Freebie marketing

A gift knitting row counter given away by Woman's Weekly in the 1980s-1990s.

Freebie marketing, also known as the razor and blades business model,[1] is a business model wherein one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as supplies. For example, inkjet printers require ink cartridges, "Swiffers" require cleaning fluid, mobile phones require service contracts,[2] and game consoles require accessories and software.[1] It is distinct from loss leader marketing and free sample marketing, which do not depend on complementary products or services.

Although the concept and its proverbial example "Give 'em the razor; sell 'em the blades" are widely credited to King Camp Gillette, the inventor of the disposable safety razor and founder of Gillette Safety Razor Company,[1] Gillette did not originate this model.[3]

Development

Main article: King Camp Gillette

The usual story about Gillette is that he realized that a disposable razor blade would not only be convenient, but also generate a continuous revenue stream. To foster that stream, he sold razors at an artificially low price to create the market for the blades.[1][4]

However, Gillette razors were expensive when they were first introduced and the price only went down after his patents expired: it was his competitors who invented the razors-and-blades model.[5]

Applications

Freebie marketing has been used in business models for many years. The Gillette company still uses this approach, often sending disposable safety razors in the mail to young men near their 18th birthday, or packaging them as giveaways at public events that Gillette has sponsored.

Standard Oil

With a monopoly in the American domestic market, Standard Oil and its owner, John D. Rockefeller, looked to China to expand their business. Representatives of Standard Oil gave away eight million kerosene lamps for free or sold them at greatly reduced prices to increase the demand for kerosene.[6]

Among American businessmen, this gave rise to the catchphrase "Oil for the lamps of China." Alice Tisdale Hobart's novel Oil for the Lamps of China was a fictional treatment of the phenomenon.[6]

Comcast

Comcast often gives away DVRs to its subscribing customers. However, the cost of giving away each free DVR is offset by a $19.95 installation fee as well as a $13.95 monthly subscription fee to use the machine. Based on an average assumed cost of $250 per DVR box to Comcast, after 18 months the loss would balance out and begin to generate a profit.[4]

Issues

The freebie marketing model may be threatened if the price of the high margin consumables in question falls due to competition. For the freebie market to be successful the company must have an effective monopoly on the corresponding goods. (Predatory pricing to destroy a smaller competitor is not covered here.) This can make the practice illegal.

Specific examples

Printers

Computer printer manufacturers have gone through extensive efforts to make sure that their printers are incompatible with lower cost after-market ink cartridges and refilled cartridges. This is because the printers are often sold at or below cost to generate sales of proprietary cartridges which will generate profits for the company over the life of the equipment. In fact, in certain cases, the cost of replacing disposable ink or toner may even approach the cost of buying new equipment with included cartridges, although included cartridges are often 'starter' cartridges that are only partially filled. Methods of vendor lock-in include designing the cartridges in a way that makes it possible to patent certain parts or aspects, or invoking the Digital Millennium Copyright Act[7] to prohibit reverse engineering by third-party ink manufacturers. Another method entails completely disabling the printer when a non-proprietary ink cartridge is placed into the machine, instead of merely issuing an ignorable message that a non-genuine (yet still fully functional) cartridge was installed.

In Lexmark Int'l v. Static Control Components the United States Court of Appeals for the Sixth Circuit ruled that circumvention of Lexmark's ink cartridge lock does not violate the DMCA. On the other hand, in August 2005, Lexmark won a case in the United States that allows them to sue certain large customers for violating their boxwrap license.

Video games

Atari had a similar problem in the 1980s with Atari 2600 games. Atari was initially the only developer and publisher of games for the 2600; it sold the 2600 itself at cost and relied on the games for profit. When several programmers left to found Activision and began publishing cheaper games of comparable quality, Atari was left without a source of profit. Lawsuits to block Activision were unsuccessful. Atari added measures to ensure games were from licensed producers only for its later-produced 5200 and 7800 consoles.

