Small Business Owner Tip: The Power of Free

For any business small or large, determining effective promotions is one of the most important and difficult strategic decisions to make.  While there are many different methods to promote a product – discounts, loyalty cards, buy one get one free, etc. – studies show that certain strategies are better suited for certain products.  For high involvement (items that customers make a conscious effort during their purchase), premium products such as craft beers, research suggests that “Free” promotions are most effective in retaining the product’s original value.  This is a key point, especially for many small business owners that deliver value over and above major brands.

Undoubtedly, aggressive discounts are going to drive in customers to purchase promoted products.  But what happens when you discontinue the promotion?  Would the customers still consider your craft beer just as valuable as it was before the promotion?   

Experiments and data analyses from prominent universities show that customers deferentially alter their willingness to pay after a promo comes to an end.  For instance, a car that is equipped with a “Free” navigation system worth $2,000 is valued higher by the customer than a car that is equipped with a navigation system that was given a $2,000 discount.  Although they sound extremely similar, the mental accounting of customers significantly differ. 

In another example, imagine you bought 5 bottles of high quality craft beer which cost $5 each, and was given a promo of 20%.  Now, instead of the 20% promo, you are told that one bottle was free of charge, compliments of the local bar owner.  Although these two are equal in monetary value, people’s perception of the quality and actual price of the beer will be higher for the free bottle of beer, especially in the long run.

So, when you plan your next aggressive promotional strategy to gain market share, plan a “free” promotion to boost your sales AND retain your brand value.