covered here.) This can make the practice illegal.

Specific examples

Printers

Computer printer manufacturers have gone through extensive efforts to make sure that their printers are incompatible with lower cost after-market ink cartridges and refilled cartridges. This is because the printers are often sold at or below cost to generate sales of proprietary cartridges which will generate profits for the company over the life of the equipment. In fact, in certain cases, the cost of replacing disposable ink or toner may even approach the cost of buying new equipment with included cartridges, although included cartridges are often 'starter' cartridges that are only partially filled. Methods of vendor lock-in include designing the cartridges in a way that makes it possible to patent certain parts or aspects, or invoking the Digital Millennium Copyright Act to prohibit reverse engineering by third-party ink manufacturers.

In Lexmark Int'l v. Static Control Components the United States Court of Appeals for the Sixth Circuit ruled that circumvention of Lexmark's ink cartridge lock does not violate the DMCA. On the other hand, in August 2005, Lexmark won a case in the U.S. that allows them to sue certain large customers for violating their boxwrap license.

Video Games

Atari had a similar problem in the 1980s with Atari 2600 games. Atari was initially the only developer and publisher of games for the 2600; it sold the 2600 itself at cost and relied on the games for profit. When several programmers left to found Activision and began publishing cheaper games of comparable quality, Atari was left without a source of profit. Lawsuits to block Activision were unsuccessful. Atari added measures to ensure games were from licensed producers only for its later-produced 5200 and 7800 consoles.

In recent times, video game consoles have often been sold at a loss while software and accessory sales are highly profitable to the console manufacturer. For this reason, console manufacturers aggressively protect their profit margin against piracy by pursuing legal action against carriers of modchips and jailbreaks. Particularly in the sixth generation era and beyond, Sony and Microsoft, with their PlayStation 2 and Xbox, had prohibitively high manufacturing costs so they were forced to sell their consoles at a loss, and these losses widened especially in 2002–2003 when both sides tried to grab market share with price cuts. Nintendo had a different strategy with its GameCube, which was considerably less expensive to produce than its rivals, so it retailed at break-even or higher prices. In the current generation of consoles, both Sony and Microsoft have continued to sell their consoles, the PlayStation 3 and Xbox 360 respectively, at a loss.

Other Goods

Consumers may also find other uses for the subsidized product rather than utilize it for the company's intended purpose, which adversely affects revenue streams. This has happened to "free" personal computers with expensive proprietary Internet services and contributed to the failure of the CueCat barcode scanner.

Affiliate Marketing makes extensive use of the freebie marketing business model, as many products are promoted as having a "free" trial, that entice consumers to sample the product and pay only for shipping and handling. Advertisers of heavily-promoted products such as Acai Berry targeting dieters hope the consumer will continue paying for continuous shipments of the product at inflated prices, and this business model has been met with much success.

Websites specializing in Sampling and discounts have proven to be very popular with economy-minded consumers, who visit sites which utilize freebies as link bait. The business model of these sites is to attract visitors that will click on AdSense and complete affiliate offers.

Tying

Tying is a variation of freebie marketing that is often illegal when the products are not naturally related (for example, requiring a bookstore to stock up on an unpopular title before allowing them to purchase a bestseller). Tying is also known in some markets as 'Third Line Forcing.'

Some kinds of tying, especially by contract, have historically been regarded as anti-competitive practices. The basic idea is that consumers are harmed by being forced to buy an undesired good (the tied good) to purchase a good they actually want (the tying good), and so would prefer that the goods be sold separately. The company doing this bundling may have a significantly large market share so that it may impose the tie on consumers, despite the forces of market competition. The tie may also harm other companies in the market for the tied good, or who sell only single components.

Another common example comes from how cable and satellite TV providers contract with content producers. The production company pays to produce 25 channels and forces the cable provider to pay for 10 low-audience channels to get a popular channel. Since cable providers lose customers without the popular channel, they are forced to purchase many other channels even if they have a very small viewing audience.

