What is a *FREE* customer worth?
January 6, 2009 1 Comment
I always wonder if companies should pursue community building with lots of users, or a few paid users. While both have their advantage, it is a question that can be better answered on a case-to-case basis. Many factors might affect the strategy a company might want to employ – funding levels (do you have money to invest through a franchise building phase?), maturity of the market (how many other players are there?), state of the product (is your product extremely well-defined, or are you tuning it still?), but I found this feature story by Sunil Gupta and Carl Mela that brings to the fore a new dimension and one I had not been able to quantify — indirect network effects — when you acquire a free customer, over time they might start buying from you, or attract other customers.
Gupta and Mela point out these free customers are extremely important for many businesses — from a shopping mall where they build up aspirational value and buy products later, or gaming consoles where it drives more developers and a wider eco-system leading to a higher monetization. They explain these in light of an online auctions house — where more buyers lead to more sellers and higher lifetime earnings even though the buyers don’t actually pay a fee. What’s really interesting about the report is that they have quantified these indirect network effects, explain how a penetrative pricing (low initially, and higher later) leads to higher lifetime earnings since it broadens the base.
Also reminds me of when I was talking to a manager in Shoppers Stop sometime back, and he told me that everybody walking into his store is a potential customer — they might not buy anything now, but the fact that they walked in shows that they are interested in buying something, and will come back and buy. Which is also true of brands targeting youth — they don’t have a lot of immediate spending power, but very high lifetime earnings, and so you are better off getting them hooked onto your products.