Tech Trailblazers

Tech Trailblazers

Thursday, 19 January 2012 15:42

Replace a sales force with a giveaway

People still incredulously me ask how giving away a product for free makes financial sense? But more and more evidence is mounting that when you use your free plan as a replacement for an expensive sales force, it's not only cheaper but way more scalable too.

 

Firstly, in software and internet companies the marginal cost is nearly always very close to zero. That means that to bring on an extra customer, the incremental bandwidth and server costs are negligible.

 

So having a free plan is nearly always not going to cost you any hard cash, as opposed to a coffee shop where rent, labor and the raw materials represent real cash going out the door.

 

Conversely, having a sales force who are richly compensated, travel regularly and stay in hotels means you often have little choice but to price your product at a ridiculously high rate (a ridiculously high rate that barely makes back the cost of the salesperson).

 

Compare that to an entry level plan for that enterprise software company where the direct user subscribes and begins using the product for free, who then spreads the word via word-of-mouth, prompting other people to use and adopt the service.

 

It doesn't matter if the vast majority of those free signups don't turn into paid accounts because you haven't lost that much hard cash. But if there is a sales person who is working on a deal that doesn't come through after four months, then hard cash has certainly left the building.

 

Think about how a free plan that is based on light usage of the full features can be implemented, and think of it as saving money on more sales peoples' salaries, rather than giving away something for free.

Niki Scevak is the founder of Homethinking, a real estate startup based in the US, and Startmate, a mentor-driven seed fund that invests in small startups at the earliest of stages. He is based in Sydney.

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