In recent times, video game consoles have often been sold at a loss while software and accessory sales are highly profitable to the console manufacturer. For this reason, console manufacturers aggressively protect their profit margin against piracy by pursuing legal action against carriers of modchips and jailbreaks. Particularly in the sixth generation era and beyond, Sony and Microsoft, with their PlayStation 2 and Xbox, had prohibitively high manufacturing costs so they were forced to sell their consoles at a loss, and these losses widened especially in 2002–2003 when both sides tried to grab market share with price cuts. Nintendo had a different strategy with its GameCube, which was considerably less expensive to produce than its rivals, so it retailed at break-even or higher prices. In the following generation of consoles, both Sony and Microsoft have continued to sell their consoles, the PlayStation 3 and Xbox 360 respectively, at a loss, with the practice continuing in the most recent generation with the PlayStation 4 and Xbox One.

Nuclear energy

Ever since the beginning of the commercial nuclear power industry, the business model has centered around selling the reactor at cost (or at a loss) and making its profits off fuel-supply contracts by exploiting vendor lock-in.[8]

Mobile phones

Mobile phone handsets provided with monthly usage contracts are often provided at below cost price - or even free of charge, particularly if obtained as an upgrade from an older model. The monthly contract funds the handset cost.

Other goods

Consumers may also find other uses for the subsidized product rather than utilize it for the company's intended purpose, which adversely affects revenue streams. This has happened to "free" personal computers with expensive proprietary Internet services and contributed to the failure of the CueCat barcode scanner.[9]

Affiliate Marketing makes extensive use of the freebie marketing business model, as many products are promoted as having a "free" trial, that entice consumers to sample the product and pay only for shipping and handling. Advertisers of heavily-promoted products such as Acai Berry targeting dieters hope the consumer will continue paying for continuous shipments of the product at inflated prices, and this business model has been met with much success.

Websites specializing in Sampling and discounts have proven to be very popular with economy-minded consumers, who visit sites which utilize freebies as link bait. The business model of these sites is to attract visitors that will click on AdSense and complete affiliate offers.

Tying

Main article: Tying (commerce)

Tying is a variation of freebie marketing that is often illegal when the products are not naturally related (for example, requiring a bookstore to stock up on an unpopular title before allowing them to purchase a bestseller). Tying is also known in some markets as 'Third Line Forcing.'[10]

Some kinds of tying, especially by contract, have historically been regarded as anti-competitive practices. The basic idea is that consumers are harmed by being forced to buy an undesired good (the tied good) to purchase a good they actually want (the tying good), and so would prefer that the goods be sold separately. The company doing this bundling may have a significantly large market share so that it may impose the tie on consumers, despite the forces of market competition. The tie may also harm other companies in the market for the tied good, or who sell only single components.

Another common example comes from how cable and satellite TV providers contract with content producers. The production company pays to produce 25 channels and forces the cable provider to pay for 10 low-audience channels to get a popular channel. Since cable providers lose customers without the popular channel, they are forced to purchase many other channels even if they have a very small viewing audience.

Legal issues

Microsoft was accused of releasing Internet Explorer at no charge to destroy Netscape's market (see United States v. Microsoft).

See also

References

  1. 1 2 3 4 Martin, Richard (2001-08-06). "The Razor's Edge". The Industry Standard. Retrieved 2008-08-01.
  2. ↑ James Corden, "Free Gifts With Mobile Phones", Best Contract Mobile Phones
  3. ↑ Randal C. Picker, "The Razors-and-Blades Myth(s)", John M. Olin Law & Economics Working Paper No. 532, University of Chicago Law School full text PDF
  4. 1 2 Anderson, Chris (March 2008). "Why $0.00 is the Future of Business". Wired.
  5. ↑ Picker, p. 3
  6. 1 2 Cochran, Sherman. "Encountering Chinese Networks: Western, Japanese, and Chinese Corporations in China, 1880-1937". University of California Press. Retrieved 2008-03-16.
  7. ↑ Yuk-fai Fong. "When Does Aftermarket Monopolization Soften Foremarket Competition?" (PDF). Northwestern University Kellogg School of Management. Retrieved 2008-03-16.
  8. ↑ Kirk Sorensen. "Kirk Sorensen @ PROTOSPACE on Liquid Fluoride Thorium Reactors". Gordon MacDowell via YouTube.
  9. ↑ Cory Doctorow. "Two million CueCats at $0.30/each". BoingBoing.net. Retrieved 2008-03-16.
  10. ↑ Trade Practices Act - Third Line Forcing
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