… by Walt Ribeiro
Disclosure: I am not affiliated with BlogWorld or Southwest.
Back in 2009 I was asked to speak at BlogWorld, and I was immediately excited to present to other artists and entrepreneurs about how they can apply what I learned from growing my online presence. BlogWorld has a rich and well-informed online community, so I was speaking to a savvy and interested audience – a presenters dream.
But I live in New York City, and BlogWorld was in Las Vegas. So Southwest offered vouchers to presenters, and although I was unsure about flying a new airline, I wasn’t going to say no. As Southwest would find out, they made their money back ten-fold.
Bloggers – what Blogworld has that no other conference has:
Bloggers read a lot of blogs, podcaster listen to a lot of podcasters. And ultimately, the attendees at Blogworld have a collective audience of millions of followers.
If I promote a product in a newspaper, it gets seen by 20,000 people, and then the next day it’s as if it never existed. But if I promote my company through Blogworld, then it lives online – forever. That, and the fact that Bloggers will share, talk, tweet, blog, facebook, and praise the company to their community is huge, and creates a sharing ripple effect that traditional media can’t replicate.
Case in point – not only has Southwest made back their money on my purchases alone, but I tweeted about it and documented the entire experience for my followers.
Loss Leaders create new customers:
You can taste test a beer at a bar before you buy it, and you can testdrive a car before purchasing. But then how come you can’t test ride a plane? Or a train ride?
Loss leaders have been around since commerce has been around. Freemium models are a type of loss leader, where companies give intro features in hopes that you become a paying member for ‘pro’ features. Internships are loss leaders where employees hope to get their foot in the door and become a part of the full-time staff.
So when Southwest was offering me a free flight, it surely was an expensive loss leader. But the upside has been much greater – not only do I now use them exclusively since that day going forward, but I even became a credit card member of theirs.
So what does this mean? Should airlines give away free tickets to new customers? Wouldn’t be a bad idea. It’s the only way I would have ever tried the product before paying. But one thing is for sure, you have to spend money before you make money – the difference is in where you spend that money, and in today’s online world it’s now cheaper, more viral, more fun, and trackable. That’s the power of social media’s biggest conference and of social media itself.
BlogWorld contributor Walt Ribeiro is founder of For Orchestra where he arranges pop and rock songs for orchestra every week – from Lady Gaga, Slayer, and more. He frequents many social media, tech, and music conferences, and spoke at BlogWorld in 2009 and 2010.
Walt, my comment below might sound negative, but it isn’t. The above view is just too simplistic to serve as a guiding principle or best practice for other large brands. Fundamentally, the idea that giving away more free product drives more sales than the cost of the free product is inherently flawed.
I don’t meant to geek out too much on the math and science behind these types of campaigns, but do want to provide some context.
For campaigns that are acquisition focused (vs just brand or positioning focused), companies need to look at the total ownership cost (TCO), customer acquisition cost (TAC) and lifetime value (LTV) of customers to assess if a given program falls between TAC and LTV, especially if LTV is rear-loaded.
Yes, Southwest made their money back on you as soon as you flew more than twice. But if they offered it to 1000 non customers, are they guaranteed to generate 2,000 flights?
Fundamentally they need the LTV to be higher than TCO + TAC. Ideally with an ROI within a reasonable window (6-18 months), otherwise the net present value of future earnings (NPV) is just too low.
I don’t mean to rag on Walt at all (at all!), but if large brands read articles like this they’ll either do something similar and likely fail, or discount the space when really social media and digital marketing is actually one of the easiest ways (outside of direct mail and eCRM) to generate rapid ROI.
Hey Jeremy – I like your points a lot. You definitely seem to understand economics more than I do. However, I was stressing “how can a new airline get new customers”? “How can McDonald’s get people to try their new french fries”? I don’t think I fall alone in the idea that this worked on me – I’m sure it’s worked for Southwest before. But the Blogworld community creates marketing on steroids – heavily because of the social media factor which creates free publicity and traffic and branding.
For the $400 round trip, they all combined for hundreds of linkbacks throughout people at Blogworld talking about it, and even pictures of me documenting my whole trip, and then even talking about it here. That’s not too shabby of an investment.I really don’t think it would be a bad position for brands to give out free product to ONLY new customers. I’d imagine lifetime members will easily eclipse any “freeloaders”. It’s not only about the product being given away, it’s also about bringing people into the entire ecosystem of possible revenue. Like how Amazon basically gave away Lady Gaga ‘Born This Way’ album, so they can get people to use their cloud service, and start buying books, bicycles, furniture, movies, and more. How else would people have the incentive to try these things?
