How to Leverage an Economy of Giving and Profit

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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The concept of the free giveaway — offering a sample or gift as a way to initiate or build customer relationships — isn't new, but free offers now work in terms of digital products, rather than in free samples mailed to customers' homes or free products offered over the counter. This low cost and virtually unlimited system of giving can be a boon to small businesses that can't afford to spend tight marketing dollars on pricey freebies.

As Seth Godin puts it, "The new economy often involves trading in things that don't cost money. There's no incremental cost in writing an essay, composing a song or making an introduction. Since it doesn't cost money to play, we have the ability to give before we get."

The good news, then, is that it's easier than ever before for businesses, even small ones, to offer free items to a large audience.

The Cost of Free

Despite the ease of giving which the digital revolution has created, there is still cost to the provider.

To create a product worth giving, you have to invest the initial expense of time, creativity, production, and design. If you're equipped to do all this work yourself, all you invest is the time to create and produce the gift. If you pay someone else to create the freebie for you, whether an employee or an outsourced writer, graphic designer, or other professional, you're investing money as well as the time to oversee the project to completion.

But the cost of this manufacturing only occurs once, and the inventory of your digital gift never needs replenshing. No matter how many people take you up on your free offer, your cost to produce it never occurs again.

Consider that ROI against the old, tangible-item ROI. With a tangible item to give away, you were limited to a certain return. Free Item X costs you $0.10 to produce or buy and to distribute; no matter what happens, you always have to invest that $0.10 per customer in order to get Free Item X in their hands, and on many, you'll never get a return. Still, even with a fixed initial cost, the freebies were often a superb marketing investment. The customers who did come back and purchase more than paid for the customers who didn't. So it worked, and companies made the investment to get their Free Stuff into the hands of potential customers.

With digital freebies, let's say you make an initial $200 investment in creating an e-book to give away to your customers. Distribution cost does not exist: it costs no more to offer a "free ebook" on your website than it does to have a website. For the first 200 customers who download the e-book, the cost is $1 per customer. But the cost dives as more customers click the link. 200 more downloads, and you're down to a $0.50 investment. Then 400 more downloads, and it's only costing you $0.25. Then another 1000, and the cost dives to $0.11 per download. Then another 1000, then another 1000, and you've invested a mere $0.05 per customer. Think that cost will be tough to recover? You never have to spend that $200 on production again, but your inventory never drops and you can keep giving that goodie away.

Your cost goes down as your status in the free economy world goes up. The return keeps growing, until, literally, your cost per customer is fractions of a penny. At that point, the question that stops people from investing in free seems kind of silly.

The Wrong Question

"Why would customers buy from me if they can get value without giving me money?"

Bottom line: does it really matter? If the cost per person is a fraction of a penny, and you're building brand awareness and creating recognition and goodwill toward your business, then you're making a marketing investment that will pay off. You're bringing traffic to your website, you're growing numbers on your Facebook fan page, and even if you're not seeing direct sales as a result of that free download, you're seeing increased interaction, an broader network, and a lot of word-of-mouth about your business as people tell other people about your free resource.

That question, the "why" question, is an imaginary hurdle that keeps you from interacting in an economy of giving. The real question is not "what does free cost me?" but "what is it costing me to opt-out of free?"

And once you've figured that one out, tackle these:

• Can you compete with free if you choose not to participate?
• Where does free fit in for your customer?
• What can you provide for free?

Free is a magic word. Gifts open doors. Your free gifts open the doors for building customer relationships, brand awareness, familiarity, and trust. Seems like that might be worth a penny or so per customer.