Direct Cross Subsidies

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In this lecture we draw on material from Chris Anderson's book "Free", to examine the first Model of Free: Direct Cros Subsidies. Direct Cross Subsidies are old world free, in which the price the customer pays (now or later) covers the cost of the freebie.

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Direct Cross Subsidies

  1. 1. (Stanford BUS-21) Martin Westhead Mastering Marketing Model: Direct Cross Subsidies How to make money by giving things away
  2. 2. Overview  Direct cross subsidy model (Tied)  Examples - Ryan Air - Comcast - Controlinveste  Business Models
  3. 3. Direct cross subsidy  Price/Quantity  Size rectangle = revenue  Model assumption: Price ($/Q) Quantity PA + PB P(A+B) QA + QB Q (A+B) Revenue products combined > Revenue products separately P(A+B) Q(A+B) > (PA+ PB) (QA+ QB) Red Area > Blue Area  Cost model is directly tied to sale
  4. 4. Free Cell Phone Free Cell Phone: postpaid mode Paid Cell Phone: prepay model Subscribers get free phone Subscribers pay for their phone up front Generally more expensive phones Generally cheaper phones (cost sensitive customer base) Multi-year contract with termination fee No contract: usage only
  5. 5. Ryan Air  London -> Barcelona - $20 (£10)  Ryan Air CEO wants - All flights all seats free  Cut costs  Ramp up ancillary fees  Higher fares on popular days ($100) Ticket Price ($20) Checking 2 bags ($30) Ad revenue per hour ($1) Subsidy for more expensive flight ($5.50) Credit card handling ($6) Priority boarding ($4) Bottle of water ($3.50)
  6. 6. FREE DVR  9 million free DVRs  Hidden fees - $20 installation  Monthly subscription - $14 p.m. - Break even in under 18 months  Up-sell other services - Internet $43 p.m. - Pay-per-view $5 each
  7. 7. Free silverware  Leading media company in Portugal  Jornal de Noticias - 120th Anniversary - 60-piece silverware set - Regular pieces during the week - Serving pieces on Sat  36% increase in circulation in 3 months
  8. 8. More give-aways  Free toolbox with tools - 177 pieces - 20% 3m  Free DVD every Sat - Coupon in Friday paper - 47% increase 2m  Free Dinner plate set - 19 plates - 70% increase 4m  Free language course - 11 languages - 48 disks - 22 books - 2 boxes - 63% increase 4m
  9. 9. DIRECT CROSS SUBSIDY BUSINESS MODELS
  10. 10. Direct Cross Subsidy Business Models Give away services, sell products  Apple Store Genius Bar tech support Give away products, sell services  Free gifts when you open a bank account https://www.bncbank.com/files/BNC_Gift_List_2014.pdf  Example gifts
  11. 11. Direct Cross Subsidy Business ModelsGive away software, sell hardware  IBM &HP’s Linux offerings Give away hardware, sell software  Game consoles (e.g. XBox)  Not technically free but below cost
  12. 12. Direct Cross Subsidy Business ModelsGive away cell phones, sell talk time  Cell phone carriers Give away talk time, sell cell phones  Free night and weekend plans from same carriers
  13. 13. Give away the show, sell the drinks  Music, comedy clubs, strip clubs Give away the drinks, sell the show  Casinos Direct Cross Subsidy Business Models
  14. 14. Buy one get one free  Grocers / Supermarkets Free gift inside  Cereal Direct Cross Subsidy Business Models
  15. 15. Free shipping orders over $25  Amazon Free samples  Supermarkets, Perfume counters Direct Cross Subsidy Business Models
  16. 16. Free trial  Magazine subscription  SaaS products Free Parking  Malls, Movie theatres Direct Cross Subsidy Business Models
  17. 17. Summary  Direct cross subsidy model (Tied)  Examples - Ryan Air - Comcast - Controlinveste  Business Models

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