The Penny Gap – Why free customers are costly

US_One_Cent_ObvIn the digital age there are lots of companies that factor free in their business model. Whether it is paid services that also offer a ‘freemium’ package, online media who get paid per view (and thus only cost customers a click) or when free information is given away as part of marketing efforts (Like a free book excerpt). However, getting from free to paid is one of the hardest leaps, and one where you will face the most difficult customers.

The Penny Gap is a concept which suggests that consumers will find a huge barrier between free and a penny, much greater than any other price differential. So a potential customer will encounter more resistance upgrading from free to $5, than they would upgrade from $10 to $50.

This is particularly toxic in informational fields, where the end user asks why should they pay for a book or info product, when they can in theory find the same information online (Even though in the case of high quality information, it likely would take a lifetime of experience and research to arrive at the same conclusion)?

Anyone who puts out digital products has to be concerned with piracy, however most will be surprised at just how unapologetic consumers are about this. You only have to Google the name of any popular book and see how it always will try and auto complete to [Book name] + PDF/Torrent. I’m amazed at how often people have asked us to send them a free book because they were going to find it on a torrent site anyway if we didn’t.

As a side note, if you put out informational products, if they are good you will become the victims of plagiarism. I would actually say we have had more issues with people stealing and reproducing our content as their own, than just stealing it. In almost every instance, the person doing it genuinely did not understand they were plagiarising the content. In fact, when challenged, we often get told they thought they were doing us/the world a favour by sharing it (despite giving us no citation). In particular watch out people translating your content into other languages without permission. Someone translated our book into Russian, gave it away for free, and then emailed us proudly to tell us, I think expecting us to thank him.

Free customers have more time

WhatTimeIsItPerhaps the biggest imposition free customers will make on you, however, is on your time. Free customers invariably take up more customer support time than those who are paying for a premium service, for a number of reasons.

First of all, anyone who has actually paid money has also made a personal commitment to take the product seriously. Just like there is a Penny Gap for actually getting the sale, there is a Penny Gap for how seriously the consumer will take the content. When you get something for free, no such commitment is implied. I know from some customer support friends of mine that the biggest percentage of the support requests they get are from free customers who could have answered their own questions by simply reading the FAQ page. But they didn’t pay for the product, so they didn’t put that minimum effort in to get started.

Sebastian Thrun, founder of MOOC Udacity, revealed recently that only 10% of his customers completed the online courses. This is essentially a free University course, something which some students would get themselves in hundreds of thousands of dollars worth of debt for, yet when it is offered for free, people lose interest quickly.

Not paying also means customers have less personal accountability towards the product. They will think nothing of being rude or disruptive, because there is nothing at stake. They also often believe that they hold more leverage because they are a prospect, rather than a customer, using the threat of not buying to make demands. Some of the most entitled customers you will ever encounter have not paid a penny for the product they are making demands about.

Free customers also invariably have more time on their hands than paying customers. I work in the online poker industry, and the majority of support requests and complaints online poker rooms get are from ‘freeroll’ level players (People who are playing free to play tournaments that did not require them to deposit any money), whereas ‘high rakers’ (People who contribute thousands of dollars a month in fees generated through high volume of play) comparatively are quiet. This is true across many industries, when someone is paying a premium for something, they usually have more agency and momentum about them, and don’t have time to debate trivial matters.

My own personal experience with a particularly toxic customer really highlights this. Our book was as cheap as $9.99 on Kindle, yet one particular individual spent more than a year and, by his own admission, 100 hours trying to discredit the book, and he had never actually read the thing. The 100 hours he spent discrediting it on public forums were to ascertain if the book was worth buying, which he was slating purely on the merit of free guest posts we had written to promote it. To this day it amazes me that someone did not have $9.99, but did have 100 spare hours, essentially to try and get a free book.

Free is great. Free works. But free comes with a price. Your customer support is not free. Your time is not free. Most free customers will never break through the Penny Gap. When you offer goods and services for free, you invite people who would never spend a penny on your business through the door along with genuine prospects. These customers can more disruptive and demanding than your loyal paying customers if you allow them to be.

My email is free, why not sign up for it and make a bunch of unreasonable demands?