Freebie marketing
Encyclopedia
Freebie marketing, also known as the razor and blades business model, 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 (inkjet printers and ink cartridges) or software (game consoles and games). It is distinct from loss leader marketing
and free sample marketing, which do not depend on complementarity products or services.
Though the concept is widely credited to King Camp Gillette, the inventor of the disposable safety razor
and founder of Gillette Safety Razor Company, in fact Gillette did not originate this model.
But in fact 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.
and its owner, John D. Rockefeller
, looked to China to expand their business. Representatives of Standard Oil gave away eight million kerosene lamp
s for free or at greatly reduced prices to increase the demand for kerosene
.
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.
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.
certain parts or aspects, or invoking the Digital Millennium Copyright Act
to prohibit reverse engineering by third-party ink manufacturers.
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 U.S. that allows them to sue certain large customers for violating their boxwrap license
.
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.
services and contributed to the failure of the CueCat
barcode scanner.
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.
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.
was accused of releasing Internet Explorer
at no charge to destroy Netscape's market (see United States v. Microsoft
).
Loss leader
A loss leader or leader is a product sold at a low price to stimulate other profitable sales. It is a kind of sales promotion, in other words marketing concentrating on a pricing strategy. A loss leader is often a popular article...
and free sample marketing, which do not depend on complementarity products or services.
Though the concept is widely credited to King Camp Gillette, the inventor of the disposable safety razor
Safety razor
A safety razor is a razor that protects the skin from all but the very edge of the blade. These razors reduce the possibility of serious injury, which makes them more forgiving than a straight razor.-Cartridges introduced:...
and founder of Gillette Safety Razor Company, in fact Gillette did not originate this model.
Development
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.But in fact 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.
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, packaging them as giveaways at public events that Gillette has sponsored, et cetera.Standard Oil
With a monopoly in the American domestic market, Standard OilStandard Oil
Standard Oil was a predominant American integrated oil producing, transporting, refining, and marketing company. Established in 1870 as a corporation in Ohio, it was the largest oil refiner in the world and operated as a major company trust and was one of the world's first and largest multinational...
and its owner, John D. Rockefeller
John D. Rockefeller
John Davison Rockefeller was an American oil industrialist, investor, and philanthropist. He was the founder of the Standard Oil Company, which dominated the oil industry and was the first great U.S. business trust. Rockefeller revolutionized the petroleum industry and defined the structure of...
, looked to China to expand their business. Representatives of Standard Oil gave away eight million kerosene lamp
Kerosene lamp
The kerosene lamp is a type of lighting device that uses kerosene as a fuel. This article refers to kerosene lamps that have a wick and a tall glass chimney. Kerosene lanterns that have a wick and a glass globe are related to kerosene lamps and are included here as well...
s for free or at greatly reduced prices to increase the demand for kerosene
Kerosene
Kerosene, sometimes spelled kerosine in scientific and industrial usage, also known as paraffin or paraffin oil in the United Kingdom, Hong Kong, Ireland and South Africa, is a combustible hydrocarbon liquid. The name is derived from Greek keros...
.
Among American businessmen, this gave rise to the catchphrase "Oil for the lamps of China." Alice Tisdale Hobart
Alice Tisdale Hobart
Alice Tisdale Hobart born Alice Nourse in Lockport, New York, was an American novelist. Her most famous book, Oil for the Lamps of China , which was also made into a film, drew heavily on her experiences as the wife of an American oil executive in China amid the turmoil of the overthrow of the...
's novel Oil for the Lamps of China
Oil For the Lamps of China
Oil for the Lamps of China is a novel by Alice Tisdale Hobart. It was originally published by Bobbs Merrill in 1933, and reprinted by EastBridge in 2002 ....
was a fictional treatment of the phenomenon.
Comcast
ComcastComcast
Comcast Corporation is the largest cable operator, home Internet service provider, and fourth largest home telephone service provider in the United States, providing cable television, broadband Internet, and telephone service to both residential and commercial customers in 39 states and the...
often gives away DVRs
Digital video recorder
A digital video recorder , sometimes referred to by the merchandising term personal video recorder , is a consumer electronics device or application software that records video in a digital format to a disk drive, USB flash drive, SD memory card or other local or networked mass storage device...
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.
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. (Market dumping to destroy a smaller competitor is not covered here.) This can make the practice illegal.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 patentPatent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
certain parts or aspects, or invoking the Digital Millennium Copyright Act
Digital Millennium Copyright Act
The Digital Millennium Copyright Act is a United States copyright law that implements two 1996 treaties of the World Intellectual Property Organization . It criminalizes production and dissemination of technology, devices, or services intended to circumvent measures that control access to...
to prohibit reverse engineering by third-party ink manufacturers.
