This document discusses strategies for companies responding to free offerings that threaten their business. It identifies three main factors for assessing the threat: the entrant's ability to cover costs, growth of the free offering's user base, and rate of defecting paying customers. The document outlines strategies companies have used such as matching or exceeding the free offering (Yahoo vs. Google), purchasing the rival (Intuit vs. Mint), ignoring the threat until it's too large (airlines vs. Ryanair), and delaying response while maintaining profits (Microsoft Office vs. free alternatives). It also discusses strategies for monetizing free offerings like upselling premium features, cross-selling other products, charging third parties for access to users, and b

2. Which one would you choose?

3. In two-third battles incumbents made the
wrong choice

4. Why does it happen?
Companies
Ignore
Launch free too
late
Launch free too
early

5. Assessing the threat
Three main factors
The entrant’s ability to
quickly cover its costs
Growth rate of the free
offering users
Rate of defecting
paying customers

7. Choosing how to
respond

8. Companies that prevailed
Yahoo, responded to Google’s
entry by matching, and then
exceeding, Gmail’s free
storage offer

9. Companies that prevailed
Intuit responded to the threat from free rival Mint.com by
purchasing it

10. Companies that ignored the threat
Ryanair, which offers free or deeply discounted tickets and charges for other services,
was ignored by all airlines and now has major share in Europe

11. Companies that ignored the threat
Pandora, provides free radio over the internet and generates revenue by charging for ad-free
service and selling access to its user base has taken major share of SiriusXM

13. Delayed threat
Microsoft office has
long enjoyed a near
monopoly and has been
highly profitable and
except for price-
sensitive users its
customers have not
flocked to the free
products

14. Tried and Tested
Strategies

16. Up-sell
Offer a free version to gain attention and widespread use, then offer a
premium product which customers are willing to pay
WhatsApp is currently providing free
services in India to increase user base
Dropbox provides limited free cloud
storage space which can be increased
through paid subscription

17. Requirements for Upsell
Large enough user base to ensure profits with low conversion rate
A high percentage of users willing to pay for the premium version
OR

18. Cross-sell
Selling fries along with burger
Sell other products that are not directly tied
to main product
Requirements
• Broad product line, preferably one that
complements the free product
• The ability through partnerships to sell a
broad line of products to users of the free
product

19. Charge third parties
Provide a free product to users and then
charge a third party for access to them
Requirements
• A free offering that attracts either many
users who can be segmented for
advertisers
• Third parties willing to pay to reach these
users

20. Bundle
Offer a free product or service with a paid
offering
Requirements
• Products or services that can be bundled
with the free offering
• A free product that needs regular
maintenance or a complementary offering

21. Example
Facebook and Reliance
together launched
internet.org in India which
provides basic internet
facilities for free so as
encourage more people to
use internet

22. Still confused?

23. Rethink Profit Centers
Main obstacles
Products must generate a
respectable level of revenues
and profits on their own.
the profit-center structure
and the accounting system it
employs

24. Overcoming Obstacles
Profit responsibility
managers must be
oversee revenue and cost
streams from a much
wider perspective
Give revenue streams and
cost management tasks in
separate hands
Building product features
and expanding user base
costs should be separate

25. Overcoming Obstacles
The distinction
between average
cost and actual cost
Cross selling and
cross subsidizing
new products to
gain market share
Realizing,
additional products
or services adds
very little to total
costs

27. These slides were created by Sharang Agarwal, IIT Kharagpur as part
of an internship done under the guidance of Prof. Sameer Mathur,
IIM Lucknow (www.IIMInternship.com)
Disclaimer