Opinion Series: The Landscape of “Free” in Business, Part I/II

Opinion Series: The Landscape of “Free” in Business, Part I/II

Matthew Manos, Founder and Creative Director of verynice, has developed a new way of doing business. Over the course of the next two articles he will describe the landscape of "free" business, and the new era of pro-bono.

 

When I was young, I remember a moment in a local grocery store when I saw a coupon for a free toy. I looked to my dad and said, “Look, a free toy!!!” His response to me was: “Matthew... Nothing in this world is free.” I’ve spent the majority of my professional career actually trying to prove that sentiment wrong and, so far, I am not quite sure if I have been able to or not. Over the past 5 years, through the founding and continued work in developing verynice, a design and innovation consultancy that dedicates over 50% of its work toward free services for non-profit organizations, I have been investigating the cultural relevance and promise of pro-bono. As a result, put in a less fancy manner, I’ve become obsessed with “free stuff” and more specifically, the role of “free” in business. The following is a collection of essays written over the past 3 years that reflect upon the meaning of giving half of your work away for free, the role of design in the creation of new models for business, and the importance of alternative economies in our society.

Between digital economics and the wholesale embrace of King’s Gillette’s experiment in price shifting, we are entering an era when free will be seen as the norm, not an anomaly. [ 1 ]

Free stuff” has been at the core of business strategy for centuries. Sure, the fundamentals of capitalism have always been rooted in the design of models for exchange and value creation, but what often goes without much recognition in the mainstream is that client and consumer acquisition has long begun with a free gesture, such as a free initial consultation, or a free sample. That gesture and the role of “free” in business can be categorized into two typologies: Strategic and Altruistic. While very separated in intentions, these two takes on “free” in business have actually historically yielded much inspiration on one another, and clear lineages can be traced between models. Let’s take a walk through time together to get our heads around the role of “free” in business. Specifically, let’s explore a series of both historical and contemporary models of business in which “free” is at the heart of the strategy in order to understand how “free” in business can actually go beyond opportunity and instead be seen as an expectation for business, something that can transition into the altruistic side of things.

There are two kinds of business: product and service. While product-oriented business deals with physical goods that are manufactured and require distribution, service-oriented business focuses on the value of time, experience, and the sharing of knowledge. Think for a second about a pair of really nice leather shoes in comparison to an hour long conversation with an attorney. While both actually cost a customer the same amount of money (~$200), they both reside in completely different business landscapes, and therefore are perceived very differently in terms of value both by the consumer and the provider. Likewise, if we gaze a few layers beneath the surface of these engagements, we will soon find that the inner-workings of both trajectories are just as different as their perceived value. In fact, both are so different from one another that they actually require completely different modeling strategies to ensure success and scalability. So why is this all so important to leverage as a preface for the words to come? Because “free” can mean a lot of things in business, and the histories of the product side and the service side, as well as their evolution, have quite different stories to tell.

Thanks to Wikipedia, I can tell you that the first known promotional giveaway item was actually a series of commemorative buttons that dated all the way back to the days of George Washington’s election in 1789. To this day, giveaways, more popularly referred to as “swag,” continue to be used in and out of the political space at gatherings such as corporate events and conventions. That said, from my perspective, the real godfather of “free” in product-oriented business is not the promotional giveaway, but instead the promotional coupon. While coupons were made popular primarily during the great depression due to the need for value and free goods, the legacy of the coupon can actually be drawn back to the year 1888. Shortly after incorporating in Atlanta, one of the Coca-Cola Company’s key partners, Asa Candler, played a significant role in transforming the company into the profitable business it is today by experimenting with innovative advertising techniques. One of these techniques was what many consider to be the first-ever coupon. The coupon itself promised a free glass of Coca-Cola from any dispenser that sold the beverage. What was the result of this deal? Well, within less than 10 years, one in nine Americans had enjoyed a free glass, and right at the end of the 19th century, Candler had announced to his shareholders that glasses of Coca-Cola were being served in every state across the US [ 2 ].  Shortly after the launch of the coupon program by Coca-Cola, the method of promotional advertising started hitting the mainstream thanks to some more help in proving the potential of coupons by C.W. Post, the guy that decided putting coupons on the back of a cereal box was a good idea (thanks for the tip, Wikipedia). Turns out he was correct! According to NCH Marketing Services, Inc.’s Annual Coupon Facts Report, more than 2,800 different packaged-goods companies actually offer a coupon for discounts on their products. In 2012 alone, 2.9 billion coupons were redeemed [ 3 ]. 

