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Freebie marketing

A free gift knitting row counter given away by Woman's Weekly in

the 1980s-1990s.

Freebie marketing, also known as the razor and

blades business model, is a business model wherein

one item is sold at a low price (or given away for free)

in order to increase sales of a complementary good,

such as supplies (inkjet printers and ink cartridges,

"Swiffers" and cleaning fluid, mobile phones and

service contracts)[1]

or game consoles (accessories and

software). It is distinct from loss leader marketing and

free sample marketing, which do not depend on

complementarity of products or services.

Though the concept and its proverbial example "Give

'em the razor; sell 'em the blades" are widely credited to

King Camp Gillette, the inventor of the disposablesafety razor and founder of Gillette Safety Razor

Company, in fact Gillette did not originate this

model.[2]

Development

Free gifts

A free gift is one for which the giver is not trying to get something in return, or one which does not cost the giver,

such as when it is discount on resulting sales.

Free lunch

The phrase free lunch, in U. S. literature from about 1870 to 1920, refers to a tradition once common in saloons in

many places in the United States. These establishments included a "free" lunch, varying from rudimentary to quite

elaborate, with the purchase of at least one drink. These free lunches were typically worth far more than the price of 

a single drink. The saloon-keeper relied on the expectation that most customers would buy more than one drink, and

that the practice would build patronage for other times of day.

GilletteThe usual story about Gillette is that he realized that a disposable razor blade would not only be convenient, but also

generate a continuous revenue stream. To foster that stream, he sold razors at an artificially low price to create the

market for the blades.

But in fact Gillette razors were expensive when they were first introduced, and the price only went down after his

patents expired: it was his competitors who invented the razors-and-blades model.[3]

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Applications

Freebie marketing has been used in business models for many years. The Gillette company still uses this approach,

often sending disposable safety razors in the mail to young men near their 18th birthday, packaging them as

giveaways at public events that Gillette has sponsored, et cetera.

Standard Oil

With a monopoly in the American domestic market, Standard Oil and its owner, John D. Rockefeller, looked to

China to expand their business. Representatives of Standard Oil gave away eight million kerosene lamps for free or

at greatly reduced prices to increase the demand for kerosene.

Among American businessmen, this gave rise to the catchphrase "Oil for the lamps of China." Alice Tisdale Hobart's

novel Oil for the Lamps of China was a fictional treatment of the phenomenon.

Comcast

Comcast often gives away DVRs to its subscribing customers. However, the cost of giving away each free DVR is

offset by a $19.95 installation fee as well as a $13.95 monthly subscription fee to use the machine. Based on anaverage assumed cost of $250 per DVR box to Comcast, after 18 months the loss would balance out and begin to

generate a profit.

Issues

The freebie marketing model may be threatened if the price of the high margin consumables in question falls due to

competition. For the freebie market to be successful the company must have an effective monopoly on the

corresponding goods. (Predatory pricing to destroy a smaller competitor is not covered here.) This can make the

practice illegal.

Specific examples

Printers

Computer printer manufacturers have gone through extensive efforts to make sure that their printers are incompatible

with lower cost after-market ink cartridges and refilled cartridges. This is because the printers are often sold at or

below cost to generate sales of proprietary cartridges which will generate profits for the company over the life of the

equipment. In fact, in certain cases, the cost of replacing disposable ink or toner may even approach the cost of 

buying new equipment with included cartridges, although included cartridges are often 'starter' cartridges that are

only partially filled. Methods of vendor lock-in include designing the cartridges in a way that makes it possible to

patent certain parts or aspects, or invoking the Digital Millennium Copyright Act to prohibit reverse engineering by

third-party ink manufacturers.

In  Lexmark Int'l v. Static Control Components the United States Court of Appeals for the Sixth Circuit ruled that

circumvention of Lexmark's ink cartridge lock does not violate the DMCA. On the other hand, in August 2005,

Lexmark won a case in the U.S. that allows them to sue certain large customers for violating their boxwrap license.

