Freebies Are A Sign A Company Is About To Go Under


Thinking about giving out some freebies for your business? According to new research, that could be a bad sign.

There is no free lunch in company giveaways of sandwiches, airline flights, hotel stays and other goodies. That's because there is a significant risk that the so-called "future rewards" will diminish in value when claimed – or the business might not last long enough to hand out the goodies, a new University of Florida study finds…

…Many of these so-called reward or loyalty programs are really "shams," said Shugan, who presented his research, which focused on the travel industry, at numerous conferences and universities, including the INFORMS Marketing Science Conference in June 2006. Instead of building customer loyalty the traditional way by beefing up staff and increasing service, companies provide a lower-quality product in the form of reduced service, hoping to avoid sales losses by promising customers future rewards, he said.

Zero percent financing is the first thing that popped into my head. Great marketing ideas aren't great marketing ideas if they ultimately hurt the company in the long term.

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  • J

    “Zero percent financing is the first thing that popped into my head”

    I’d agree if I’d run into a zero percent deal that was truly that, but the zpf deals I’ve seen fall into two broad categories – deals in which the financing cost is built into the original price (cars), or deals which are a bet – evidently with very favorable odds – that the buyer will fail to comply with zpf terms and wind up paying exorbitant interest after all(electronics/furniture).

    I also disagree with the author’s example of airline FF ticket awards. The liability case would be valid if customers could use the minimum point value to get on any flight at any time, but airlines seem to do a very good job, via award restrictions, of steering FF rewards tickets to product with a very high likelihood of being wasted anyway.

    Also, is the impression that a company is in trouble bad for business across the board? Readers in the Dallas/Plano area might be familiar with the furniture store at 75 and Spring Creek Parkway whose business model evidently is to change the name of the store, hold a “going out of business” sale, change the name of the store, hold a “going out of business” sale, etc, etc. They’ve been doing this for 15 years (at least). Oddly, the “new” place always seems to have the same stock and employees…

  • W

    This is an interesting post- especially since Chris Anderson just announced he will be coming out with a new book saying how to have a successful company by offering things for free:

    “So the word is out. I’ve sealed the deal on my next book, to be called “FREE”.”

  • Craig

    Then I guess Craigslist is a complete failure?

  • Rob

    Will, Craig,
    Excellent points. I suspect what we will find is that you have to think about marginal costs and loss leaders when you think about freebies. Marginal cost for a craigslist post is probably less than a hundredth of one cent. Economic theory would, in that case, actually dictate a free price. My hunch here is that the problem is giving away free things that have a significant marginal cost.

  • Geoff

    Rob –

    One Item to keep in mind is the opportunity cost associated with that good/service which is being provided for free. For instance, your supermarket shopper card, or your loyalty programs at various department stores. IF they are smart (which some are) they use that gathered information for targeted marketing and other targeted material. This in turn can generate further sales by using these programs.

    Another item to consider is competition. When we often see 0% this is in reaction to market conditions. Think of Best Buy for instance… If Circuit City provides a 0%, Best Buy might react by doing the same in order to maintain the market share. Also, generally with 0% the consumer might end up spending more than they intended because they do not have to pay any additional interest.

    Just some thoughts.