Can Your Business Win Aganist Ad-Sponsored Competitors?

When a business gives away its products for free and sustains itself through advertisements alone, how can rivals that charge for their products and services compete? This is one of the questions addressed in new research by Ramon Casadesus-Masanell, an associate professor at Harvard Business School, and Feng Zhu (pictured), an assistant professor at the Marshall School of Business at the University of Southern California. Through an email exchange, Casadesus-Masanell and Zhu discussed with me some of the concepts covered in their study "Strategies to Fight Ad-Sponsored Rivals."

RCM & FZ: Ad-sponsored products and services are increasingly prevalent in many industries. In addition to traditional media industries such as newspapers and television, today we can find many free products and services in many different industries such as online services (e.g., social networking sites such as Facebook, content sharing sites such as YouTube, email services such as Gmail and Hotmail, and online searches such as Google and Microsoft Bing), software applications (e.g., many of the iPhone applications), paper cups from FreePaperCups.com and free phone calls (e.g., Blyk).
While our research looks at ad-sponsored free products, it is important to note that there are many other forms of free products and services such as open source software, free trials and samples and free products due to cross subsidies (e.g., printer manufacturers may give away printers and make money from selling cartridges; Adobe gives away Adobe Readers for free in order to sell more copies of Adobe Professional). Finally, p2p networks distribute free content contributed by their users.

BNET: What options are available to a business when it starts losing money because of ad-sponsored rivals?

RCM & FZ: To compete effectively with ad-sponsored rivals, in addition to considering tactical adjustments such as changing prices, firms need to consider adjustments to their business models. Our research finds that firms frequently use four types of alternative business models: subscription-based model, ad-sponsored model, mixed model in which the incumbent offers a product that is both subscription-based and ad-sponsored and dual model in which the firm offers two products, one based on the ad-sponsored model and the other based on the mixed business model.

We find that the profit loss for not competing through different business models could be substantial. Moreover, our research suggests that incumbents should not attempt to be "all things to all people." Our model suggests that while in the absence of ad-sponsored competitors, it may make sense to compete through a "hybrid" business model; with competition, "pure" business models are more likely to be optimal.

Next week, the authors will discuss how the economic crisis has affected ad-sponsored companies and more recommendations for competing with ad-sponsored rivals.