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Evangelism Marketing

Evangelism Marketing is an advanced form of word-of-mouth marketing (WOMM) in which companies develop customers who believe so strongly in a particular product or service that they freely try to convince others to buy and use it. The customers become voluntary advocates, actively spreading the word on behalf of the company.

Evangelism marketing is sometimes confused with affiliate marketing. However, while affiliate programs provide incentives in the form of money or products, evangelist customers spread their recommendations and recruit new customers out of pure belief, not for the receipt of goods or money. Rather, the goal of the customer evangelist is simply to provide benefit to other individuals.

As they act independently, evangelist customers often become key influencers. The fact that evangelists are not paid or associated with any company makes their beliefs perceived by others as credible and trustworthy.

Evangelism comes from the three words of 'bringing good news,' and the marketing term justly draws from the religious sense, as consumers are driven by their beliefs in a product or service, which they preach in an attempt to convert others.

History

Many people believe Guy Kawasaki, the former chief evangelist of Apple Computer, to be the father of evangelism marketing. In his books “The Art of the Start" and "How to Drive Your Competition Crazy” Kawasaki states that the driving force behind evangelism marketing is the fact that individuals simply want to make the world a better place. Evangelist customers spread their recommendations and recruit new customers out of pure belief, not for goods or money.

Kinds of Evangelism Marketing

• Evangelism marketing is applicable to any kind of product.
• Technology evangelism is the evangelism marketing of a tool.
• Platform evangelism is the evangelism marketing of the opportunity to create complementary goods for a multi-sided platform, which also involves non-marketing functions such as regulation of the platform's commercial ecosystem to maximize network effects.

Customer Communities

A strong avenue for evangelists is in the form of customer communities, which bring together groups of users of a product or service to share information and discuss common issues. Some companies assist with such events, for example General Motors' Saturn division in Tennessee organizes an annual summer picnic for thousands of customers. Another example is the Harley Owners Groups (HOGS), organized by Harley Davidson, which associate bikers locally and globally through quarterly and annual meetings held all over the world.

Starbucks Corporation, the coffee company, started an online customer community in 2008 called My Starbucks Idea, designed to collect suggestions for products or services and feedback from customers. During the first year of the program, My Starbucks Idea generated 70,000 ideas through the site and approximately 50 changes based on customer suggestions were implemented.

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Email Marketing

Email Marketing is directly marketing a commercial message to a group of people using email. In its broadest sense, every email sent to a potential or current customer could be considered email marketing. It usually involves using email to send ads, request business, or solicit sales or donations, and is meant to build loyalty, trust, or brand awareness. Email marketing can be done to either sold lists or current customer database. Broadly, the term is usually used to refer to:

• Sending email messages with the purpose of enhancing the relationship of a merchant with its current or previous customers, to encourage customer loyalty and repeat business.

• Sending email messages with the purpose of acquiring new customers or convincing current customers to purchase something immediately.

• Adding advertisements to email messages sent by other companies to their customers.

Types of Email Marketing

Email marketing can be carried out through different types of emails:

Transactional Emails

Transactional emails are usually triggered based on a customer’s action with a company. Triggered transactional messages include dropped basket messages, purchase or order confirmation emails and email receipts.

The primary purpose of a transactional email is to convey information regarding the action that triggered it. But, due to its high open rates (51.3% compared to 36.6% for email newsletters) transactional emails are a golden opportunity to engage customers; to introduce or extend the email relationship with customers or subscribers, to anticipate and answer questions or to cross-sell or up-sell products or services.

Many email newsletter software vendors offer transactional email support, which gives companies the ability to include promotional messages within the body of transactional emails. There are also software vendors that offer specialized transactional email marketing services, which include providing targeted and personalized transactional email messages and running specific marketing campaigns (such as customer referral programs).

Direct Emails

Direct email involves sending an email solely to communicate a promotional message (for example, an announcement of a special offer or a catalog of products). Companies usually collect a list of customer or prospect email addresses to send direct promotional messages to, or they can also rent a list of email addresses from service companies.

