Freebie marketing

From Wikipedia, the free encyclopedia

Freebie marketing, also known as the razor and blades business model, is the concept of either giving away a sellable item for nothing or charging an extremely low price in order to generate a continual market for another, generally disposable, item. The concept was pioneered by King C. Gillette, inventor of the disposable safety razor and founder of Gillette Safety Razor Company (today known as Global Gillette, a division of Proctor and Gamble). It is a similar concept to loss leader marketing.

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[edit] Development

Main article: King C. Gillette

While working as a traveling salesman in the 1890s for the Crown Cork and Seal Company, Gillette had an idea while attempting to shave one morning. His straight razor was so worn from use that it could no longer be sharpened. His idea was to create thin, cheap, removable blades that could simply be removed from the handle and discarded when no longer usable.[1]

As consumers use up the blades they then purchase replacements, potentially going on for years and decades. This potentially ensures a steady flow of consumers.

[edit] Applications

Freebie marketing has been used in business models for many years. The Gillette company still markets disposable razors in the fashion of their founder, often sending disposable safety razors in the mail to males near their 18th birthday, packaging them as giveaways at public events that Gillette has sponsored, etc.

[edit] 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.[2]

This also resulted in a slogan among American businessmen, “Oil for the lamps of China.” In other words, if you give them the lamp, they'll buy the kerosene from you. Oil for the Lamps of China became the title of a book written by Alice Tisdale Hobart explaining the phenomenon in a fictionalized way.[2]

[edit] Gmail

Freebie marketing has also been used in a number of other mediums in more recent years. In 2002, Yahoo! launched a premium webmail service, charging users $29.95 per year for 25 MB of storage. In 2004, Google launched Gmail, a free service that offered (at the time) 1 GB of storage. Operating costs were offset by advertising revenue which increased as usage did.[1] Yahoo! later announced unlimited free e-mail storage.

[edit] Comcast

Comcast often gives away DVRs to its subscribing customers. However, the cost of giving away each free DVRs 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.[1]

[edit] Music

In July, 2007, Prince gave away 2.8 million units of his most recent album for free by bundling them with a Sunday edition of London's Daily Mail. The Daily Mail paid a 36-cent licensing fee for each CD.[1] As such, Prince earned approximately $1 million in licensing fees and in turn, sold out 21 August concerts in London which grossed $23.4 million (a record for the region).[1] (The Daily Mail also increased their circulation by 20% for the day.)

[edit] Issues

The freebie marketing model may be threatened if the price of the high margin consumables in question falls. It may even be illegal in some instances.

[edit] Inkjet printers

Computer printer manufacturers have gone through extensive efforts to make sure that inkjet printers are not compatible with cheaper aftermarket ink cartridges, such as designing the cartridges in a way that makes it possible to patent certain parts or aspects, or invoking the Digital Millennium Copyright Act.[3]

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.

[edit] 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.[4]

[edit] Tying

Main article: Tying (commerce)

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.'[5]

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) in order 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.

[edit] See also

[edit] References

  1. ^ a b c d e Anderson, Chris. “Why $0.00 is the Future of Business.” Wired. March, 2008.
  2. ^ a b Cochran, Sherman. Encountering Chinese Networks: Western, Japanese, and Chinese Corporations in China, 1880-1937. University of California Press. Retrieved on 2008-03-16.
  3. ^ Yuk-fai Fong. “When Does Aftermarket Monopolization Soften Foremarket Competition?”. Northwestern University Kellogg School of Management. Retrieved on 2008-03-16.
  4. ^ Cory Doctorow. “Two million CueCats at $0.30/each”. BoingBoing.net. Retrieved on 2008-03-16.
  5. ^ Trade Practices Act - Third Line Forcing