How did a little lemonade stand run by three young girls cause a big commotion? A thirsty financial columnist stopped by -- and was appalled to find the proprietors offering their lemonade for free. Despite her harsh reaction, businesses can actually benefit by giving things away.
Chicago Sun-Times writer Terry Savage was upset that the kids didn't seem to understand how to run a business, writing that they reflected America's lamentable financial illiteracy. Fair enough. We are, in general, woefully un-savvy about money.
But giving away your wares, or selling them below cost, isn't necessarily a mistake. Consider these examples:
- Should Google
(Nasdaq: GOOG) charge users for its search engine? Free searches keep us coming back to its website, where it can generate income by selling ads to accompany our search results. - Banks such as JPMorgan Chase
(NYSE: JPM) have long given out toasters or other freebies to entice new customers. Many banks have given up on this, but the fact that Morgan persists suggests that it must be effective in driving business. -
Hewlett-Packard
(NYSE: HPQ) doesn't give out its printers for free, but it does offer them at extremely low prices, counting on making more money from repeat sales of inkjet cartridges. HP would rather make relatively little on consumers' occasional printer purchases, but enjoy much higher profit margins on their frequent cartridge buys. - HP's printers are one example of "loss leaders," items priced below cost in order to attract consumers who will buy more stuff and make up for the loss. Wal-Mart
(NYSE: WMT) sells new DVDs below cost to get more people in the door. Amazon.com(Nasdaq: AMZN) also offers e-books inexpensively to entice us to buy its Kindle (though now there's talk that it might offer the Kindle for free). Microsoft(Nasdaq: MSFT) and Sony(NYSE: SNE) dug in deep with loss leaders, selling gaming consoles for relatively little, and looking to game sales to generate profits.
In short, offering lemonade for free isn't necessarily a bad idea -- especially if the stand's pint-sized proprietors are trying to develop a cadre of loyal customers, to whom they can later offer more expensive fare. The notion that free can be profitable may not be such a revolutionary idea after all.
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