"Free" product competition strikes again and the latest casualty is Weight Watchers, whose CEO recently left the company in the midst of the onslaught of free weight loss and fitness applications. 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 to free product competition makes sense because it immediately creates a direct rival to the free entrants' products. This pushes back 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 the right comprehensive response. And it just may permanently stall the new entrant.
Too often, established companies fail to marshal their many advantages to mount effective responses of this type. 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" entrants across 26 product markets showed that launching a "free" strategy is too often a last resort, if undertaken at all (See my article, "Competing Against Free," with co-authors Jeff Dyer and Nile Hatch, in the June 2011 issue of Harvard Business Review).
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 Encyclopedia Britannica. Had the owners of those assets reacted immediately with a free or deeply discounted version of their encyclopedia (in digital form) to the segments adopting the digital versions, they may have been able to buy time for a successful transition to a new business model. Instead, the company was finally sold at a deep discount under financial distress. One of the first acts of the new owner was to finally launch free digital versions of the encyclopedia.
Or consider another recent battle, the one that free Internet radio company Pandora waged against satellite radio company SiriusXM's online and mobile offerings. While Pandora's user base soared to nearly 100 million users, SiriusXM posted only a tepid, quasi-free response (a 30-day free Internet trial). But if in reaction to Pandora, SiriusXM would instead have launched a free, advertising-supported version of their content for online and mobile, they might have permanently delayed Pandora's IPO by denying them the ability to grow users. Pandora's future success is anything but assured, but they've managed to carve out significant share in a space that SiriusXM should have owned.
The story is the same with Weight Watchers. Facing competition from free smartphone applications such as MyFitnessPal and activity trackers like Fitbit, Weight Watchers might have launched a similar set of free offerings, making them accessible on-line and through smartphone apps, and used the presumed growth in the user base to drive more volume toward key revenue products and services. Instead, MyFitnessPal's user base has climbed to over 30 million users and Weight Watchers is scrambling.
Meanwhile, Quicken did the right thing when they bought Mint.com, a free threat to their personal finance software. They 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 that incumbents are in by up-selling, cross-selling, bundling, or advertising to earn revenue. If it's working for one company, it can work for another. By launching "free," established companies create a perimeter that can protect core revenue products from the onslaught of a free product competitor. Is it the right move for every company dealing with the threat? Of course not. But for many companies, and for Weight Watchers too, it may be the best chance to stake a claim on the unfolding future of their market.