Marketing has been driven by free offers for years. Nordstrom offers free alterations, Ben & Jerry’s gives away free ice cream. Consultants give away free trainings.

The “free offer” is a critical marketing strategy, but businesses rarely know how to use it.

Most of the time, free offers are used as an easy lead generation strategy. White papers, webinars, and demos are all the rage in the world of digital marketing. But few marketers actually stop to ask, “are these freebies actually getting us paying customers?”

Giving something away for free is only a good idea if you’ve given the strategy the proper amount of thought. Economically speaking, something is free only when there’s so much supply the price drops to zero. From a customer’s standpoint, when something is in abundant supply, it’s not scarce, which is a factor we use to determine value.

Unfortunately, most marketers go the easy route by simply giving stuff away without considering the consequences.

The Free Frenzy

When we get something for free, we make irrational choices we can’t explain. We forget that a downside exists to the transaction. In short, we go a bit crazy.

If you’ve ever come home from a conference with a bag stuffed with useless swag, you’ve experienced what can be pretty accurately called a “free frenzy.” Behavioral economist and TED speaker Dan Ariely puts it this way in his book, Predictably Irrational:

It’s no secret that getting something free feels very good. Zero is not just another price. Zero is an emotional hot button—a source of irrational excitement.

Would you buy something if it were discounted from 50 cents to 20 cents? Maybe.

Would you buy it if it were discounted from 50 cents to two cents? Maybe.

Would you grab it if it were discounted from 50 cents to zero? You bet!

Ariely, Dan. Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions (pp. 55-56). HarperCollins. Kindle Edition.

With all of this mental short-circuitry happening around free offers, it can be tough to use a free giveaway to your advantage while not falling victim to “free-frenzied” leads who never buy.

Companies like the ones giving away conference swag are constantly falling into this trap. Other (smarter) companies have used free offers very carefully – and reaped the rewards.

How Nordstrom Uses Free Offers To Its Advantage

Derek Coburn, author of Networking Is Not Working, wrote a post recounting his experience signing up for a Nordstrom credit card. In this story, he was asked to sign up over and over again by the cashier – until they mentioned that Nordstrom offered free alterations to card members.

Nordstrom logo

Typically, Nordstrom customers (and clothing customers in general) are turned off by the idea of getting their clothes tailored after buying them. The “mystery cost” of an alteration is too much to bear for many customers. So most of them don’t buy, and if they do, they hold back knowing they’ll soon pay for an alteration.

Nordstrom knew that people get an emotional rush from getting free stuff, so it set out to use that rush to its advantage. Their management likely realized that free alterations would be a great benefit for the credit card. They’d get a big boost in signups as well as a big boost in sales from removing alterations as a financial hurdle for their customers.

Since alterations were a service they already “up-sold,” Nordstrom knew what costs they’d incur if every customer took them up on their offer. They also likely understood the long game: offering free alterations to clothing purchases would bring in a greater number of sales than the cost of the free alterations. Imagine what they could expect from such a promotion:

  • Nordstrom would become a magnet for customers who were previously turned off by the “mystery cost” of alterations
  • Shopping cart values would be boosted now that customers weren’t mentally budgeting for alterations
  • Repeat business would be created when customers came back into the store to pick up their tailored clothes
  • New credit card usage would bring in a new revenue stream

In this scenario, Nordstrom harnessed the power of a free offer without damaging their margins or top line revenue. They took something they would have otherwise up-sold and offered it for free with every clothing purchase. They benefitted from increased sales from two new sources.

Side note: In his article, Derek Coburn went on to note how Nordstrom actually downplayed this alterations benefit, despite it being the selling point for the credit card. 

What We Can Learn From Nordstrom

Like Nordstrom, you can start incorporating a free offer WITH a paid offer that you already provide. By doing that, you make use of the free frenzy without incurring substantial costs along the way.

Most businesses take the easy route and just give stuff away for free.

Some of the time, that “stuff” is truly valuable and can work as a way to build a strong audience relationship – Gary Vee’s “Jab Jab Jab Right Hook” model reflects this. Most of the time, however, that free “stuff” isn’t something a customer would ever pay for in the first place, despite what the “Normally Priced” labels say (that’s a different mental trigger called anchoring, which is still a smart strategy – as long as the thing you’re giving away is actually valuable).

Uninformed businesses also get distracted by vanity metrics like Leads Per Week. They go for quantity rather than quality. They’re so distracted by the idea of getting tons of free-frenzied leads in the door that the important questions are never asked:

  • What if that free “thing” ends up being cheap or useless to the customer?
  • What if it attracts more tire-kickers than real customers?
  • What if you spend more money on it than you expected?
  • What if you can’t deliver the free “thing” at scale?

It’s a bad strategy to risk your brand or bottom line for a short-lived promo and an email list of people who will never pull out their wallets.

Let’s zoom out: so you don’t misunderstand me, I’m not arguing against free offers. I’m making a case for the fact that you need to measure the costs of offering something for free and consider the alternative of charging leads for something upfront.

