[Viewpoint]Buying favor with freebies

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[Viewpoint]Buying favor with freebies

There is a company that gives away cars for free. There is also a company that gives away refrigerators for free. As unbelievable as it may sound, such things are actually happening around us nowadays.

The world’s top home appliance maker has decided to give refrigerators to the poor in Brazil for free. Better Place, a U.S. venture company, is promoting a project that provides next-generation electric cars to Israelis for free. The age of “freeconomics,” (a coined word combining “free” and “economics”) is unfolding before our eyes.

So how can these two companies afford to give away their products for free? The home appliances company can gain profits by securing carbon credits in return for replacing old refrigerators with new ones. And Better Place is guaranteed of securing a new income source - the recharging of batteries - in return for providing free cars. Theses are typical freeconomics and free marketing models.

Freeconomics is a method of creating new profits in related fields by securing interest and brand recognition from the public and a wide user base in return for providing products or services that once carried a hefty price tag for free or at a low cost. In short, it refers to a business model that makes money by providing products for free.

The term Freeconomics first enter the financial vernacular when Chris Anderson, an advocate of the Long Tail Economy, introduced it as a new business trend in the Economist magazine. The LG Economic Research Institute also predicted in its report, “The Age of Freeconomics is Coming,” that “it is highly likely that the freeconomics model will flourish.”

There is indeed a high chance that the freeconomics model will grow stronger in the next two to three years as economic stagnation worsens internationally.

In South Korea, too, we can easily find examples of freeconomics cases. A water purifier company recently collaborated with a credit card company to execute free rental marketing where points accumulated from card use are returned to the customer as cash that can be used for the rental of a water purifier. The water purifier company can expand its market by gaining new customers and preventing existing ones from changing to a competitor’s brand. In addition, consumers can lessen the financial burden by using points that were of no use in the past, like cash. It is a good case study for marketing where the customer and company both benefit.

The background of the emergence of freeconomics that follows the age of drastic price cuts is as follows. The first reason starts with the consumer. Consumers prefer products that cost less, but they do not to lower their expectations in terms of quality. Even when consumers have a good image of a product, they mostly have a strong tendency to delay or forgo an actual purchase unless there is an attractive selling point such as a coupon or discount. Especially, as the actual purchasing power is decreasing due to the recent worldwide economic downturn, this psychology has grown even stronger.

The second reason is the reduction of marginal costs, wider use of a product and convergences caused by technological innovation. Due to the Internet, “the age of zero marginal cost” has actually arrived owing to continuous development in semi-conductors, storage and communications technology.

The third reason our attention is called to is the change in scarce resources and the increased importance of a creative business model. Thomas H. Davenport, a business management scholar, points out that core resources to be acquired by a company are changing. Thus, he says, land, capital and labor are no longer scarce resources due to rapid globalization and development of information technology. The true scarce resources are customers’ time, interest and reputation. Many companies are competing with similar products and services in the age of mass production, mass consumption and mass information. A creative business model is desperately needed for differentiation. In this respect, the freeconomics business model is rising as a new method for winning the interest and time of customers and a helping to generate a good reputation.

Freeconomics is already positioning itself as a significant trend. If a new business field and source of profit can be created through freeconomics, this is worth investigating by companies. People will invest their time and attention in companies that return benefits to consumers and actively introduce a freeconomics, not as a marketing scheme aimed at winning customers’ favor and their wallets or as a one-time marketing event but with sincerity.


*The writer is a professor emeritus at Sungkyunkwan University. Translation by the JoongAng Daily staff.

by Lee Chae-woong

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