I love freemium and freemium is actually one of my favorite principles in this entire course. But one thing I get, a question I get a lot around freemium people say, look, it's really good for digital goods and services. Sure, Dropbox, for example, I'm Pandora, and there's very low variable costs that's really easy to give something away for free. I can give away a membership for free because that doesn't cost me any more to run that business. But what if I'm a doctor? What if I'm a hospital? What if I'm a fleet management company? What if I'm a storage company? What if I sell something physical? It seems a lot harder to give something away for free. If I'm a bakery, I can't use freemium, right? I mean, what's the free version and what's the premium version? And it cost me every time I give something away for free. And so how do I think about using this principle? But it turns out the same ideas beyond freemium can be applied much more broadly. And to understand how it helps look at the struggles of a guy named Nick Swinmurn and his challenges in finding a pair of shoes. And so Nick was living in the Bay Area in the late 90s, early 2000s, and he was walking around a mall near San Francisco searching for a pair of shoes. He wanted a particular pair of air walks in a particular size and a particular color, but he couldn't find them. He went to one store and they had the right color but the wrong size. He went to another store and they had the right size but the wrong color. And after 30 minutes to an hour of walking around the mall, he was frustrated, right? He thought, could there be a better way, there's gotta be a better way, right? And so it was the time where everyone was starting online businesses in the Bay Area and so Nick wondered, well, could I do this with shoes? Could I start an online business with shoes where people could search for all the different options they wanted, find whatever they liked without having to walk around the mall? And so he found a couple business partners, and he raised some money and he started this business. And it was called ShoeSite.com. And initially ShoeSite.com did okay, but the first few months in even a year and they were struggling, right? They had raised some money, but they were burning through capital. They couldn't acquire customers fast enough. And the only really upside was there was no competition because the venture capitalists thought it was a terrible business to be in, right? No one else wanted to start the business because they didn't think it would work. They need to figure out a way to jumpstart sales. And so they thought what can we do? They thought about discounting the shoes, maybe putting them on sale or something along those lines. But most of the shoe companies the Nikes and the Reeboks and the Adidas of the world didn't want to do discounts, right? Nike really prides itself on its brand and they thought, look, if you discount our product it'll lower brand equity. So ShoeSite.com tried to figure out a different approach. And they said, well, what can we do to get people to be willing to buy stuff online? Now, you have to turn back the clock a little bit, because you're probably sitting there going, well, I buy everything online today, right? I found my spouse online. I got my pet online. I got my house online. I found everything online, we get everything online today. But thinking back to the late 90s, the early 2000s, things were quite different, right? Less than 1% of things were bought online. Most of those things were in B2B markets not actually consumer markets. And if you remember it was scary to buy things online, right? You went to some website, you weren't sure what you're actually going to buy, whether the place was legit or not. And you had to turn over that money without actually seeing the product or service. Not only that, but you had to pay to get it to you, right? Unlike walking to the mall, let's say, where I only have to pay for the shoes once I've tried them on and figure out whether I like them or not, to buy shoes online I had to pay for the shoes upfront and I had to pay for shipping to get them to me. And if I didn't like those shoes I had to pay to send them back, right? Why would I want to pay additional money to do something I wasn't even sure that I liked? And so part of the problem was, very simply people are uncertain. They didn't know whether online would be better for them or not. And so, go back to ShoeSite.com, they're running out of options. They didn't know what to do. So they tried a different approach, very simply they tried free shipping. They didn't know if it would work. No one else was doing it. They didn't know whether would work for them or not, but they tried it. In November 1999 they announced free shipping on their website on the top of the company's home page. Now, things didn't take off right away, right? They got a little bit more sales, but slowly things grew. The downside was they lost some money by doing it, right? It cost the money to pay for free shipping rather than the consumer paying to ship the item to the consumer's house. ShoeSite.com had to pay. And every time the consumer sent it back, they had to pay for it as well. But soon ShoeSite got a little bit of traction, then they got a little