Comparison to Traditional Mail

There are both advantages and disadvantages to using email marketing in comparison to traditional advertising mail.

Advantages

Email marketing (on the Internet) is popular with companies for several reasons:

• Email's immediacy reduces delays in communication, allowing businesses to run more smoothly.

• An exact return on investment can be tracked ("track to basket") and has proven to be high when done properly. Email marketing is often reported as second only to search marketing as the most effective online marketing tactic.

• Email Marketing is significantly cheaper and faster than traditional mail, mainly because of high cost and time required in a traditional mail campaign for producing the artwork, printing, addressing and mailing.

• Advertisers can reach substantial numbers of email subscribers who have opted in (i.e., consented) to receive email communications on subjects of interest to them.

• Almost half of American Internet users check or send email on a typical day, with email blasts that are delivered between 1 am and 5 am local time outperforming those sent at other times in open and click rates.

Disadvantages

A report issued by the email services company Return Path, as of mid-2008 email deliverability is still an issue for legitimate marketers. According to the report, legitimate email servers averaged a delivery rate of 56%; twenty percent of the messages were rejected, and eight percent were filtered.

Companies considering the use of an email marketing program must make sure that their program does not violate spam laws such as the United States' Controlling the Assault of Non-Solicited Pornography and Marketing Act (CAN-SPAM), the European Privacy and Electronic Communications Regulations 2003, or their Internet service provider's acceptable use policy.

Opt-in Email Advertising

Opt-in email advertising, or permission marketing, is a method of advertising via email whereby the recipient of the advertisement has consented to receive it. This method is one of several developed by marketers to eliminate the disadvantages of email marketing.

Opt-in email marketing may evolve into a technology that uses a handshake protocol between the sender and receiver. This system is intended to eventually result in a high degree of satisfaction between consumers and marketers. If opt-in email advertising is used, the material that is emailed to consumers will be "anticipated." It is assumed that the consumer wants to receive it, which makes it unlike unsolicited advertisements sent to the consumer. Ideally, opt-in email advertisements will be more personal and relevant to the consumer than untargeted advertisements.

A common example of permission marketing is a newsletter sent to an advertising firm's customers. Such newsletters inform customers of upcoming events or promotions, or new products. In this type of advertising, a company that wants to send a newsletter to their customers may ask them at the point of purchase if they would like to receive the newsletter.

With a foundation of opted-in contact information stored in their database, marketers can send out promotional materials automatically—known as Drip Marketing. They can also segment their promotions to specific market segments.

Legal Requirements

In 2002 the European Union introduced the Directive on Privacy and Electronic Communications. Article 13 of the Directive prohibits the use of personal email addresses for marketing purposes. The Directive establishes the opt-in regime, where unsolicited emails may be sent only with prior agreement of the recipient, this does not apply to business email addresses.

The directive has since been incorporated into the laws of member states. In the UK it is covered under the Privacy and Electronic Communications (EC Directive) Regulations 2003 and applies to all organizations that send out marketing by some form of electronic communication.

The CAN-SPAM Act of 2003 authorizes a US $16,000 penalty per violation for spamming each individual recipient. Therefore, many commercial email marketers within the United States utilize a service or special software to ensure compliance with the Act. A variety of older systems exist that do not ensure compliance with the Act. To comply with the Act's regulation of commercial email, services typically require users to authenticate their return address and include a valid physical address, provide a one-click unsubscribe feature, and prohibit importing lists of purchased addresses that may not have given valid permission.

In addition to satisfying legal requirements, email service providers (ESPs) began to help customers establish and manage their own email marketing campaigns. The service providers supply email templates and general best practices, as well as methods for handling subscriptions and cancellations automatically. Some ESPs will provide insight/assistance with deliverability issues for major email providers. They also provide statistics pertaining to the number of messages received and opened, and whether the recipients clicked on any links within the messages.

The CAN-SPAM Act was updated with some new regulations including a no fee provision for opting out, further definition of "sender", post office or private mail boxes count as a "valid physical postal address" and definition of "person". These new provisions went into effect on July 7, 2008.

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