The Price of "Free"
I was visiting with a partner the other day and mentioned a free trial. He just about jumped over the table. He asked that I never use "that four letter word starting with 'F'" again. Wow!!! Had I made some unconscious slip? Not something that I usually do or a word that I usually use.
Then I realized that he was upset about my use of the word "free". This fellow believes that free is one of the most damaging and dangerous words in the business vocabulary. At first, I just thought that he had enjoyed too many Red Bulls. But as I considered his position, I came to believe that he is right.
Especially in this economy it's tempting to give things away. But whenever you say that your product is free, you're essentially telling your customer that it has no value. Things are only worth what we pay for them. In addition, managing yield is one of the most predictable ways to improve the profitability of your business.
Purely from an optics perspective, it's always better to position something as being included with purchase for getting "four for the price of three" than to badly say that something is free. As a smaller business, it's also better to stay away from commodity products that are profitably sold by the big box retailers at a much lower price.
But there's a subtle and very important concept baked into any discussion of promotional pricing.
Why are you discounting?
And you can't say "because I have to" or "to drive more business"? Neither of those answers is specific enough to help you determine whether a particular discount is smart or dumb. Selling more units just to increase volume, is almost never a worthwhile goalI'd suggest that a worthwhile goal is to profitably grow your revenue. Selling below your variable cost is a form of suicide usually only practiced by venture-backed companies that are comfortable transferring their investors' wealth to consumers.
A rightside-up rate card
One useful concept is that of a "rightside up" rate card. By that, I mean that your pricing incents good behavior and discourages bad behavior. The customer should get better unit pricing with more volume, but your companies revenue should also grow. This strategy lets you increase your share of your customers budget while growing your business. A "rightside up" rate card also discourages bad behavior. You should discourage customers from cancelling orders and decreasing volume. A 20 percent cut in volume should not result in them getting 20 percent of their spend with you back.
Nothing is really free -- at least it shouldn't be.
Nothing is free. Not lunch and certainly not your product. Pricing is one of your most powerful ways to grow your brand while growing your business.
