Commiting to Zero

In his fascinating book, Predictably Irrational, Dan Ariely describes the lure of the zero priced item. Dan provides examples from the real life: in his experiments, people selected Lindt truffles for 30 cents over Hershey kisses for 3 cents, but when given a choice, preferred a now free Hershey kiss over 27 cents truffle. The conclusion from this experiment and many other is clear: we love free.
No other place as the Silicon Valley has ever produced more free stuff: we have a free search, free reviews, free price comparison and free web conferencing. Almost everything is offered for free, in an attempt to win us over and break our old paying habits. In a rational world, we would have carefully considered the benefits of each option and select the best for us, no matter if it is free or not. In Ariely’s predictably irrational world, we will always go for the free option.
Nevertheless, the business software world is not acting this way. The fact it is near free to produce more units (e.g. more users) in the Internet world led to the creation of hundreds of free services (many targeting SMBs), competing with the traditional, priced services. Take Webex: Cisco believed that its web conferencing money machine worth snapping and paid over 3 billion dollars for the pleasure. Webex sales an expensive web conferencing tool and doing fairly well, thank you for asking. Vyew on the other hand, offers similar capabilities for free with ads or for a tiny amount with no ads and only achieved marginal success.
It got me wondering… laterI got to what I assume is the answer: Joe the consumer loves free. Joe the CEO hates free. The fact that Joe constantly switches roles is confusing and this is what led so many companies to offer business services for free. Joe will happily surf Facebook for free (and will most probably never log in again if Facebook come up with even a nominal fee of $1/month) but would resent using a free service for project management, CRM or web conferencing, typically used for the most important business engagement : customer calls.
So why not using free? Ask Joe, but I suppose that the following reasons are among the ones you will hear from him:

  • Perceived value: free offering creates a low perceived value. In a business setting, we tend to assume that everything we buy or use is there to create revenue so a perceived low value service might contradict this belief.
  • No throat to choke: reliability is more important than money in the business world and free service providers are perceived to be less accountable. We are all afraid to get the “you paid nothing, I owe you nothing”. (Take Grand Central for instance: this free Google service was down a couple of times in the recent weeks and for hours users couldn’t even get to a web page that will provide information regarding a fix, not to mention getting someone on the phone)
  • We don’t like surprises. Wearing our business hat we like them even less. When paying for a service we assume consistency (if I paid $30 a month for X, I assume getting at least X next year). With free services they can always add ads, change the plan and make us regret the moment we started using the service.

So? For small businesses, I do recommend using free services. Let them run for a while, check their reliability and pick services that are non mission critical to the business, and will not require major overhaul if something goes wrong. Continuing with the Vyew example, you can always start by using it for internal meetings before using it for sales calls. If you are a startup and about to launch your free service, think twice. There are cases where free can lead to faster adoption but many others that not. Once you offered something for free, there is usually no way back and your perceived value will always be low.

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Commiting to Zero

5 thoughts on “Commiting to Zero

  1. I am the CEO at Vyew and thanks for a great insight concerning free and using Vyew as an example. I think that your analysis is right-on. one point I want to emphasize is that to succeed in the market “free” is not good enough, but you need to be better than the “paid” services. We have archived profitability not because we are free, but after finding the free Vyew, enterprises are willing to pay considerably for Vyew because we offer a better product than the “paid” competition. For example, compare to Webex, Vyew doesn’t need a client installation. And Vyew is more functional because it also works asynchronously (persistent data), so that groups can collaborate over time, anytime. You are also correct that currently we have only achieved marginal success, but we believe that by delivering a superior free product and we stay in the race, Vyew shall become truly successful in the future.

  2. Thanks for commenting Henry. From what I have seen thus far, Vyew does offer many of the big boys features without installing any add on. This is HUGE as people hate to wait while their customers are downloading all the add ons they need (try MS-live meeting…)

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