Free” product competition strikes again, and the latest casualty is Weight Watchers, whose CEO recently left the company in the midst of an onslaught by free weight-loss and fitness apps.
Finding a killer strategy under these circumstances can be an elusive quest, as Weight Watchers has clearly discovered. In response, most companies hunker down and do more of the same – throw in a price cut, tweak a product feature, launch more advertising – and hope for the best. Yet they often ignore the one obvious strategy that could give them a serious break: meeting free with free.
Using free as a first response makes sense because it quickly establishes a direct rival to the entrants’ free products. This pushes back against the assault and, with the right customer targeting, can protect the more valuable segments of the business. At the very least, it can buy time while management sorts out a more comprehensive response. And it just may permanently stall the new competitor.
Too often, however, established companies fail to marshal their many advantages to mount effective responses of this type. These advantages typically include an established customer base, brand equity, market knowledge and financial resources. Nevertheless, our look at the reactions of 34 incumbent firms to free-product entrants across 26 markets showed that launching a free strategy is too often a last resort, if it’s undertaken at all.
Think about a classic case. Digital encyclopedias such as Microsoft’s Encarta and later, Wikipedia, virtually destroyed the market for the venerable print edition of the Encyclopaedia Britannica. Had Britannica reacted immediately with a free or deeply discounted digital version of its encyclopedia, it might have been able to buy time for a successful transition to a new business model. Instead, the company suffered financially and ended up being sold at a deep discount. One of the first acts of the new owner was to launch free digital versions of the encyclopedia.
Or consider another recent battle, the one that Pandora, a free Internet radio service, waged against the online
and mobile offerings of satellite radio’s SiriusXM. While Pandora’s user base soared to nearly 100 million, SiriusXM managed only a tepid, quasi-free response: a 30-day free online trial. If instead, SiriusXM had launched a free, advertising-supported version of its content for online and mobile, the company might have permanently delayed Pandora’s initial public offering by denying it the ability to grow users. Pandora’s future success is anything but assured, but the streaming service has managed to carve out significant market share in a space that SiriusXM should have owned.
The story is the same with Weight Watchers. Facing competition from free smartphone apps like MyFitnessPal and activity trackers like Fitbit, Weight Watchers might have launched a similar set of free offerings, making them accessible online and as apps, and used the presumed user growth to drive more volume toward key revenue products and services. Instead, MyFitnessPal’s user base has climbed to more than 30 million and Weight Watchers is scrambling.
Meanwhile, Quicken did the right thing when it bought Mint.com, a free threat to its personal finance software. Quicken neutralized the threat and entered the market with free all in one move.
A big obstacle to launching a free product, of course, is the worry that it will hurt revenues at best, and possibly destroy the business at worst. Yet entrants are making free work in the same markets as incumbents by upselling, cross-selling or bundling to earn revenue. If it’s working for one company, it can work for more. By launching free services, established companies can create a perimeter to protect their core revenue products from the onslaught of free-product competitors.
Is it the right move for every company dealing with this threat? Of course not. But for many firms, and certainly for Weight Watchers, it may be the best chance they have to stake a claim on their market’s future.
By: DAVID J. BRYCE
(David J. Bryce is an associate professor of strategy at Brigham Young University’s Marriott School of Management and an adjunct associate professor of management at the University of Pennsylvania’s Wharton School.)