Who doesn't like free?

When I worked at Columbia House, the music club company, our best offer was "Buy 1, Get 1 Free," not "2 for the Price of 1" or "Get 2 at half price."

Why did we use "Buy 1, Get 1 Free"? Because it was more enticing to our customers, even though it's the same as "2 for the price of 1" or "Get 2 at half price." We always used this offer. Because it worked! It was our base offer for retaining customers, to which we often added other deals.

We tested this offer over and over and it always yielded the best results in terms of customer lifetime value (CLV): i.e., the amount of revenue that a customer yields over time; minus the cost of product, fulfillment, and shipping; plus the cost to market to that customer. CLV also adjusts for the time value of money.

The reality is that free is never free for the marketer. There's always an expense that has to be paid, even if it's not paid by the customer. Moreover, that cost is often higher than marketer anticipates.

At Columbia House we were lucky to have a very high product margin: Our cost was significantly less than the fully loaded cost of the product. We covered the CD cost by charging additional shipping. It was still a great deal for our customers, because they got a full-price CD for free. From our perspective, the offer worked because we covered our product costs.

By contrast, even though customers thought that our shipping and handling charges were high, those charges never fully covered the cost of getting the CD from our warehouse to their homes—which included the costs for order processing and fulfillment, in addition to the postage.

Our finance team spent a lot of time each year figuring out those various costs, since they were used in every aspect of our marketing promotions.

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Heidi Cohen is chief content officer of Actionable Marketing Guide and president of Riverside Marketing Strategies. She works with clients to increase profitability via innovative marketing programs based on solid analytics.

Twitter: @heidicohen

LinkedIn: Heidi Cohen