How can you compete with free?
The Internet has been a godsend for consumers who don’t like paying for things, but a huge headache for businesses that like charging for things.
This has famously been a problem for the recording and news industries, but it affects small start-ups too: whatever service you try to sell on the Internet, it won’t be long before someone comes along and offers the same thing for free.
A new study by Ramon Casadesus-Masanell of Harvard Business School and Feng Zhu of USC’s Marshall School of Business looks at how companies can respond to competition from ad-based rivals. The study examines the business models of over 20 businesses across a wide range of industries, breaking them down into four basic categories:
- A pure fee-based model (iTunes or eHarmony)
- A pure ad-sponsored model (Metro newspapers, broadcast television, or Facebook)
- A mix of ads and fees for a single product (The Wall Street Journal or cable television)
- Tiered content, with some ad-sponsored content and some paid content (Match.com, many news outlets)
The researchers found that once a free, ad-based competitor enters a market, the mixed strategies stop working. (More bad news for the newspaper industry!) Instead, successful firms commit one way or the other to an ad-sponsored or fee-sponsored business model.
When the competition stops charging, entrepreneurs need to take an honest look at the quality of their product. If it is better than what consumers can get elsewhere, don’t compromise its quality with ads; just keep being better and charge for use. Otherwise, make it free and beat the competitor at their own game.
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