“Free” usually changes the form of payment rather than eliminating it. Understanding what changes hands can help buyers and sellers negotiate better deals.
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Everyone loves something free. While the best things in life may be free, if money is what you want, free is never quite free. That can be good or bad depending on which side of the table you’re sitting on. When selling or negotiating, people often use some “free” as an inducement. In reality, free typically means a structured value exchange other than direct dollars for goods and services. Understanding the structure of free lets you make the most of it.
(There’s also a psychological component, which is unfortunately beyond my skillset and outside the scope of this article.)
Many people have learned that “free products” aren’t always free. There’s the famous line: if you’re not the customer, you’re the product. Broadcast TV is free, because you’re paying with your attention by watching ads. Social media websites charge advertisers (their customers) for the attention of the users (their product). Streaming services charge you less if you watch ads, because the lost revenue is made up by advertising revenue, telling you just how much average attention is worth.
I’ve had matchmakers set me up with their paying clients. While they made sure the potential date was within the criteria I looked for, they primarily focused on their clients’ needs. The client paid the matchmaker for introductions to suitable people. I paid nothing, but my very participation was part of the service being sold. In that sense, I was the product.
As an executive, I have salespeople contacting me daily with products they claim will help my sales and productivity or reduce costs and risk. They often offer a free trial. Consumers get the same types of pitches for things that will help them make money, whiten their teeth, or provide some other benefit, often with a free trial.
The reality is it’s not free; it’s merely no cash outlay. When a vendor offers me a tool, I (or someone on my team) need to read about the tool, set it up, and learn to use it. That may be five minutes or five weeks, but it is some amount of time and there’s a real cost to that time. At the end of the free trial maybe I benefited or maybe not, but the cost of time was real. My dollar cost was zero but my productivity went down because we spent time on this instead of other work. When an offshore company offers me two weeks of a developer for free, I have to train them on our process and standards and teach them what we need to build; it may or may not be the quality I want in the end. When you try teeth whitening maybe it works or maybe it doesn’t, but you invested some time (and possibly discomfort from teeth sensitivity); that’s a real cost, even if small.
There are many different types of costs a nominally free product could impose. Examples of direct costs include evaluation costs, implementation and learning costs (as above), and switching costs. There are also indirect costs, including opportunity costs (focusing on this instead of an alternative option). If something goes wrong, it could be not just lost time, but additional costs. For example, bad software could delete your data.
Sellers often forget about these costs to the potential buyer. A salesperson with non-profit experience once taught me that non-profit doesn’t mean no-profit; rather, the “profits” aren’t intended to be distributed to shareholders, but reinvested back into the mission. Similarly, a “free” trial isn’t no-cost, it really only means no dollars exchanged.
There’s a flip side. Companies, especially startups and solopreneurs starting out, are often told not to give away their products or services for free, since it makes it look like there’s no value. We just saw “free” simply means no money, not no cost.
I advise many early-stage startups to have what are nowadays called design partners. These are early customers who will not only actively use your product or service, but will give you feedback. I noted that there’s a time cost for my team to use “free” software. Odds are, even if it’s free, the user may give up when they don’t immediately see a benefit; that may be because the user doesn’t understand it or because there are some upfront setup costs before the payback kicks in. A design partner may not pay you money (in some cases they do pay a reduced amount), but more importantly they commit to using your product and giving you feedback. That time commitment is what they’re paying for it, just not in dollars.
There are additional types of payment as well. With software, case studies and whitepapers are common. You may not charge an early customer dollars for the product or service, but in exchange, they will give you access to information. For example, they might share how the software increased the return on their advertising or reduced patient stays in a hospital. This is data the customer rarely shares with a vendor but here, just as streaming service users pay less for the service in exchange for ads, the customer pays less (possibly none) in exchange for sharing this data. The vendor can then use this (with the client named or anonymous as per the agreement) for marketing. Other variants include doing webinars or conference events together, or even using the client logo on the website. The vendor may not get dollars, but they do get value.
Professional speakers starting out often will provide discounted or reduced-cost talks in exchange for being able to use video clips in their marketing or in exchange for endorsements. For speakers trying to build a speaking reel (their demo video), such clips can be more valuable than the cash they would have otherwise charged.
This should not be confused with “exposure.” Creative people, and many people in other fields, have heard, “I can’t pay you, but I can give you exposure.” E.g., cater my event for free, I won’t pay you, but there will be lots of big-name people exposed to your food. In my experience, 99% of the time, it’s BS.
The difference between “exposure” and the design partner agreements above is that the design partner agreements lay out explicitly what each side is getting. In the software examples, there will typically be a commitment from the client to use the product at a specified level (or minimum), such as hours per week or on certain projects. The type of data shared or marketing collaboration is also spelled out. Often there’s a regular check-in call or other checkpointing cadence. The “exposure” conversations are usually just a vague promise that some unspecified people may see your work for some potential future benefits, while the design partner and similar agreements offer explicit quid pro quo.
There are some cases where exposure can be worth it. A classic example is the practice of lending dresses for free to celebrities walking the red carpet at the Oscars, where the level of exposure is fairly well established, even if nothing is guaranteed. These are rare exceptions, so be wary of being paid in “exposure.” If exposure is being offered, be very clear about how much, how often, to whom exactly, and what prior benefits similar vendors have gotten from it. Caveat emptor.
Additionally, free may simply be a bookkeeping matter. When a company offers you free shipping, it’s not really free. We know there's a cost; it’s simply that the cost is built into other components. In this case it’s not free so much as accounted for differently.
This is one of the most common techniques when negotiating. Often the costs and benefits are not symmetrical across the parties. For example, a booth at a conference may have a fair market value of $5,000. A conference sponsorship may cost $20,000 and include multiple mentions of the company. The marginal cost to the organizer to include a free booth with the sponsorship is near zero (the hall is already rented), but there’s a $5,000 value to the company. It’s also equivalent to a sponsorship being only $15,000 but it requires a $5,000 booth purchase. The costs and benefits are the same; the accounting is the only difference.
When you negotiate, you may offer or be offered something for free, or you may be the one offering. It’s important to recognize that “free” is never truly free. Rather, it’s a shifting of value. The cost may take a non-dollar form, like time or data; the dollar cost may be moved to another component of the deal, as with free shipping; or the exchange may involve something else of value, as in the conference booth example.
None of this is underhanded or unethical. It’s a useful technique when negotiating and for sales. What matters is that you understand the true costs of free because cost (or benefit) can help you achieve better deals for both parties.
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