This document discusses strategies for incumbent firms to respond to threats from competitors offering free products. It begins by outlining factors to assess the seriousness of the threat, such as user growth rates and customer defection rates. Four response strategies are proposed based on these factors, ranging from immediately launching a free product to monitoring the situation. Additional strategies discussed include offering a better free product, upselling premium versions, cross-selling other products, charging third parties for access to users, bundling free products, and rethinking profit centers. Examples of companies that succeeded or failed against free competitors are provided. The document emphasizes adopting the mindset of low-cost rivals and anticipating their moves to effectively compete against free.

1. Competing
Against FREE
GROUP-GOSSIPMONGERS
AMIT SAINI – PGP31131
ANANT KUMAR – PGP31133
PALASH GUPTA – PGP31160
PRANAY VIMAL – PGP31163

2. Free products- Introduction
 What will an established firm do if a new entrant offers
a free product in your market?
 Options- Do nothing/introduce free products
 Research shows that most actions of incumbent has
been inadequate
 Even firms with formidable assets are slow to fend off
free product competitors, reason being ubiquity of the
profit center structure and mind- set

3. Assessing the threat
1. Entrants ability to recover its cost quickly enough
2. Growth rate of free users
3. Defection rate of your customers
 Seriousness of threat depends upon above mentioned factors
 Analysis shows that 40% or more growth rate of free users
and 5% or more defection rate is detrimental for the
incumbents

4. Response strategy
Immediate Threat
(Launch free product immediately)
DR>=5%, GR<=40%
Business Model Threat
(Change business model)
DR>=5%, GR>=40%
Minor Threat
(Monitor Situation)
DR<=5%, GR<=40%
Delayed threat
(Coexist or delay launch of free product)
DR<=5%, GR>=40%

5. Offer a Better Free
 If threat is established, how to respond becomes important
 Incumbents can use their assets to introduce a better free product
 They can also use their existing resources to enlarge their
customer base
 Some sales and pricing strategies to generate profit can be used :
Up-selling, Cross-selling, selling access to customers and building
the free product with paid offerings

6. Companies That Prevailed
 Yahoo matched up to
the threat from
Google by matching
and then exceeding
the free storage
provided by Gmail
 Su-kam Power
Systems India’s
largest power
solutions company
has resisted
competition by
consistently
improving its
products over the
years and selling
them at prices lower
than rivals

7. Companies that ignored the threat
WHAT DID THEY DO WRONG?
They responded too
quickly-hurting revenues
and profitability
They waited too late to
respond-not capitalizing
on strengths
WHAT WAS THE REASON?
Deeply rooted belief that
products must generate
own revenues and profits
Profit Centre Mind-set;
companies relegate P&L
accountability to lower
levels; don’t isolate
revenue and cost
responsibilities
Preference for average
cost over marginal cost;
emphasis on traditional
cost accounting system
Traditional organizational
structure and culture not
conducive to the new
business model

8. Examples in India
Whatsapp launched its free instant
messaging services in India in 2010
and managed to capture a large
market share from Blackberry
Messenger which relied on people
buying dedicated data plans to use the
service
Patanjali, launched in 2009 is the fastest
growing Indian FMCG brand. It offers
most of its products at a discounted
rate(60-80 RPI) compared to industry
average. Majors like HUL, P&G ignored
the threat this strategy could pose,
refusing to alter their business model
and losing out on market share

9. Up-sell
INTRODUCE A FREE BASIC OFFERING TO GAIN WIDESPREAD
USE AND THEN CHARGE FOR A PREMIUM VERSION
REQUIREMENTS
• A FREE PRODUCT WITH A MASS APPEAL WHICH WOULD
HELP GENERATE SUBSTANTIAL REVENUES IN CASE OF A
LOW CONVERSION RATE OF USERS
• A HIGH PERCENTAGE OF USERS WILLING TO PAY FOR THE
PREMIUM VERSION

10. Naukri.com provides free member service to
increase its user base. For people who need a
better jobs and visibility among top potential
employers, naukri.com has a premium service(
paid membership)
Hotstar is a digital and mobile entertainment
platform that lets you watch online movies, TV
shows and also supports streaming of sports
matches. It has a free service to expand the user
base and to expand it further it offers a
premium account which helps you get access to
latest high quality movies and TV shows

11. Cross Sell
Sell other products that are not directly tied to the
free product
REQUIREMENTS
 A broad product line preferably one that
complements the free product
 Ability to sell a broad product line through
partnerships, to users of free product

12. They make use of analytical insights from data collected
about the customer and its demographics.
Example :
Mrs. Sharma sits down with a Customer Representative(CR)
to order more checks and mentions she is late to pick up her
daughter from school.
Rather than try to sell Mrs. Sharma on a college savings
account right then (an idea Mrs. Sharma will likely reject), the
CR can log a note in the system that Mrs. Sharma has
children. The next time she comes into the branch and is in
less of a hurry, another CR can follow up with a pitch for the
college savings account.
This shows respect for customers’ time and also shows the
bank cares enough to choose products that might fit their
specific needs.
Cross-selling happens frequently in banking
industry

13. Cross-selling in sanitization industry

14. Charge 3rd Parties
Provide a free product to users and then charge a 3rd party for
access to them
REQUIREMENTS
 A free offering that attracts either many users who can be
segmented for advertisers or a targeted group that makes up
a customer segment
 3rd parties willing to pay to reach to these users

16. 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 complimentary
offering

19. Rethink Profit Centers
 Main Obstacles
A deeply rooted belief that products must
generate a respectable level of revenues &
profits on their own
The profit center structure and the
accounting system it employs, which
both reflect and reinforce this mindset

20. At every stage asking
the right questions can
lead a business to the
right path and help it
overcome a low cost
rival.
Can you tackle free?

21. How We Can Tackle the
Obstacles
 Profit responsibility must be pushed up to a management group that
oversees revenue and cost streams from a much wide variety of
sources
 Charge third parties for your services
 Revenue streams and cost management tasks should be delegated
to separate hands
 Development of product features and expansion of user base costs
should be kept separate
 Distinction between average and actual cost is important as the
latter is always lower than the former
 Cross selling new products to gain market share
‘‘ The best way to identify and thwart a low-cost rival is to adopt its mindset,
anticipate its next competitive move and measure your costs against its costs. ’’
– A. T. Kearney

22. Identify low-cost rivals
 Concentrate on a cost-effective design process rather than a
unique product design
 Involve suppliers early in the process, during initial product design
and development.
 Assemble products in low-cost countries
 Standardize products to reduce testing
 Effective firms also engage their suppliers in the quality process.
 Engage consumer-to-consumer online communities (eBay and
grassfire.com are good examples) and develop low-cost shipping
and distribution models via third-party logistics providers.
 Sell in large volume to developing economies
 Offer unique online and self-service customer support systems –
or find creative solutions in call-center strategies
Source: A. T. Kearney