I totally understand your point. And I’m glad we’re discussing this (isn’t that what it’s about?!)
Question: how do you come to the fact that a 6-18 month ROI is the only reasonable window? How does time alter the success of a campaign? Selling $5,000 of airline tickets and brand impressions within 6 months is just as effective as selling it in 6 years. No? It’s still the same outcome.
This’d be far better as a podcast debate. Sigh. Stupid busy to be doing this, but always happy to chatter about marketing at scale.
All marketing comes out of budgets. Marketers are, by nature, numbers nuts. This is mostly because any new program needs to take budget from other programs, so they need to figure out exactly the right amount to take from TV ads and to move to giving away free tickets, for example. Do you do it for 10 people? 100? 1000?
So those numbers need quantified.
Second, ROI is critical, and is typically required in the same fiscal year. Returns that come later mean the company spent more that year than they made back from marketing which typically means (you guessed it), smaller marketing budgets the year after.
The reality is that given a choice between generating 5x return in 5 years, and generating 1.5x return in 1 year, almost every company will choose the latter. This is partially due to timing/CYA, but mostly because actually 1.5x in 1 year IS better economically than 5x in 5 years: if you get 1.5x, every year, after 5 years (compounded) you net out at about 7.5x over the 5 years.
Also, as far as social, it’s not free for them to give away free tickets or do these types of campaigns. My guess would be the campaign was, on top of tickets, a 250K campaign. So if they gave away 1000 tickets at an internal cost of 250$/ticket in actual lost revenue, they had to recoup 500K.
The only way to recoup that in actual earnings would be if every blogger bought 3 tickets the first year. Or generated 3 tickets worth of sales that could not have otherwise been derived.
As far as acquisition marketing (what you’re talking about), it’s always a balance between value, motivation and cost. For example, if a QSR (quick service restaurant) like Chick-Fil-A (chosen cause they aren’t a client) wants to do new customer marketing, by far the cheapest and most effective is Direct Mail.
In terms of what you offer customers, it might seem simple to say that free is most motivational, but it’s not that simple. Again, marketers are math geeks (yay Excel!), so it goes something like this:
Scenario A: Give 100 people 100% free combo: person comes in, eats, returns if they like it.
Scenario B: Give 100 people BOGO (buy one get one free) coupons for a sandwich. Two people come in, both buy sandwich and a drink. They come back if they like it.
In Scenario A, only 10% more people will redeem the offer. And revenue is only generated on the next visit, which for many QSRs is only once a quarter. And, given net cost vs franchise costs, it would take 3 trips to make this back. So Scenario A only pays back after roughly a year.
In Scenario B, while 10% less people redeem, each visit is actually 1.5 people (not everyone redeems properly). So more people come in the door. In addition, they actually pay for their drinks, and sometimes a few extra items, so typically the QSR will only “lose” a buck. Now, given that two people came in, if they liked it, the QSR will make their money back in 4-6 weeks.
Versus a year.
Yes, free is great. But free is best in very, very, very specific situations. Either make it a smaller product (why beauty companies give lots of samples and gift bundles away), or do it because you are trying to kneecap a competitor (Amazon example above) or do it to support a marketing strategy (we did Free Taco Week for Taco Bell here in Canada to support negation of the Beef Quality lawsuit, for example).
Sorry to monopolize the discussion, but the whole adjunct that “give me something free and I’ll broadcast it to 20,000 people and so you’ll make your money back every time” thing may or may not be true. What isn’t true is that it’s the best way to reallocate resources on shrinking marketing budgets.
Again, far better to do this as a convo than a long rant, but figured context is better. After all, if giving free things away was the best marketing, every company would do it!
Perhaps a 50% off for new customers deems profitable for a campaign., Although I’d imagine 50% off is not the same as 2-for-1. 2-for-1 certainly seems like the better loss leader – and shows some investment in new customers, therefore carving out the freeloaders.
i love your points, really.
I’m too busy to type today too! i’d podcast debate this in 2 seconds. haha
If you want, email me (firstname.lastname@example.org) and we can do it next week. This week is useless is all!
If you guys podcast debate this you need to send the link to me so I can add to the post 🙂
Thanks for the blog post and for choosing Southwest! Hope to see you at BWE in LA!
Its a great story and it motivates an individual how blogging can bring in bigger changes.
The following tips tips are fantastic. Which i enjoy brainstorming about catchy subject lines. Often it can be challenging, but we need to do might know about want to do – please our readers!