Before discussing my suggestions, let’s take a quick look at the psychology of free.

The psychology of free – price creates barriers, free doesn’t

I’ve just finished reading Chris Anderson’s “Free: The future of a radical price”, so much of what I am about to explain comes directly from Anderson’s book – not me.

In his book, Anderson asserts that people naturally overvalue loss, so when price is involved – whatever the price may be – we are inherently forced to decide whether we will lose or gain in the transaction.

Think about it this way, all transactions will produce either an upside or a downside. We give something we value (usually money but can be information, time, or something else that we value) to obtain another type of value (product or service). The potential upside is that we are satisfied with our purchase – we win. The potential downside is that we are dissatisfied – we lose. We are forced to weigh the choice because of the possible outcomes. According to Anderson, the mental process of actually weighing the costs and benefits creates a barrier during the decision-making process – which is bad.

On the other hand… When something is free, we forget the downside because we perceive that there isn’t a possibility for loss. According to Anderson, free gives us an emotional charge such that we perceive that what is being offered is immensely more valuable than it really is. So therein lay the allure of free; we do not perceive the possibility of loss. In other words, when we choose a free item (it’s free), but when it’s not free we perceive the risk of loss.

How can you use this to your advantage?

First, let me summarize, here are some of the advantages of free:

• Free (zero) lowers mental barriers in your decision-making process
• No perception of loss: Decreases potential downside; hence decreases perception of risk
• Free can install confidence, ie: try it without cost/risk.

Some of the disadvantages of Price:

• Price, any price, increases mental barriers during decision-making.
• Possibility of loss: Increases potential downside; hence increases perception of risk
• Decreases willingness to try something because it costs you something.

In looking at the advantages of free vs the disadvantage of price, the clear strength is that it decreases risk – or the perception of risk anyways.

So, in a practical way, your goal is to eliminate the perception of risk when a (potential) customer is making his/her choice – ie: Try to remove the “will I lose in this transaction” barrier.

Therefore, I would suggest 2 simple and practical tactics:

1. Offer a Free Trial

The “free” in free trial increases people’s willingness to try something, so use this aspect of free to your advantage. Most software publishers use the free trial model today because of its low-risk appeal to consumers. We all understand this principle – it makes sense.

I would however caution you to be careful how you implement it. You can inadvertently create a “transaction cost” by requiring personal information ” – ie: Your potential customer may not want to give you his/her personal information because they don’t want to be bothered, or they are overly-concerned about privacy, etc.

Note: There may be a valid reason that you are asking for personal information – such as a lead gen process, etc – but please understand it is a barrier in the “trial” process.

In the war against free, make your free trial process as easy as possible. Don’t ask the user to jump through hoops to try your product when the free alternative is just a click and download away.

On the other hand, if you want the best of both world’s (easy trial and lead gen), make the personal information aspect optional.

While this is not a free trial for a paid product, I think Sun Microsystems does an excellent job of balancing a no transaction cost download and the collection of personal information in their SDK download process:

As you can see in the screenshot, they offer an added incentive (Guide to optimizing GlassFish performance) to submit your personal information, but they also make it easy to bypass this step and go straight to the download (Continue to Download).

2. Money Back Guarantee

This particular tactic goes against conventional wisdom with electronically delivered goods because (most times) there is not a way to prevent someone from using the product after it has been delivered. True, but…

In the fight against free, a money back guarantee decreases the potential downside in the transaction. Think about it in terms of your customer. Your customer may be thinking, “What if I make a bad choice and [product] doesn’t meet my needs? Well, I suppose I can always return it if I’m not satisfied”. Remember, there is no perceivable downside with the free product, so your want to counter that advantage.

The money back guarantee also instills confidence; it says to the customer “we believe so strongly that our product is the best for your needs that we will give you your money back if it doesn’t”. That’s a bold claim, wouldn’t you agree?

Closing Thoughts…

In conclusion, free trials and money back guarantees are not by any means a silver bullet against “free” – not even close. They are simple tactics that can help in your war against free.

Remember, as I said in parts 1 and 2, the best weapon against “free” is a better product – ie: a product that is better suited to solving the customer’s problem, or that offers greater value than the free alternative.

Ultimately, the starting point always comes back to the customer – what are their needs, what problems are they solving with your software, and what is important to them. Competing with free means you must act strategically and not with gimmicks; it requires that you improve, innovate, and add value in the ways that matter most to your customers.

The obvious question then is how do you know what is most important to your customers? The answer: spend some time getting to know your customers, the answer will quickly reveal itself.

Here are a few tips to help you learn more about your customers.

Tip 1: Listen to your current customers.
An easy way to learn what customers want/need is to spend a little time – daily, weekly, monthly – reading support emails. Support email provides great insight into how your current customers are using your software; what their problems are; and how (they think) you can improve your product.

Tip 2: Join the conversation.
“Web 2.0” and Social media is your friend… For better or worse, people are talking. People are voicing their opinions in comments on your blog, on your competitor’s site, in your forums, on Twitter, etc. You need to find out where they are talking and what they are saying.

There are a variety of tools that make social media monitoring easy, such as Google Alerts and TweetBeep. Used correctly, web 2.0/social media sites are a free form of market research. So get involved in the conversation.

Tip 3: Site and keyword analysis.
Another way to learn about your customers – albeit more convoluted – is by analyzing the search terms/phrases that are bringing them to your site. Google Analytics allows you to drill down into the search terms/phrases people are using when they come to your site. Additionally, you may want to spend some time analyzing the pages they visit most. This can be especially beneficial if you have specific content, such as tutorials, focused on specific problems and/or tasks.

Maybe people aren’t coming to your site (yet). No problem, Google’s keyword tool (and other similar services) allow you to see the search terms/phrases people are using on search engines in relation to your product.

Together, the search terms/phrases and the “top content”, can further illuminate what matters most to your customers.

Tip 4: Formal market research.
Of course, if you have the resources, formal market research is by far the best method to determine what is important to your target customers. The previous methods, while they have their benefits, are subject to various types of bias such as availability heuristic, confirmation bias, etc. This isn’t a post about psychology so let’s just get back to the matter at hand.

Market research doesn’t have to be a high-price marketing company; you can start with a simple survey or sit down with a group of users and learn how they use your software.

If you want a formal study, but are on a budget, go to the local university and ask the marketing department to help you with a research project – university professors (grad and undergrad) will typically welcome the opportunity to give their students a “real world” application for the concepts they are studying.

With knowledge on your side, you can make better strategic choices in your fight against “free”.

As always, remember… People are not looking for “software”, they are using your software to solve problems. Think “problems” first and features second. Your goal is to understand the problems your customers face and develop “features” that solve those problems. Too many times we like to think about features first and then how those features can be used (to solve problems) second.

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.