So, there is a free alternative to your software product… The end is here, your business is doomed. Your only option is to close up shop, layoff your employees, and sell all of your office equipment on Craigslist. There is just no way to compete with free – right? Of course not!

Certainly, open source and/or free software can be a threat but a free alternative isn’t a guaranteed death-blow to your business. So why do we think we cannot compete with free? Because somewhere along the line we got it into our heads that consumers only care about price. It’s simply not true. Price is only one way in which we compete.

Let’s look at this from another perspective. Do you believe there can be only one restaurant that sells hamburgers; only one car manufacturer; only one company that produces televisions – that’s absurd, right? But, if price was all that mattered, the lowest-priced product would inevitably overtake all the competition in every category.

Yet, this is not the case, and there are a wide variety of products for each category each offering specific features/benefits at varying price points – and people buy them whether or not they are the lowest-priced. The reason? In marketing terms… differentiation.

For most products, your product included, competition isn’t based on price it’s based on differentiation – unique attributes and/or benefits that your product alone offers that are not matched by a competitor’s product.

So, how do you compete through differentiation? By doing something better than anyone else. There is a catch though. The catch is that your customers must value the unique aspect of your product/service so much so that they are willing to pay for it. Of course, willingness to pay is the key.

Forget “price” for a moment and think about it this way, why does someone buy your product vs. your competitors product? There are probably a lot of reasons. An easy way to find them is to look at your testimonials, such as “your product does X much better than [competitors product here]”, or “your customer service is great”, or “your product is the only one I’ve found that can do Y”. This is differentiation, unique features and/or attributes (not just from your product but also from your business in general) that your competition does not offer.

Let’s look at an example of free vs paid and differentiation in the consumer market place… Take for example drinking water. Generally speaking drinking water is free most everywhere you go – restaurants, at the gym, in the mall, at the office, at your home.

Ok, yes, it’s not free at home, you pay the utility bills. Technically that’s true, but we consume water like it’s free. You don’t pull out your wallet each time you fill up a glass of water from the kitchen tap – right? Before you fill up a glass of water do you stop and think, “how much is it going to cost me if I am drinking this water?”. We consume it like its free, so let’s call it free at home too.

In 2008, according to the consulting firm Beverage Marketing Corp., Americans drank 8.7 billion gallons of bottled water in 2008. Why would Americans buy 8.7 gallons of bottled water when they could get it for free from their home, office, and gym? The answer, differentiation! Clearly, the free water has a better price – it’s free so it costs nothing. However, a large group of consumers purchased the bottled water anyways. Why?

The (paying) group of consumers have been convinced that they receive a specific benefit, probably that bottled water is healthier, so they buy bottled water. So the value of the benefit they receive (health) is greater than the cost (money) – even when there is a free alternative.

Yes, health is more important than software, but there are many examples of people buying a paid alternative rather than choosing “free”. Consider email, hotmail is free. Why doesn’t your company turn off the company email addresses – which would save money on servers, support, maintenance, time, etc – and give everyone hotmail addresses? The reason, benefits such as security, privacy, reputation, control.

What about Photoshop and The Gimp?  I personally use Photoshop because it is the best image manipulation software I have ever used. Photoshop offers a wide variety of features, it is widely viewed as the industry standard, and there is a large user community which provides me with resources such as tutorials, brushes, plugins, etc that make it easier for me to use. I tried the Gimp, I’m sure it’s great, but I just didn’t like it, so I bought Photoshop.

What about Windows and Linux? If price was all that mattered, then Linux would have wiped out Windows long ago.  What about Office and Open Office or Google Analytics and Omniture?

Each of the free products I’ve mentioned has been available for a number of years, yet the commercial version of the product remains in business (not free) and profitable. Has the free version taken some sales from the commercial version, probably. But, year-after-year, the commercial version of the products have continued to sell.  The publishers have found a way to create a unique value that no one can match – free or paid – and that is how they continue to compete.  If they can find and/or create that unique value, why can’t you?

The bottom line: The best weapon against “free” is a better product – ie: a product that offers a unique value and that is better suited to solving the customer’s problem than the free alternative.  While there may be a free alternative, there are real and perceived benefits that consumers want – and are willing to pay for. So, your challenge is to find the benefits that matter to your target market and relentlessly polish your offering to ensure it is #1 for those specific benefits.

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