Real-World Education for Modern Marketers

Join Over 600,000 Marketing Professionals

Start here!
N E X T
Text:  A A

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

by Heidi Cohen  |  
June 16, 2014
  |  5,201 views

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.


Sign up for free to read the full article.Read the Full Article

Membership is required to access the full version of this how-to marketing article ... don't worry though, it's FREE!

WANT TO READ MORE?
SIGN UP TODAY ...
IT'S FREE!

We will never sell or rent your email address to anyone. We value your privacy. (We hate spam as much as you do.) See our privacy policy.

Sign in with one of your preferred accounts below:

Loading...

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

Rate this  

Overall rating

  • Not rated yet.

Add a Comment

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!

MarketingProfs uses single
sign-on with Facebook, Twitter, Google and others to make subscribing and signing in easier for you. That's it, and nothing more! Rest assured that MarketingProfs: Your data is secure with MarketingProfs SocialSafe!