In this lecture we draw on material from Chris Anderson's book "Free", to examine the first Model of Free: Direct Cros Subsidies. Direct Cross Subsidies are old world free, in which the price the customer pays (now or later) covers the cost of the freebie.

1. (Stanford BUS-21)
Martin Westhead
Mastering Marketing
Model: Direct Cross Subsidies
How to make money
by giving things away

2. Overview
 Direct cross subsidy model (Tied)
 Examples
- Ryan Air
- Comcast
- Controlinveste
 Business Models

3. Direct cross subsidy
 Price/Quantity
 Size rectangle = revenue
 Model assumption:
Price ($/Q)
Quantity
PA + PB
P(A+B)
QA + QB Q (A+B)
Revenue products
combined >
Revenue products
separately
P(A+B) Q(A+B)
>
(PA+ PB) (QA+ QB)
Red Area > Blue Area
 Cost model is directly tied
to sale

4. Free Cell Phone
Free Cell Phone: postpaid
mode
Paid Cell Phone: prepay
model
Subscribers get free phone Subscribers pay for their
phone up front
Generally more expensive
phones
Generally cheaper phones
(cost sensitive customer base)
Multi-year contract with
termination fee
No contract: usage only

5. Ryan Air
 London -> Barcelona
- $20 (£10)
 Ryan Air CEO wants
- All flights all seats free
 Cut costs
 Ramp up ancillary fees
 Higher fares on popular
days ($100)
Ticket Price ($20)
Checking 2 bags ($30)
Ad revenue per hour ($1)
Subsidy for more
expensive flight ($5.50)
Credit card handling ($6)
Priority boarding ($4)
Bottle of water ($3.50)

6. FREE DVR
 9 million free DVRs
 Hidden fees
- $20 installation
 Monthly subscription
- $14 p.m.
- Break even in under 18
months
 Up-sell other services
- Internet $43 p.m.
- Pay-per-view $5 each

7. Free silverware
 Leading media company
in Portugal
 Jornal de Noticias
- 120th Anniversary
- 60-piece silverware set
- Regular pieces during
the week
- Serving pieces on Sat
 36% increase in
circulation in 3 months

8. More give-aways
 Free toolbox with tools
- 177 pieces
- 20% 3m
 Free DVD every Sat
- Coupon in Friday paper
- 47% increase 2m
 Free Dinner plate set
- 19 plates
- 70% increase 4m
 Free language course
- 11 languages
- 48 disks
- 22 books
- 2 boxes
- 63% increase 4m

9. DIRECT CROSS SUBSIDY BUSINESS
MODELS

10. Direct Cross Subsidy
Business Models
Give away services, sell products
 Apple Store Genius Bar tech
support
Give away products, sell services
 Free gifts when you open a bank
account
https://www.bncbank.com/files/BNC_Gift_List_2014.pdf
 Example gifts

11. Direct Cross Subsidy
Business ModelsGive away software, sell
hardware
 IBM &HP’s Linux offerings
Give away hardware, sell
software
 Game consoles (e.g. XBox)
 Not technically free but below
cost

12. Direct Cross Subsidy
Business ModelsGive away cell phones, sell talk
time
 Cell phone carriers
Give away talk time, sell cell
phones
 Free night and weekend plans
from same carriers

13. Give away the show, sell the
drinks
 Music, comedy clubs, strip
clubs
Give away the drinks, sell the
show
 Casinos
Direct Cross Subsidy Business
Models

14. Buy one get one free
 Grocers / Supermarkets
Free gift inside
 Cereal
Direct Cross Subsidy Business
Models

15. Free shipping orders over $25
 Amazon
Free samples
 Supermarkets, Perfume
counters
Direct Cross Subsidy
Business Models

16. Free trial
 Magazine subscription
 SaaS products
Free Parking
 Malls, Movie theatres
Direct Cross Subsidy
Business Models

17. Summary
 Direct cross subsidy model (Tied)
 Examples
- Ryan Air
- Comcast
- Controlinveste
 Business Models