Video games

Atari had a similar problem in the 1980s with Atari 2600 games. Atari was initially the only developer and publisher

of games for the 2600; it sold the 2600 itself at cost and relied on the games for profit. When several programmers

left to found Activision and began publishing cheaper games of comparable quality, Atari was left without a source

of profit. Lawsuits to block Activision were unsuccessful. Atari added measures to ensure games were from licensedproducers only for its later-produced 5200 and 7800 consoles.

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In recent times, video game consoles have often been sold at a loss while software and accessory sales are highly

profitable to the console manufacturer. For this reason, console manufacturers aggressively protect their profit

margin against piracy by pursuing legal action against carriers of modchips and jailbreaks. Particularly in the sixth

generation era and beyond, Sony and Microsoft, with their PlayStation 2 and Xbox, had prohibitively high

manufacturing costs so they were forced to sell their consoles at a loss, and these losses widened especially in

2002 – 2003 when both sides tried to grab market share with price cuts. Nintendo had a different strategy with its

GameCube, which was considerably less expensive to produce than its rivals, so it retailed at break-even or higher

prices. In the current generation of consoles, both Sony and Microsoft have continued to sell their consoles, the

PlayStation 3 and Xbox 360 respectively, at a loss.

Other goods

Consumers may also find other uses for the subsidized product rather than utilize it for the company's intended

purpose, which adversely affects revenue streams. This has happened to "free" personal computers with expensive

proprietary Internet services and contributed to the failure of the CueCat barcode scanner.

Affiliate Marketing makes extensive use of the freebie marketing business model, as many products are promoted as

having a "free" trial, that entice consumers to sample the product and pay only for shipping and handling.

Advertisers of heavily-promoted products such as Acai Berry targeting dieters hope the consumer will continue

paying for continuous shipments of the product at inflated prices, and this business model has been met with much

success.

Websites specializing in Sampling and discounts have proven to be very popular with economy-minded consumers,

who visit sites which utilize freebies as link bait. The business model of these sites is to attract visitors that will click 

on AdSense and complete affiliate offers.

Tying

Tying is a variation of freebie marketing that is often illegal when the products are not naturally related (for example,requiring a bookstore to stock up on an unpopular title before allowing them to purchase a bestseller). Tying is also

known in some markets as 'Third Line Forcing.'[4]

Some kinds of tying, especially by contract, have historically been regarded as anti-competitive practices. The basic

idea is that consumers are harmed by being forced to buy an undesired good (the tied good) to purchase a good they

actually want (the tying good), and so would prefer that the goods be sold separately. The company doing this

bundling may have a significantly large market share so that it may impose the tie on consumers, despite the forces

of market competition. The tie may also harm other companies in the market for the tied good, or who sell only

single components.

Another common example comes from how cable and satellite TV providers contract with content producers. The

production company pays to produce 25 channels and forces the cable provider to pay for 10 low-audience channels

to get a popular channel. Since cable providers lose customers without the popular channel, they are forced to

purchase many other channels even if they have a very small viewing audience.

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Legal issues

Microsoft was accused of releasing Internet Explorer at no charge to destroy Netscape's market (see United States v.

 Microsoft ).

References

[1] James Corden, "Free Gifts With Mobile Phones", Best Contract Mobile Phones (http:/   /  www. bestcontractmobilephones. co. uk/  free-gifts/  )

[2] Randal C. Picker, "The Razors-and-Blades Myth(s)", John M. Olin Law & Economics Working Paper No. 532, University of Chicago Law

School full text PDF (http:/   /  www. law. uchicago. edu/  files/  file/  532-rcp-razors. pdf)

[3][3] Picker, p. 3

[4] Trade Practices Act - Third Line Forcing (http:/   /  www. findlaw. com. au/  article/  6686.  htm)

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Article Sources and Contributors 5

Article Sources and ContributorsFreebie marketing  Source: http://en.wikipedia.org/w/index.php?oldid=573569644 Contributors: 23pokrzywa, 28421u2232nfenfcenc, Andrewaskew, Aquillion, BluejacketT, Bradchristie,

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