What to do when your competition is free

September 30, 2009

Skip the study, unless you have a PhD in applied math… but check out the excerpt from businessinsider:

A new study by Ramon Casadesus-Masanell of Harvard Business School and Feng Zhu of USC’s Marshall School of Business looks at how companies can respond to competition from ad-based rivals. The study examines the business models of over twenty businesses across a wide range of industries, breaking them down into four basic categories:

  • A pure fee-based model (iTunes or eHarmony)
  • A pure ad-sponsored model (Metro newspapers, broadcast television, or Facebook)
  • A mix of ads and fees for a single product (The Wall Street Journal or cable television)
  • Tiered content, with some ad-sponsored content and some paid content (Match.com, many news outlets)

The researchers found that once a free, ad-based competitor enters a market, the mixed strategies stop working. (More bad news for the newspaper industry!) Instead, successful firms commit one way or the other to an ad-sponsored or fee-sponsored business model.

When the competition stops charging, entrepreneurs need to take an honest look at the quality of their product. If it is better than what consumers can get elsewhere, don’t compromise its quality with ads; just keep being better and charge for use. Otherwise, make it free and beat the competitor at their own game.