Want to make more money, give it away!

This is another great guest post from my dear friend Shawn. In the comments below feel free to share how you're "giving it away" to make money. 

It’s a paradox to be sure, but a good way to make lots of money is actually giving things out for free.  The concept is based on another paradox, people love free stuff and they’re willing to pay money to get things for free.

 Retail has been using it for years with a concept they call the “Loss Leader”.  They’ll lose money on every soda bottle they sell, but they sell them at the back of the store forcing you to walk by every other sale.  If you’ve ever wandered out of a grocery store with a full cart after going in for ‘just one item’ you’ve experienced how effective a loss leader can be.  The Loss Leader does more than just cross-sales though.  As you visit and revisit the same store you are more willing to buy from them again, even if their prices are comparable or slightly worse than their competitors.  These are the guys you ALWAYS go to after all, so you’re willing to pay just a few cents more.  They may lose money in the beginning but they have bought you as a customer and will make money over the lifetime of purchases you make from your favorite local store.

More recently a new business model of micro transactions has begun to show up on the Internet.  A game or application gives away the basic service for free to bring you in, then allows you to pay for ‘premium’ services.  Even if only 1% of their customer base is buying into these services, the sheer volume of free customers makes that 1% a very healthy bottom line.  Besides the premium services, advertising during the free sessions also generates stable income from a very high population of ‘free’ players.

Even more subtle than the advertising and premium micro transaction model is the one currently being used by Microsoft.  The price on Internet Explorer 8?  Free.  IE 7?  6?  5?  Why would Microsoft develop an application which has no additional services (premium content) or no advertising revenue associated with it?  If anything, Microsoft advertises Internet Explorer and pushes it heavily which is a further drain on company resources.  The secret behind this is something that you may not have even noticed in this paragraph.  Microsoft.  It’s name is everywhere.  Microsoft Internet Explorer may be free, but Windows, Word, Excel, and the other million applications which are all branded with the same name and logo are not.  If Microsoft can get you to rely on them for your browsing (an activity which many of us do far more than we’d like to admit) you’ll be willing to think of them for your other Office needs.  Remember how convenient your local store is after shopping for all that ‘cheap’ soda?  Microsoft is relying on the same brand familiarity.  You use Microsoft Internet Explorer so you’re familiar with Microsoft products.

 So giving things away for free, be they services or products or discounts (which accountants simply write off as a cost of doing business) can be profitable but how does it apply to the personal finances which Financiallydigital is teaching?

 Giving things away isn’t just for business.  Volunteering your efforts, donating to local events and nonprofits, giving your business to Local instead of big-box stores, all of these things will help you with your personal networking and you’ll find unexpected benefits in the long run.  Think of volunteering and donating as a loss leader for your personal finances.  It might take time but being a part of an organization like a Rotary or Lions Club shows others in the community that you are investing in the community and they’ll be happy to invest back in you.  Employment opportunities, business partnerships, free advice from experienced mentors and much more can be accessed by giving of yourself.

 Look for an opportunity to have your business assets or personal experience to be donated.  The rewards will come in the short term with opportunities to reduce your taxable income (talk to a financial planner or tax accountant for the full details) and in the long term by building professional and personal relationships.

 Finally, don’t give away the whole ship.  Just the ticket to an island where you sell the only food, water, and lodging for 500 miles.  Remember that your “loss leaders” are really just long term investments but the end goal is still to make an investment which has a generous return.

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 Shawn Durham is a Microsoft Certified Systems Engineer with ten years experience in purchasing, accounting and information technology.  His company, Kodiak Informatino Systems trains employees on the use of Microsoft Office, networking, internet resources and running a digital office.