bit more traction. Soon they had millions of revenue. Today their warehouses boasts more than 3.2 million items from thousands of brands around the world. Now, you're probably sitting there go, ShoeSite.com sounds really successful, but I've never heard of them. Well, I bet even though you've never heard of them you've probably bought something from them. Because ShoeSite.com is no longer ShoeSite.com, a number of years ago they changed their name to an adaptation of the Spanish word for shoes, it's Zapatos. We know them today as Zappos. And Zappos built their business on free shipping. They are one of the first companies to use free shipping. But they also created the e-commerce experience that we know today. Because the challenge that consumers had wasn't about price, lowering the price of the shoes might have made them cheaper, but it didn't solve the uncertainty. The uncertainty was about whether I'm going to like the thing or not. And people didn't want to have to pay to find it out. Zappos didn't use freemium, free shipping didn't make it any cheaper to get the shoes themselves, all that it did was it lowered the upfront cost. It made it easier for people to experience whether they like something or not. And we talked about what those costs could be already, right? When we talked about the cost of switching from one thing another, we talked about time, money, effort and energy. And so this strategy of shrinking the upfront cost is all about these different dimensions. It's not just about making something free, it's about lowering that upfront barrier to figuring out whether you'll like something or not, right? Think about buying a car for example, imagine you had to pay 30 or $40,000 upfront before you even knew whether you like the car not, right? That would be the online shopping version of buying a car. Well, no one will buy a new car, right? Because you want to sit in the new car before you buy it. You want to see whether you like it or not. Well, that's exactly what test-drives do. Test-drives don't make the car itself any cheaper, the car itself so costs whatever it costs, but it makes it cheaper for the person to experience the value of that car. It lowers that upfront wall or that upfront barrier to experience. And we can think about test-drives and all sorts of situations, go to the Apple Store for example. Apple doesn't ask you to pay upfront for the new phone, they let you check it out or play with the computer to figure out whether you like it or not. It doesn't make the computer itself any cheaper, but it lowers the barrier to figuring out whether you like it. Think about renting. Imagine you're renting skis, for example, if you couldn't rent skis, most was probably never tried skiing. Have you ever tried a sport before an activity and you tell me it's going to cost $1,000 to buy the equipment, why would ever do that, right? But if you can rent the equipment first, you can get a chance to see whether you like it, figure out whether you like it and then be willing to pay the money. Think about the same thing with month-to-month contracts, right? If you're not sure whether something's going to work, you don't want to commit to a whole year. That month-to-month contract lowers the cost, it still cost the same amount per month potentially even more per month. But because you have to pay less upfront, it lowers the cost to figure out whether you like it, same with smaller sizes, right? If a Tide only came in a family size container Greek yogurt only came in a huge family size, you might not buy it because you don't know whether you'd like it but having a smaller size allows you to figure out whether it's good or not. I think a good way to think about lowering that upfront cost is actually think about buying ice cream. Think about the last time you went to the supermarket and you bought ice cream. You probably bought one of a small number of flavors. You bought the same flavor that you always do. You bought vanilla, you bought chocolate, you bought mint chocolate chip, maybe bought butter pecan, you bought whatever flavor you always do. Contrast that the whole with the last time you went to an ice cream parlor. I bet the last time you went to an ice cream parlor, you picked something more unusual, something more different. A flavor you had maybe never bought before. Pistachios, cookies and cream, maybe milk chocolate hazelnut or whatever they had particularly on that day. Are you just a more interesting person when you eat out, or are you more interesting person when you go to that ice cream parlor though than you do when you go to the grocery store? No, are you more daring, more willing to change, more willing to do something new? No, not really. It's just that what the ice cream parlor did is they lower that upfront cost, because they give out samples, right? They allow you to taste what those flavors are, and so because you know what it's like, you're much more willing to try something new and end up buying something new. And so the same thing goes for change more broadly. Want people to change, want people switch from their usual behavior, choice, action, want flavor of ice cream? Well, lower that upfront cost, right? Lower that barrier to trial. Be an ice cream parlor, not a supermarket.
