October 10, 2013

There’s No Such Thing as a Free Lunch

The economic theory that “there’s no such thing as a free lunch” is a widely adopted belief. Someone must pay for whatever goods or services are provided, regardless of the mechanism used.

What about suppliers that are offering their goods or services for free? Why would they do that, and who pays for it?

Regardless of the commodity or sector, this seems to becoming more common – and I do believe that there are times and situations that it makes great business sense. For example, 25 years ago I had a nice little operation that created, distributed and sold tee shirts on college campuses. The day that I introduced a new tee shirt, I provided, for free, one tee shirt to every bartender that was willing to wear one that afternoon, or evening, while at work. This created a buzz and a coolness factor, which resulted in an increase in sales. If there is no such thing as a free lunch, who paid for those free shirts? The other customers did because I was able to sell my remaining stock at a higher price.

This example applies across any industry. “Free” may ultimately be paid for by other customers, or even in conjunction with lesser service or quality (which may mean you, the buyer, are ultimately paying for it in other ways).

In the case of a new company, or new product, “free” may be an effective method to earning experience or gaining a reference-able customer base. Good business sense.

But why, then, are companies with many years of experience, and a mature product, offering their goods and services for free? Experience tells me that this tactic is both bad for the buyer, and bad for the seller. More often than not, the reason is they are either intimidated by competition, or they have an inferior offering, which cannot effectively compete. Net-net: If you have a good product or service, it can stand on its own.

I’ve seen it from large ERP providers – offering free modules either because it is not competitive, or because they want to have it paid back through very large implementation charges. I’ve also seen it from smaller players – offering free products because they are afraid to see others gain traction. These terms are bad for the supplier, as they are not receiving the money necessary to stay, or get, competitive (research and development, support, etc.). And… someone, somewhere, will have to pay for it.

What about the buyer? Doesn’t it send a big red flag when you hear that a supplier is offering their goods or services for free? Why would they have to, and how well will they be able to deliver these goods or services once the contract is signed? Is that supplier more at risk now that they don’t have that revenue source? Is it a sustainable strategy? And why you? Obviously they are not offering free to everyone, so… why you?

I think it is high time for cheesy sales tactics to stop. I do 100% believe that buying organizations deserve better – and I do 100% believe that “free”, for the wrong reasons, ultimately hurts the customer. Goods and services should be appropriately priced so that every deal is beneficial to the selling organization, as well as the buying organization. The customer benefits from better goods and services, and a more resilient, trustworthy supplier.

Just my two cents.

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