October 22, 2012 at 11:36 am | Blog
Don’t Let Price be the Tie Breaker for your Products or Services
Have you considered offering “freemiums” (free products or services) to build your customer base? I encourage you to reconsider. Giving away a product or service, in hopes of gaining a following, often back-fires and results in a disappointing return on investment. The reason is that “free” does not top the average consumers’ buying criteria. In fact, a number of double-blind research studies aimed at pinpointing buying criteria have revealed that shoppers almost always place more value on attributes other than price.
In support of this view, I’ll discuss the following proclamations to reveal how “freemiums” can lead to failure while relevant messagingnearly always trumps the give-a-way.
- Free or drastically discounted prices can actually undermine growth attempts.
- How to identify what your customer values most when making a purchasing decision.
- Explain the importance of constructing a relevant customer message.
Why Free Fails. Sarah E. Needleman’s recent Wall Street Journal article acknowledges that many massive companies have enjoyed success by using the freemium model to build a customer base – think Dropbox, Skype and LinkedIn. But Needleman cautions this approach due to the substantial probability of a back fire. This results when a company is not offering what their customers value. Customer service, speed of delivery, quality of service, warranties, and a good return policy are just a few attributes that may be more valuable to your customer, other than the price of your product.
I believe the same thing applies not just to freemium offerings, but also to deeply discounted products or services. When companies don’t sell a solid value proposition, they often default to price as the tie breaker between themselves and their competition. This is a very dangerous approach.
Identifying Buying Criteria. How do you identify what’s valuable to your customer? Although customer satisfaction surveys act as report cards, they aren’t always the best way to determine what is valuable to your customer. This is because they only question customers about topics determined by the businesses management, which naturally neglects the consumer standpoint. For example, a survey question may ask, “On a scale of 1 to 10, how satisfied are you with delivery?”… The customer may answer ’10,’ because the delivery was facilitated flawlessly; at the same time, their buying criteria may be something completely separate, such as accurate delivery and/or accurate invoicing, but the survey neglected to ask about that. Fail to identify your customers buying criteria and you may as well delete your entire marketing plan.
A personal example: I recently purchased a garment bag/suitcase from overstock.com for work travel. I rarely make such purchases online in fear of receiving a product that was described improperly, and then end up having to pay 20-35% of the product price in shipping the item back. Overstock offered free returns, so I decided to take the leap and order. Low and behold – the bag was too big to carry on, but the description made it seem otherwise. When I went to make the return, I was informed that the return shipping amount would be withheld from my product refund because they were not ‘responsible’ for the reason of return.
So yes, shipment of the product to my home was great. Communication was efficient. Price was reasonable. But I would have paid more if my needs were being met. In fact, I purchased a bag from Macy’s at almost twice the price I paid for my Overstock bag, less than a week later. Overstock’s inability to fulfill the main element of my buying criteria – a hassle-free return – has lost them a customer.
Relevant Massaging. I have heard countless sales people complain that ‘all their customers care about is price!’ Price is what the customer will fall back on if you fail to communicate relevantly.
“Offer me features that I want and I’ll buy it from you. Offer me what corporate has told you they think I want, and chances are you’ll have to sell it to me…and it better be cheap.”
Start-ups and the Freemium Frenzy
Needleman recognizes that the freemium model is especially attractive to start-ups because of its potential to attract a large customer base, with the hope of converting them to paying customers. Needleman spoke with Vineet Kumar, a Harvard professor involved in a study of the freemium model, and noted that “the problem is, it’s not always obvious what features should be free and which should be paid.” Kumar warns that offering too many features in the freemium version of your product or service risks “cannibalizing your paid customers.” Offering limited features may result in minimal interest.
Don’t get me wrong, free or drastically discounted prices do have a place in the market, if you’re Walmart. But unless you’ve established a distribution model so lean that it allows you to charge a lower markup then anyone else in the industry, then freemiums and discounted prices probably aren’t the secret to boosting sales.