By David J. Bryce, Jeffrey H. Dyer, Nile W.

Hatch HBR June 2011

Presented by Praveenkumar A. P

Assessing the Threat

Seriousness of the threat posed by a new entrant hinges on three factors:

Entrants ability to cover its costs quickly enough Rate at which the number of users of the free offering is growing Speed with which your paying customers are defecting

Determine if the competitors free offering is generating revenue by any means

E.g. Skype offered free phone service for a year before introducing Skype Out, a paid service for calling landlines from computers
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Assessing the Threat

OR

Free offerings user base is growing by 40% or more a year (meaning that it will double every 2 years)

Customer defection rate is 5% or more a year (meaning that you stand to lose at least 25% of your customers within five years)

Assessing the Threat

D E F E C T I O N R A T E

High 5% a year or more

Immediate Threat Launch free product immediately

Business Model Threat Change business model

Minor Threat

Delayed Threat Coexist or delay launch of free product

Less than 5% a year LOW

Monitor Situation

Less than 40% a year

More than 40% a year

GROWTH RATE

Choosing whether and when to Respond

Established companies must not only respond with a free offering but also radically change their business model to survive Take swift measures, preferably within a year or two Incase of Delayed Threat, your offering can coexist with the free one for at least a few years
E.g. Microsoft Office , because of its high switching cost, most enterprise users arent defecting, but new users college students, small and medium business are using Google Docs
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How to Respond

Tools at disposal
Large base of users or customers who have made investments in learning how to use the product Advanced technical know how Substantial brand equity Significant financial resources Knowledge of the market Access to important distribution and marketing channels

How to Respond

Responses can be of varied types,

Offer free good of the same type as the competitor but different version Offer a scaled down version as free but charge premium on the full version Buy one get one free / buy two get one free Offer a different product from the same company as free, but which is of a lower value

How to Respond

Responses can be of varied types, (continued)

Cross selling with other products from the same company Up-selling whereby seller induces the customer to purchase more expensive items, upgrades, or other add-ons Selling access to customers