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STREET SMARTS

When to Change Your Business Model

If a competitor offers its product for free, should you do the same in hopes of increasing market share?

Norm Brodsky is a veteran entrepreneur.

Dear Norm,
Our small business provides government agencies and consulting firms with specialized computer models that simulate flooding. Sales have been very slow this year, and one of my partners thinks we should make the software available as a free download to anybody who wants it. That's what our main competitor does, and a lot of people use its product even though it's not as good as ours. My partner's theory is that by getting our software into more hands, we would be able to sell more support subscriptions. My fear is that we would succeed only in losing a lot of revenue at the worst possible moment for our company. It would be one thing if price was the main reason we aren't selling more software. But, in fact, price plays a small role in a customer's buying decision. I'd love to hear your thoughts on what we should do.

—Reinaldo G.
(Company name withheld)

 

Changing a business model is a very big deal, and Reinaldo was smart to look for outside opinions before he committed to a course he could not easily reverse. Reinaldo told me that his company had 700 licensees using the software in question. The total market, he said, was 5,000 to 6,000 users. Reinaldo estimated that the company's revenue from current customers would drop by about two-thirds if it adopted the free-download model.

Suddenly, this became a no-brainer. "Listen to what you're telling me from a financial standpoint," I said. "You're saying that you'd have to triple your current number of users and go from a 14 percent to a 42 percent market share just to get your sales back to where they are today. And that's assuming a very high percentage of your new customers opt to pay for support. It's also assuming that a high percentage of your competitor's customers will decide to change their software. That's unrealistic. If they believe what they're using now is good enough, they'll probably stick with it."

To be sure, it sometimes makes sense to give your product away, and I might have reacted differently if Reinaldo had said the total market was a million users. But in such a small market, giving up two-thirds of the company's revenue makes no sense. Then again, there is a hybrid approach that might work. I suggested that Reinaldo think about offering new customers a six-month free trial. If they opt to keep the product after the trial period, they'll have to pay a licensing fee.

But I added a caveat. If the company adopts this approach, it should offer old customers something at the same time. They would be justifiably resentful if they felt they were being taken for granted. Customer loyalty needs to be rewarded. It's always a bad idea to treat new customers better than old ones.

 

Please send all questions and comments to AskNorm@inc.com. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. You can follow them on Twitter at @normbrodsky and @boburlingham. Their book, Street Smarts, is available in paperback.

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From the October 2011 issue of Inc. magazine

NORM BRODSKY | Columnist

Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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