So what exactly is the point of coupons? Well, they of course make consumers happy, but the immediate implications are far more strategic then that. Coupons can help convince a consumer to try your stuff. As we saw with Coca-Cola, 8.5 Million people were able to take a sip of their soda as a result of their free trial coupon. While there are no statistics that I can find to prove this, the company would arguably had a far more difficult time building the god-like brand recognition it has today if it were not for that little piece of paper. Beyond brand building and lead acquisition, though, coupons have also been leveraged as a tool for market research and, more specifically, price sensitivity. By sending different types of coupons to different demographics and regional markets, businesses are able to get a sense for what kind of price marks can get them the most bites [ 4 ].  More broadly defined, a coupon can really be understood as a “deal” - a discount, or an opportunity for the consumer to acquire something new at less cost to them. As we will explore, the idea of “discounted consumption” that the coupon blazed a trail for has evolved into several models, some new and some old, but all of which will be defined and analyzed over the next few thousand words: BOGOF, Freemium, PWYW, and pro-bono.

The phrase “BUY ONE GET ONE FREE” (also commonly referred to as BOGO or BOGOF), created by Shara ‘BOGO’ Jacavage, is a marketing strategy that often graces window displays, interior signage, and hang tags at every big-box store across several retail-oriented sectors. In the instance of the BOGOF model, “free” is an integral component of this model of business, but the intentions are purely strategic, and thus the model strays far away from altruism. Instead, it is a strategic means of persuasion that sub-consciously inspires consumers to perceive the value of exchange to be much greater than it really is. What does this mean for stores? Put simply, it is one of the most profitable forms of sales promotion, even more so than 50% discounts. 

[...] assume that you value your first pizza of the night at $15.01 and the second at $5.01 and let’s say it costs the store $2 to make each pizza. If the pizza store has a buy-one-get-one-free offer at $20 then you will buy two pizzas and the store will have profits of $16 ($20-$2-$2). But if the store sells pizzas for half price, $10 each, you will buy just one pizza and the store will have profits of just $8 ($10-$2). [ 5 ]

Now, I know. There are a lot of numbers in that example. Truth be told, I haven’t been required to take a math class since I was 17 years old, BUT if you do some quick math on the above scenario, you will quickly realize that the store in this pizza-night scenario actually made double the profits while simultaneously giving you one pizza for free. According to IGD, a data company that monitors supermarkets, a quarter of all shoppers buy goods because they are part of a buy-one-get-one-free offer.  So is this model sneaky or genius?

I once found myself in Jerome, Arizona wandering around one of those tchotchke stores that are filled to the brim with questionable “antiques” and a plethora of corny statues. Behind the counter, I stumbled upon an amazing sign that served as a direct critique of this infamous BOGOF model as it read: “BUY ONE FOR THE PRICE OF TWO AND GET THE SECOND ONE FREE.” While intentionally comical, and not intended to be taken too seriously, the sign actually captures the real genius behind the BOGOF model’s long-standing success in the retail environment. The BOGOF model introduces business owners with the opportunity to increase the perceived worth amongst consumers through strategic mark-up, and it also introduces an opportunity to “kill two birds with one stone” by enabling the acquisition of at least two products per one consumer. This is a textbook example of “free” as a means to create opportunity for business success in the for-profit space, but what would happen if this model was leveraged for the greater good?

