Wednesday, June 18, 2014

The High Cost of 'Free': Four Types of Free Offers and How to Calculate Their Cost to Marketers

From MarketingProfs:

Who doesn't like free?

When I worked at Columbia House, the music club company, our best offer was "Buy 1, Get 1 Free," not "2 for the Price of 1" or "Get 2 at half price."

Why did we use "Buy 1, Get 1 Free"? Because it was more enticing to our customers, even though it's the same as "2 for the price of 1" or "Get 2 at half price." We always used this offer. Because it worked! It was our base offer for retaining customers, to which we often added other deals.

We tested this offer over and over and it always yielded the best results in terms of customer lifetime value (CLV): i.e., the amount of revenue that a customer yields over time; minus the cost of product, fulfillment, and shipping; plus the cost to market to that customer. CLV also adjusts for the time value of money.

The reality is that free is never free for the marketer. There's always an expense that has to be paid, even if it's not paid by the customer. Moreover, that cost is often higher than marketer anticipates.



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