You Can Compete with Free--and Win
I recently visited a colleague at home, where I met his 10-year-old son. When prompted by his dad, the boy--Arian--told me about the yo-yo business he had founded with a classmate.
Arian and his partner offer services to repair and upgrade yo-yos for tricks with new parts like extra-long string and inner-gear modifications. With great pride, Arian boasted that he made $13 his very first day in business. Then he told me that business had gotten tougher. "Some kid is trying to screw us," he elaborated.
Arian's shop now has a new competitor that offers similar yo-yo services for free. The boy's father, my colleague, was quick to exclaim, "He was Googled!" The dad was, of course, alluding to Google's frequently-used strategy to make available free services in otherwise paid markets to rattle competition and gain market share for advertising-supported products.
Having built multiple businesses that compete with "free," I was absolutely fascinated by the conversation with the boy. I asked the young entrepreneur how he's managing to compete with this free alternative. Arian was quick to say that his competitor is "only offering this service to become popular" and that his competitor's sales pitch is that "his parents are rich so he could afford to do it for free."
So, to combat that position, Arian said he and his partner were highlighting that they offer higher-quality work and, aside from doing strong work for customers, don't have any ulterior, hidden motivations. Arian also told me that his competitor bought a $95 yo-yo and therefore, doesn't understand the needs of an average customer who buys a lower-priced yo-yo. While Arian had had to modify his offering and pitch, it seemed that business was doing just fine.
Arian's dad told me that his other son, Arian's brother, forked over the money so Arian could buy inventory and parts. So, in a matter of weeks, this 10-year-old entrepreneur found a market (yo-yo owners), identified a need he could serve (fixing and upgrading yo-yos), secured an investor (his brother), and is now facing competitive pressure from a new market entrant. Indeed, the fundamentals of most businesses are the same as this: identify market pain, provide a superior solution, compete, modify strategy to adjust to the market, and repeat.
The biggest lesson I learned here was about competing with "free." Many markets have free alternatives. If companies were not able to compete with free, Microsoft would have been crushed by Linux, Oracle by MySQL, and the dot-com boom would have wiped out half of the world's brick and mortar economy. Cable TV or satellite radio wouldn't exist. And, yes, while services like Napster offered consumers the ability to download free music, Apple came along years later with iTunes and charged a fee per download. Today, Apple is the most valuable technology company in the world.
In the end, the best product wins. Focus on building a truly great product and offer it to your customers with great service to back it up. People have proven time and time again that they'll choose (and pay for) a better product over a free one, whether a yo-yo upgrade or a digital Jefferson Airplane album.