In Lexmark Int'l v. Static Control Components
Lexmark Int'l v. Static Control Components
Lexmark International, Inc. v. Static Control Components, Inc., 387 F.3d 522 , was an American legal case involving the computer printer company Lexmark, which had designed an authentication system using a microcontroller so that only authorized toner cartridges could be used...
the United States Court of Appeals for the Sixth Circuit
United States Court of Appeals for the Sixth Circuit
The United States Court of Appeals for the Sixth Circuit is a federal court with appellate jurisdiction over the district courts in the following districts:* Eastern District of Kentucky* Western District of Kentucky...
ruled that circumvention of Lexmark's ink cartridge lock does not violate the DMCA. On the other hand, in August 2005, Lexmark
Lexmark
Lexmark International, Inc. is an American corporation which develops and manufactures printing and imaging products, including laser and inkjet printers, multifunction products, printing supplies, and services for business and individual consumers...
won a case in the U.S. that allows them to sue certain large customers for violating their boxwrap license
Arizona Cartridge Remanufacturers Association Inc. v. Lexmark International Inc.
Arizona Cartridge Remanufacturers Association Inc. v. Lexmark International Inc. 421 F.3d 981 was a decision by the United States Court of Appeals for the Ninth Circuit which ruled that an End User License Agreement on a physical box can be binding on consumers who signal their acceptance of the...
.
Video games
AtariAtari
Atari is a corporate and brand name owned by several entities since its inception in 1972. It is currently owned by Atari Interactive, a wholly owned subsidiary of the French publisher Atari, SA . The original Atari, Inc. was founded in 1972 by Nolan Bushnell and Ted Dabney. It was a pioneer in...
had a similar problem in the 1980s with Atari 2600
Atari 2600
The Atari 2600 is a video game console released in October 1977 by Atari, Inc. It is credited with popularizing the use of microprocessor-based hardware and cartridges containing game code, instead of having non-microprocessor dedicated hardware with all games built in...
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
Activision
Activision is an American publisher, majority owned by French conglomerate Vivendi SA. Its current CEO is Robert Kotick. It was founded on October 1, 1979 and was the world's first independent developer and distributor of video games for gaming consoles...
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.
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 InternetInternet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
services and contributed to the failure of the CueCat
CueCat
The CueCat is a cat-shaped handheld barcode reader that was developed in early 1990s and released in 1999 by the now defunct Digital Convergence Corporation, which connected to computers using the PS/2 keyboard port and USB...
barcode scanner.
Affiliate Marketing
Affiliate marketing
Affiliate marketing is a marketing practice in which a business rewards one or more affiliates for each visitor or customer brought about by the affiliate's own marketing efforts...
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
AdSense
Google AdSense which is a program run by Google Inc. allows publishers in the Google Network of content sites to automatically serve text, image, video, and rich media adverts that are targeted to site content and audience. These adverts are administered, sorted, and maintained by Google, and they...
and complete affiliate offers.
Tying
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.'Some kinds of tying, especially by contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
, have historically been regarded as anti-competitive practices
Anti-competitive practices
Anti-competitive practices are business or government practices that prevent or reduce competition in a market .- Anti-competitive practices :These can include:...
. 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.
Legal issues
Different freebie practices can be seen as anti-competitive. For example MicrosoftMicrosoft
Microsoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...
was accused of releasing Internet Explorer
Internet Explorer
Windows Internet Explorer is a series of graphical web browsers developed by Microsoft and included as part of the Microsoft Windows line of operating systems, starting in 1995. It was first released as part of the add-on package Plus! for Windows 95 that year...
at no charge to destroy Netscape's market (see United States v. Microsoft
United States v. Microsoft
United States v. Microsoft was a set of civil actions filed against Microsoft Corporation pursuant to the Sherman Antitrust Act of 1890 Section 1 and 2 on May 8, 1998 by the United States Department of Justice and 20 U.S. states. Joel I. Klein was the lead prosecutor...
).
See also
- Complementary good, a good that should be consumed with another good
- Loss leaderLoss leaderA loss leader or leader is a product sold at a low price to stimulate other profitable sales. It is a kind of sales promotion, in other words marketing concentrating on a pricing strategy. A loss leader is often a popular article...
, for an item that is sold below cost in an effort to stimulate other profitable sales - Consumption subsidies
- Product bundlingProduct bundlingProduct bundling is a marketing strategy that involves offering several products for sale as one combined product. This strategy is very common in the software business , in the cable television industry Product bundling is a marketing strategy that involves offering several products for sale as...
, offering several products for sale as one combined product - Product churningProduct churningProduct churning is the business practice whereby more of the product is sold than is beneficial to the consumer. An example is a stock broker who buys and sells securities in a portfolio more frequently than is necessary in order to generate commission fees....
, selling more product than is beneficial to the consumer - Vendor lock-inVendor lock-inIn economics, vendor lock-in, also known as proprietary lock-in or customer lock-in, makes a customer dependent on a vendor for products and services, unable to use another vendor without substantial switching costs...
- Demo (marketing)Demo (marketing)In marketing, an in-store demonstration is a promotion where samples of a product are distributed to customers within a store. The goal of an in-store demonstration is to introduce customers to the product in hopes of getting them to purchase that item...
, an event in which free samples of a product are distributed - Trojan horse (business)Trojan horse (business)In business, a trojan horse is an advertising offer made by a company that is designed to draw potential customers by offering them cash or something of value for acceptance, but following acceptance, the buyer is forced to spend a much larger amount of money, either by being signed into a lengthy...