Sponsorship models have long been leveraged in the non-profit space. Some of the more famous examples are organizations that allow you to sponsor a child through a monthly commitment to provide monetary support to make access to clean water, an education, healthcare, and more possible on a daily basis. Another famous example of sponsorship in the non-profit space is Heifer International, an organization that allows you to sponsor villages abroad by purchasing a goat for them. Likewise, Charity Water is a popular donate-to-sponsor organization. But what would happen if donors could sponsor, but also receive something in exchange for their donation? One Laptop Per Child (OLPC) is a non-profit organization that aims to do exactly as its name suggests: provide one laptop for every child. 

We aim to provide each child with a rugged, low-cost, low-power, connected laptop. To this end, we have designed hardware, content and software for collaborative, joyful, and self-empowered learning. With access to this type of tool, children are engaged in their own education, and learn, share, and create together. They become connected to each other, to the world and to a brighter future. [ 7 ]

Upon its debut, with its focus resting on children in third world scenarios that have little access to technology, the organization originally set out to create a laptop that would only cost $100.00. While affordable to the average American, the ability to whip out one hundred bucks in certain countries abroad is quite a privilege. In lieu of this, OLPC leveraged the BOGOF model in a way it had never been leveraged before. Put simply, members of privileged nations can elect to purchase a $100 laptop for the price of $200 in order to sponsor the purchase of one device for someone abroad who cannot afford it. In many ways, this model of business can be described in similar terms to that comical sign I had brought up earlier, but with one slight modification: “BUY ONE FOR THE PRICE OF TWO AND GIVE THE SECOND ONE AWAY FOR FREE.” The buy one give one model, popularized by OLPC, is unique in both its practicality and its scalability. Through transparent pricing models, consumers are able to know exactly where their purchase dollars are going, and are therefore compelled to give. Arguably, not many first-world inhabitants actually want the OLPC machine due to its irrelevance in our privileged society. Instead, these purchases are being made with the desire to give back. This fact shines light on the fact that giving can compel consumption among many. Therefore, the model goes beyond being a unique fundraising method, and is actually a strong model for business and revenue generation at a larger scale.

Borrowing from the OLPC model, Blake Mycoskie, the founder of TOMS shoes has made a name for his “One for One” model through the introduction of this line of thinking to the for-profit sector. For every pair of shoes that a customer purchases, a pair is donated to a child in need. Upon its introduction to the market place, this model spread like wild fire amongst small businesses on a global scale and, as a result, there are now many instances of replication across the product-oriented business landscape that borrow the same tactic. “It’s like TOMS, but for ___” is a phrase that can be commonly overheard at social enterprise startup events. Part of the reason the model is so successful is due to its ability to make giving back an accessible act. The consumer does not need to go out of his or her way to contribute to a cause, in this scenario; instead, they need only purchase products that they already need in their daily lives. The company takes it from there. Like the OLPC model, “One for One” relies on the relevance and desire for the product both by the purchaser and the beneficiary. Because of this reality, the “one for one” model, as a for-profit business strategy, does gather a lot of skepticism and critique in regards to the authenticity of the model’s intentions due to the fact that the model can only succeed in the market place if the problem continues to exist. Intentions aside, TOMS Shoes, and other companies leveraging the One for One approach have been able to create significant impact in terms of the volume of their contributions. As of October 2011, TOMS has been able to give away over 2,000,000 pairs of shoes to children in need. [ 8 ]

