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The High Cost of 'Free': Four Types of Free Offers and How to Calculate Their Cost to Marketers

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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.

Four Types of Free

Free offerings generally fall into one of four categories. Before making a free offer, it's critical to ensure that it appeals to your target audience.

Then calculate the costs associated with your "free" offer. Each option has specific costs associated with it.

1. Product

Free products are the easiest free offers to understand. Each giveaway is a tangible item, such as a small sample of your product or a related product.

  • The marketing goal is to get customers to buy more from your firm in the form of new or related product.
  • Free-product costs include product and packaging, and fulfillment and shipping to get it to the customer. Note: when the sample is included with an existing product, the incremental packaging and shipping costs are lower.
  • Negatives: Many prospects just want the freebie and aren't loyal. Also, if you give prospects too much of a freebie, they may not need to purchase as much of the product.

2. Content

Content is a less tangible free offering. It's often used to entice customers to purchase from B2B organizations. The information is delivered in the form of a research report, e-book, or webinar.

  • The marketing goal is to acquire prospect contact details, especially for B2B companies, where more information is needed attract customers for high-priced, high-consideration products.
  • Free-content costs include the cost of content creation (including the design) and distribution via online or offline channels, as well as related marketing.
  • Negatives: Many prospects seek only information that's available for free.

3. Time

Time is another intangible offering, since it can be difficult to show its value to a prospect. It often takes the form of a free consultation to persuade a prospect to use your services or to reduce risk by providing help via an 800 number.

  • The marketing goal is to acquire prospect contact details, especially for B2B.
  • Free-time costs include the cost of your time and that of your employees. If you use time as your free giveaway, be very clear about the amount of time you're giving. Don't be afraid to set boundaries. Ironically, time is the most scarce resource any person has. Unfortunately, it's difficult to measure. Without having a timer and putting a hard stop, many solopreneurs tend to giveaway their time in the form of free advice.
  • Negatives: Many prospects are not willing or able to pay, and the supplier of the time may be enticed to contribute more free time in hopes of a bigger project.

4. Shipping and handling

Customers tend to prefer free shipping and handling to other "free" giveaways. In part, free shipping and handling is an enticement, since customers know what a product will cost them. Of course, this offer makes no sense if you're selling heavy products or ones that require special treatment.

  • The marketing goal is to get prospects to buy. This approach is particularly important if prospects are checking prices from a competitor's retail establishment.
  • Free-shipping-and-handling costs include order fulfillment (getting from the order through to the shipping) and the price of postage or shipping.
  • Negatives: Once you start to offer free shipping and handling, customers tend to expect it. They will wait for you to offer it again.

As you can see, each of those "free" offerings has costs.

How Do You Calculate the Cost of Free?

When you offer customers something for free, there's a real cost to you. It's critical to calculate that expense in advance to determine whether you can afford to make the offer.

Once you're sure that you can afford your giveaway, you need to determine how many prospects or customers you are willing to accommodate. (For some offerings, such as content, the number of prospects isn't limited.)

Here's the formula for determining the cost of free (note: not all of the variables apply to every offering):

  • Total Cost of Free = (Sum of the free costs, including product, packaging, product consultation, content creation, fulfillment, shipping, and handling) + (Related marketing costs, where appropriate)
  • Cost of Free per Unit = (Total cost of free) / (Number of units given away)

Components:

  • Free costs depend on the giveaway being offered. Include all of the costs that apply to your specific offering. When time is involved, calculate the number of hours and multiply that by the person's hourly rate.
  • Marketing costs consist of the cost of the marketing related to your giveaway, including content and related communications.
  • Number of units is the number of people who get a free item or free shipping or those who download a whitepaper, etc.

A Final Word

Many firms think that it's necessary to give away free stuff to attract and build an audience. Before you make that assumption, check what your competitors are doing.

When choosing a free giveaway, make sure that it's appropriate relative to your audience and the profitability of your offering. Then determine what it'll actually cost you before you run your campaign!

When using products or free shipping as giveaways, it's relatively easy to calculate the costs, since they're tangible. With less-tangible offerings, it's easy to underestimate the true cost of free.

What has your experience been with offering free giveaways?


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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

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Comments

  • by Kim Mon Jun 16, 2014 via web

    This is a very interesting article. I hope to use it with my students. How-ever, I really dislike the misuse of the word "free" in "Buy one, get one free." It isn't free for the customer. S/he is paying a (presumably) lower than normal price; that's all. I think it works primarily because it is deceiving the customer, who is subconsciously responding to the word "free" as if it really meant free. Another abuse of the word is online, where customers are lured in by the word "free," only to find out later that there are real costs (e.g., shipping) often not mentioned in the original ad at all or that there is an automatic extension of a subscription that is either hard to find out about or hard and not cost-free to get out of.

  • by Kimmy Burgess Tue Jun 17, 2014 via web

    Wow. The free offers have always a profit attached for the marketeers. This analysis of how these are working for them is a tough task to know.Thanks Heidi.

  • by riveradaniel Tue Jun 17, 2014 via web

    Well written article .If you are offering free products or discount with another product it will definitely going to attract more customers especially women's .

  • by Fabienne RaphaŽl Tue Jun 17, 2014 via web

    Thanks Heidi for such great content. You are so right. Free is never free for marketers!

    I really appreciated the fact that you gave a detailed explanation on all the costs that come with what we give away for free to our audience.

    Personally, I try to schedule a specific amount of time when I am working on these free content, products or offers. I definitely think that if something you want to give away for free takes you way too long to accomplish, maybe it should not be free...

    But I have to admit that it is a great way to build trust with your audience by sharing some valuable content and truly showing that you want to help them solving their problems.

  • by Ben Lawton Wed Jun 18, 2014 via web

    Brilliant article, Heidi.

    As a long-term strategy, I think too many people discount the idea of paid "offers".

    By paid offers I'm talking paid webinars; books; ebooks; online courses; seminars. Obviously we're not talking a paid sample of your product, but something related would work wonders. Just look at the success some freelancers have by hosting seminars in their local areas.

    These "paid offers" have a much higher perceived value than sharing free samples/content, and even though your initial reach may be smaller with paid offers, IMHO they do a much better job of establishing authority. Plus there's also the upside of not losing money on the front-end, establishing credibility and even making a healthy profit.

  • by Matt Fenn Thu Jun 26, 2014 via web

    Great article Heidi, I think it's also worth mentioning the idea of 'Freemium' often used by web apps, I run the Jumplead online marketing platform, and we have recently moved from a 'timed trial' to a 'free to play' Freemium model, we did this for a few reasons:

    1. Free is incredibly powerful.
    2. Free removes risk.
    3. All prospects are moved further down our sales funnel.
    4. All previous timed trials could be reclassified and become opportunities to nurture.
    5. Product learning curve becomes an opportunity for gamification via credits & social media.
    6. Free invokes reciprocation.
    7. In an industry that charges for training, providing free tools for self learning is a significant point of difference.

    We've been very careful to ensure that we have the redundancy within our existing infrastructure before undertaking this.

    It's early days, but our experience so far is very positive.

    We are already getting a significant amount of re-engagement from people who had previously taken timed trials, and of course our conversion rate has rocketed!

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