Sometimes, your conversion rates are so great on a free webinar that you get a positive ROI on the investment. In that case, keep going!

In my experience, however, more businesses blindly go for the free offer. Founders and management expect a free lead magnet to be their saving grace when, in reality, it’s the nail in their coffin. They only realize months later that they took a shortcut and lost out big time.

The Science Of Fee vs. Free

This leaves us with the question: How do we know whether or not a free offer is right for your business?

The answer to this is in two parts.

  1. It’s important to know how people behave in free frenzies and why a zero price causes your offer to be de-valued.
  2. It’s important to know how the math works between paid and free offers so you can determine for yourself what works best for your business.

#1: Human Behavior In Free Frenzies

A few years back, two economists set out to run an experiment. They assembled a desk in the main hallway of a college building, dumping a pile of candy on the desk and setting up a sign which announced “For Sale: 1-Cent Candy!

Over the course of a class break, 58 students stopped by the desk and purchased an average of 3-4 pieces of candy at $0.01 each. The next class period quickly started and the hallway then emptied.

During the next class, while the students were busy learning, the two economists flipped the sign over.

It now said “FREE Candy!!!

Not surprisingly, when the next class break rolled around, a flood of 207 students stopped by the desk. But that’s when things got interesting. Although more people stopped by in total, each person bought less candy on average. Instead of taking 3-4 pieces of candy each, the students now took 1 piece each.

Real Value of Free Candy

When the candy was offered for FREE, those 207 students valued the candy LESS than the 58 students who had to reach into their pockets for spare change. Now ask yourself the million-dollar question: if you had a bag of candy to sell, who would you rather be talking to: the group of 58 paying students or the group of 207 free-loaders?

If you know your “free candy” is so good that those 207 students will buy more than the 58 students, then you have a killer free offer. Go all in.

If, on the other hand, you know your “free candy” is attracting free LOADERS, it’s time to start pitching for a sale. If you don’t, then you risk investing in a bunch of candy, attracting all those free-loaders, and then returning to them with the same sales pitch you would have given in the first place.

#2: The Math Of Paid & Free Offers

Now that you understand the way humans behave around free offers, it’s time to look at the math and find out which option is better for you.

Below are two sales funnel cases that I’ve assembled to describe the difference between the profitability of a paid offer and a free offer. Note that the conversion rates in this experiment are chosen to illustrate the experiment above: it’s tougher to find paying customers, but when you find them, they will pay you faster.

CASE 1: Free-First Campaign

We’re paying $5 per lead, and each lead has a 10% likelihood of buying Product A at $50. If we attract 10 leads, we’ve paid $50. Out of those 10 leads, 1 person buys Product A, resulting in $50 in revenue. Thus, profit is $0 and we’ve broken even. You cannot retain earnings or reinvest any cash into this campaign.

CASE 2: Buy-First Campaign

We’re now paying $15 per customer of Product A, which costs $50. Every customer has a 20% likelihood of buying Product B at $150. If we attract 10 purchases of Product A, we’ve paid $150 and generated sales of $500, thus netting $350 in profit for Product A. Out of those 10 purchases, 2 people buy Product B, which generates sales of $300. Since we’ve already paid for these customers, this is pure profit. We’ve profited $650 from this campaign, which equates to 433% ROI. That amount can be retained as earnings or reinvested into growing our advertising budget.

Profitability Breakdown

Your Assignment: Do The Math

Whether you have a free or paid offer as part of your sales strategy, do the math.

Find out what your sales conversion rates are and how much you’re paying for a customer who has paid YOU. It will become clear right away what’s going on in your business and whether you should be changing up strategies.

Two Strategies For You To Use

If you happen to find that a plain old “free giveaway” isn’t serving your business, it’s time to shake things up. In the same way that Nordstrom offers free alterations on its clothing, you can offer a free “add-on” to your paid offers. Including something for “free” along with your product will make it more enticing and bring in more sales. Here are two strategies to incorporate free “add-ons” into your sales process:

Bundles

Video game consoles use this strategy all the time. If you ever walk into a Best Buy, take a look at the video game section – you’ll see Playstations for sale as bundles. Buy the console, get a couple free games. The manufacturer takes a short term cut in their margins, but receives a huge burst in console sales from all the excited gamers who don’t have to shell out another $80 for a game. Win-win.

Free Bonuses

Another example is high-ticket online courses. If you’ve seen an online course sold for over $1,000, odds are it came with a few bonuses. As you scroll down the sales page for a high-priced online course, a small part of your brain is excited to stumble upon a section titled “Limited Time Bonuses.” You start salivating at all the free stuff you can get access to – so long as you pay for the course itself!

In Summary

I wrote this article to open your eyes to how tightening up your lead generation process. Whether you have a paid offer or a free offer today, it’s worth investing the time to find out how both perform. It may make a big difference to your cash flow and your bottom line.

Thanks for reading!

-Dan