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A genre of business that describes the opportunity of BOGOF well is known as cross-subsidies. The idea is that something helps pay for something else. For example, drinks are sold at a premium to reduce food costs in restaurants. Video game consoles are sold at a price point that is less-than-break-even for the manufacturers, but the games themselves are sold at an enormous markup. The majority of economic models leveraged by business, in fact, rely on this. While “BUY ONE GET ONE FREE” has proven to be a successful spawn of the overarching cross-subsidy strategy, let’s dip into another interesting business model that equally stemmed from the same genealogy of the holy free coupon... the Gillette Model. Better referred to today as “freemium,” the Gillette model was made popular by King Camp Gillette, a brilliantly conflicted figure amongst the greatest entrepreneurs in the 19th and 20th centuries. Gillette is best known for the invention of his disposable razor. The concept, unveiled just 5 years after the Coca Cola coupon hit the market, pioneered a brilliant new model of business known as “The Razor and Blades Business Model” and, more commonly today, as “Freebie Marketing.” While working as a salesman for the Crown Cork and Seal Company, Gillette saw great opportunity in the design of a product that served its purpose, and then was tossed in the trash. These one-time-use products foster long-term, repeat, customers. While shaving his face one morning with a razor that lacked a strong edge, the idea to create a thin sheet of razor blade came upon Gillette, thus giving birth to the Gillette razor we have today. Perhaps a lesser known side of Gillette is the fact that, aside from being a successful business man, he was also a utopian socialist. This passion inspired Gillette to be a prolific writer of books that sit between the genres of fiction and non-fiction. Gillette was an obsessive planner, writing hundreds of pages that aimed to highlight every last logistic element and business plan for his utopian vision. In his first novel, “The Human Drift,” Gillette wrote about the chaos of contemporary existence, and a prospectus for the alternative world he dreamed of building to fix it (which just so happened to be based behind the Niagara Falls).
    How has the vision of Gillette manifested in more modern business models? What other examples of “free” as a business strategy exist in the market today?

 

 Stay tuned for Part II, coming soon!


Citation

[ 1 ] Chris Andersen, Wired Magazine. Retrieved 2013-07-02.

[ 2 ] Coca-Cola 120th Anniversary, The Coca-Cola Company Time Line – 120 Years of Innovation

[ 3 ] "NCH Annual Coupon Facts Report, 2012". NCH Marketing Services, Inc.

[ 4 ] McKenzie, Richard B. Why Popcorn Costs So Much at the Movies: And Other Pricing Puzzles. ISBN 978-0-387-76999-8, 2008.

[ 5 ] Buy one get one free, from Marginal Revolution. Retrieved 2008-01-05.

[ 6 ] Wallop, Harry (2008-07-07). "Food waste: Why supermarkets will never say bogof to buy one get one free". Telegraph. Retrieved 2010-08-28.

[ 7 ] One Laptop.

[ 8 ] TOMS Giving Report, 2013.

[ 9 ]  stice and the Poor. Reginald Heber Smith. 1919

[ 10 ] “History of Civil Legal Aid” - National Legal Aid and Defender Association

[ 11 ] Taproot Foundation - history of pro-bono


About Matthew Manos

Matthew Manos is a neo-philanthropist, creative director, and author that is dedicated to disrupting the way the design industry operates. Manos began his freelance design career at the age of 16, which is the same year he took on his first pro-bono client, and launched his first company. Three years later, he founded verynice, a global design and innovation consultancy that dedicates over 50% of its efforts toward free services for non-profit organizations. Manos has helped build over 300 brands in every sector and industry across the globe, and his studio works with a diverse clientele that range from Fortune 500 companies to small local shops. As of 2013, verynice has also provided over $1,000,000 worth of pro-bono design and consulting services in 40+ countries spanning 6 continents to benefit 200+ organizations thanks to a team of 250+ people located around the world. Notable clients of verynice have included The United Nations, NASA, MTV Networks, Edison International, Facebook, Kaiser Permanente, UNICEF, Disney Imagineering, and Human Rights Campaign.

Matthew’s work and ideas have been published in 200+ print and online venues internationally including Forbes, The Guardian, The Huffington Post, and Wired Magazine. Manos speaks regularly at events and institutions across the United States including an influential TEDx talk in 2012 titled ”Reinterpreting the Role of a Designer.” Representative of his passion for connecting the fields of design and business, Manos pioneered the first class on entrepreneurship in the UCLA School of Arts and Architecture in 2012, and continues to teach the course. He holds a BA in Design Media Arts from UCLA (2010), and an MFA in Media Design from the Art Center College of Design (2012).

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