The classic double-edged sword; giving things away for free.
I've compiled a few guidelines that might help you decide if you should be giving something away for free; or you should be charging for it.
Make a long term decision
The biggest mistake is changing your pricing structure from free, or to free. People better understand and accept changes in price, rather than a move to or from free.
Example:
Let's say a newspaper that costs 50 cents increases its per issue price to 75 cents. It might lose customers, but many of the customers will continue buying.
Some reasons:
Customers see the newspaper as providing more value than the price
Customers already have established a method of payment, it's just a matter of increasing the amount
Customers have an expectation of inflation
Now, lets say another newspaper decides to make the jump from being a free publication to charging 25 cents an issue. It's the same discrete increase (25 cents) but many users will not pay.
Some reasons:
Free is easy. It doesn't require you set up payment, or look in your pocket for change. You just pick it up and leave.
Publication value is suspect. If it was free yesterday, what are they adding that makes it worth 25 cents.
Comparative pricing can lead to churn. If I'm going to pay 25 cents for a 'Free' publication, why don't I pay a little more for a nationally recognized one.
Lesson: Be very careful about offering something for free. Especially if you think you might have to start charging for it down the road.
Consider competitors
So you now know that you should carefully consider your business model before deciding to make something free; now you should consider your competitors.
Ideally, you don't want to be in a market where your product or service is being offered by a competitor for free. However, if you are - you have to start considering value.
Be aware of the nature of good-enough
This is where you're offering something that costs something; but your competitor is offering something similar thats free. Even if what your offering is substantially better; if the customers needs are met by the free offering, it's likely that he'll take that offer.
The reason is comparative thinking. Once a customer starts thinking in terms of components, elements, features, and specifications, you'll have a hard time competing against a free offer.
How defeat a free competitor
Value: Offer something that the customer values more than the price.
Let's say you're an email marketing agency, and your client want to deploy e-mail through a free online service. You can offer the customer expert guidance, proven design standards, and valuable metrics analysis. This would likely be enough to convince a client to use your services.
Risks associated with using free: Another way is to inform the customer of the risk of using what the free competitor is offering.
Let's say you're Adobe Illustrator, and a major client doesn't want to buy CS4 because they found a free alternative. Adobe can make the client aware of the standards they use, and the testing that's required to create the product. They can show that the free product crashes, often losing work and increasing man-hours spend doing the same thing. They can also show that cut-corners can interact with other programs and leave a security hole in their system; potentially causing server failures.
Understand sociological factors
Ok, apart from the inconvenience of having to pay, and the risk of competitors monopolizing on free offers; there are sociological issues you should consider before making a decision to offer something for free. These relate more to the value you get from your pricing structure.
Reputation: There are essentially 3 basic pricing structures: 1. Free - read my blog 2. Paid - read my blog for a dollar 3. Employed - read my blog and I'll pay you a dollar. Each of these have certain stigmas attached to them. Each will help you build a reputation. Consider online gaming: where Second LIfe is a free, Warcraft costs money to play, and many branded games a free to play and give you prizes or money for doing so.
The pricing decision those games made, well before launch, have dictated their reputation. Second Life is now seen by many as a game they like playing, but wouldn't pay anything to play it. Warcraft is seen by those who play it, as a game worth the money. Now, branded games often need to have prizes or incentives to get users to play.
Belonging: People like being a part of something, and are often willing to pay to be included. It seems as though the internet really spread the idea of anyone can belong for free. You can sign up for a free account. Thinking back 10 years, many sites that requested registration were either for paid access, or to allow you to buy something. Both registration options entitled you to additional service, tools, and information. I've started feeling like much of the free stuff is free for a reason. I recently had an experience where a client was using a free online project management system which crashed. He wasn't able to reach anyone from the company, and subsequently had to postpone the project by 2 months. Costing him well over 30 thousand dollars.
I think important stories like this helped encourage many agencies to use paid services like Basecamp; where you can reach tech support anytime; and you can have a reasonable amount of security. As clients and agencies started to subscribe to this service, it was almost a sign of having a good process if you had a Basecamp account. In fact, I was recently told by a large telecom client that they use Basecamp internally, and I needed to use it too. It was great!
Interaction: I've always thought this was a really big issue with events; but it's becoming a bigger and bigger issue with social networking. People who are willing to pay to interact with each other, for a conference, or an event, are usually dedicated to exchanging information. They're generally seeking value, and are willing to offer it. People that attend a free conference or event might be willing to exchange information, or might not be. Maybe they're just there to blow time. Maybe they're there to extract information and leave. Regardless, free often attracts those who offer very little. (They can also bring in people who appreciate a good event, and are more willing to share because it's free.) - And don't get me wrong, sometimes paid events attract the wrong people; but they have an additional filter in place to ensure only those who really want to be there attend.
Now, there's also paid interactions, where a company pays you to interact with people. I've been seeing this more and more. Where a company offers an incentive, prize or money to promote interaction. It often has very good results, but the interactions are being paid for; therefore need to be examined for authenticity. For example, the recent success of Whopper Sacrifice; that required users to offer their facebook friends up for some food. This was deemed to be very successful; but how valuable are those facebook users? How valuable are the winners? How much did it cost to get them to interact, how much did it cost to feed them, and how many more burgers were sold because of the promotion? - I'm certainly not saying it wasn't successful, but it's a different kind of success. (The difference is between having 1,000,000 people talking about you for 3 months, and never again, and costing $100 to do it; or having an ongoing 50,000 people talking about you.)
Loyalty: In my experience, people are less loyal to brands that are free. This is an interesting topic, and I'm open to comments; but in my experience I've noticed that most customers have a closer relationship with brands that they pay for; in one way or another. Some brands are inherently free, like TV shows - but I've had experience with TV shows that offer entertainment; and shows that ask users for something in return - and those shows that ask for something end up developing a stronger following.
I've been going over a lot of research on this lately, and I've been finding a trend that customers develop a stronger relationship with brands they willingly pay for; and appreciate unexpected rewards more than expected ones. This seems to fly in the face of loyalty programs. Are people more loyal to Bank of Montreal because they offer Air Miles? or are they loyal to Air Miles because they offer customers prizes?