NorCalBMA June 2012 SF Program: Featuring Wharton Professor David Bryce speaking on Competing Against Free

1. COMPETING AGAINST
FREE
David J. Bryce
Wharton EMBA Competitive Strategy
KNOWLEDGE FOR ACTION

2. Free Competition Can Threaten Survival of
Established Companies
• Share of international
long-distance now
>25%
• Banned by state
telecoms across the
world
• Record profits last year
• Air France with
declining share, losses;
now cutting workforce
KNOWLEDGE FOR ACTION David J. Bryce 2

3. 1. Up-Sell (“Freemium”)
Offer a free version to gain attention and widespread use; then offer a premium
product with advanced features for customers willing to pay.
Requirements:
A free product that appeals to a very large user base so that even a low
conversion rate of free users to paying customers will generate substantial
revenues
or
A high percentage of users willing to pay for the premium version
KNOWLEDGE FOR ACTION David J. Bryce 3

4. 2. Cross-Sell
Offer a free version to gain attention and widespread use; then offer other products
for which customers are willing to pay.
Requirements:
A broad product line (preferably products that complement the free product)
or
The ability through partnerships to sell a broad line of products to users of the
free product
KNOWLEDGE FOR ACTION David J. Bryce 4

5. 3. Third-Party Pay
Make the product/service free to generate a community for which you get paid by a
third party company who desires access to that community.
Requirements:
A free offering that attracts either many users who can be segmented for
advertisers or a targeted group that comprises a customer segment
and
Third parties willing to pay to reach those customers
KNOWLEDGE FOR ACTION David J. Bryce 5

6. 4. Bundle
Bundle the free product with non-free products and derive revenues from non-free
products.
Requirements:
Products or services that can be bundled with the free offering
or
A free product that needs regular maintenance or a complementary offering
(helpful but not essential)
KNOWLEDGE FOR ACTION David J. Bryce 6

7. How to Respond? About Two-Thirds of Incumbents
Get it Wrong
1. Ignore
2. Launch Free too Early
3. Launch Free too Late
KNOWLEDGE FOR ACTION David J. Bryce 7

8. Responding to Free
High Immediate Business Model
(5% per Threat Threat
year or (launch free (change business
more) product model)
Defection rate immediately)
(of paying
customers to the
Delayed
free offering)
Low Minor Threat Threat
(less than (monitor (co-exist or delay
5% per situation) launch of free
year) product)
Low High
(less than 40% (more than
per year) 40% per year)
Growth rate
(of number of users
of the free offering)
KNOWLEDGE FOR ACTION David J. Bryce 8

9. Change Business Model: Deseret Media Response to
Craigslist
• Salt Lake City one of 50 markets where Craigslist not dominant
• KSL.com Classifieds
• Integrate KSL Television, KSL Radio, and Print (Deseret News)
• Restructure reporter staff – use citizen voices, columnists, and
nationally syndicate content
KNOWLEDGE FOR ACTION David J. Bryce 9

10. The Challenge of Launching Free
P&L
Obstacle 1:
– The P&L Structure
• Must separate revenue from cost
• Different managers over each
• Take profit responsibility to the top
Obstacle 2:
– The Cost Accounting System
• Must think of marginal not average costs
• Must understand the long-term cost of losing
market share to free competitors
• Beat them back while you can!
KNOWLEDGE FOR ACTION David J. Bryce 10

11. Question and Answer
KNOWLEDGE FOR ACTION Name of Presenter 11

12. KNOWLEDGE FOR ACTION