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» The Ornery American Forum » General Comments » The ethics of something for nothing

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Author Topic: The ethics of something for nothing
scifibum
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The Internet has given new life to an old business model:

Offer someone something "free." Figure out how to make money on it.

There are all kinds of degrees and variations on this business model. A few examples, roughly in order of decreasing vileness (IMO, and please note I find some of these things not vile at all):

-People can have a free bit of useful software and in return their computer is invaded with ads and even their Internet browsing is interfered with to direct them to particular sites.

-Giving stuff away in return for putting email addresses on a mailing list.

-"Free" products - just pay shipping & handling

-Giving stuff away in return for people visiting your site and being exposed to ads

-People can get something free after rebate - and you're counting on some of the people to forget to follow through on the rebate.

-(possibly the most common) free forum/entertainment/tech support supported by banner or text ads.

-The software is free, the support costs money.

There are all kinds of variations and combinations on the above.

With that long and varied list perhaps there's no obvious target for answers to the following question, but I figure people will chime in anyway.

What are the ethics here? In some cases, the deal is obviously shady. People don't know what they are signing up for. In other cases, the vast majority of people receive nothing of value, but some value is being provided - like in the cases of giveaways or sweepstakes.

I had an idea for an ad-supported site that would provide no product of any kind - just a chance to win something. My specific version of this idea might be a new, but more likely it's been done a thousand times over the past 5 (maybe 10) years. Certainly the general idea has been tried many many times. I don't really hope to make money this way, but it's something I might spend a couple of hours checking the math on...just to see.

Is it unethical to do this? It's a little like gambling except that people only gamble with a small investment of their time.

I wonder if people are savvy to this kind of thing. Are they smart enough that it's not really exploiting irrational expectations? I don't want to sucker anyone, but I also don't want to assume that people place no value on a "chance," or that such value judgments are invalid.

On the other hand, if the "players" aren't being exploited, how about the advertisers? Sometimes I think the majority of Internet advertising dollars are being spent by suckers who expect ad impressions or clicks to translate into dollars in some concrete fashion.

Beyond the giveaway concept, which is old hat anyway...

Is a loss leader or any kind of "something for nothing" foot in the door shady in ethical terms? Does the discrete interaction with a customer have to be mutually beneficial in order for the business relationship to be ethical? I'm wondering if it does. Certainly I don't really approve of introductory pricing, "free" phones, and other ways of obscuring the actual cost of services. But I'm not sure if that's just a personal preference for simplicity, or a real problem.

Since I'm already way too far into this rambling and incoherent post, I'll just keep going. I think investors sometimes lose out due to the "something for nothing" business practices. MBAs come up with these business plans where they get a certain number of customers, some amount of "traction" in a market, at a loss, with profits coming later. Get a foot in the door and THEN we'll figure out how to make some money. Problem being that profits don't always come later, and you end up with corporate bankruptcy and millions or billions of dollars lost.

I'm wondering if the only rational and ethical way to do business is to just pay what it costs. Bargain hunters and smart introductory offer-exploiters will lose out, but maybe transparency and stability in markets and pricing will provide enough benefit to offset that.

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Jesse
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The "market share" mentality has always baffled me.

[ December 31, 2007, 08:57 PM: Message edited by: Jesse ]

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Carlotta
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I was reading some economics book the other day, and it was kind of talking about this same thing. The example it used was a scratch-and-dent sale. Some stores will actually scratch their own merchandise to be able to have such a sale. (This is true, I used to work selling copiers and I knew a guy who, when he couldn't make the sale any other way, would sell "floor models" for a "discounted" price, but really they would just be new models taken out of the box.) The idea is that the store has to put a hurdle in the way for someone to get a lower price. Suppose 80% of people would pay full price for something, and 10% would pay only 75% of the regular price (which is still a 25% profit for the company over their cost) - we'll leave 10% who wouldn't ever buy the product at all. To maximize profit, the store has to figure out a way to get the 80% of full-price payers to buy at the maximum price they're willing to pay, while still selling to the 10% of bargain hunters at the price they are willing to pay, rather than lose out on those sales altogether, since they are still somewhat profitable. Having sales is a way to do this, because the bargain hunters have to jump hurdles that the full-pricers wouldn't be willing to pay, like showing up on a particular day to purchase the product. So I don't think you could really figure out how to "pay what it costs". Also, there are some long term benefits. For example stores compete with one another to have the best holiday deals, not because they'll make any money on that particular sale, but because people generally prefer to shop at a store whose layout they are familiar with. If the stores can get more people to get in the habit of coming to their store rather than their competitor, the numbers will play out throughout the year. Yes, there's risk, but that's where the profit comes in too.

I think this may have been rambling enough to rival scifibum's post. I need a nap.

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scifibum
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Carlotta, thanks for your post. Although it was a long paragraph it didn't seem to ramble on much to me.

I think that scratch and dent sales, or other efforts to maximize profit and market share where the company still makes a profit on each sale are OK - I think using creative techniques like that probably help markets thrive.

Loss leaders still seem questionable to me. Sure they are designed to lead to long term profit...and this would seem to have worked out as intended in the past, judging by how often they are used, even by long-established businesses. However, the discrete transaction is one that doesn't make economic sense. A savvy or motivated bargain shopper can get something for less than it really costs, and not be influenced into spending money that they wouldn't have anyway. The side effect is that for the company to maintain a profit, they have to charge a little bit more for everything else. So the loss leaders can potentially drive up costs for other things.

As long as individual consumers get to make choices in what they buy and what they'll pay for it, I'm not hugely concerned. But I do wonder if our economy is better for it.

A bigger concern, for me, is entire business models that operate at a loss for a period of time, with the plan (or hope?) that they can "leverage" their customer base toward future profits (please excuse the corpspeak). I'm not sure whether this is an acceptable form of risk taking, stupid, or immoral. I think that sometimes the people behind these plans are just earning out their compensation packages without any real faith that they are providing a product or service that is both valuable and sustainable. Actually, I think that might be extremely common.

So that's why I wonder if it would be better if we somehow tried harder to only pursue business that is profitable and sustainable in the here and now. I don't know enough about economics to know quite what the ramifications would be. [Frown]

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Carlotta
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Oh, good, glad you were able to understand it. I was half asleep at the time.

I may be biased here since there are several items that I only purchase when they are loss leaders. And then I stock up. Strawberries for 99 cents a box? I buy a bunch and freeze them. Grocery stores probably lose money on me many times.

I have a small business, well almost just a hobby that makes money, but I'm learning business principles in practice from running and growing it. I cook meals for people, freeze them, and charge them about double the cost of the actual food. If someone was interested but not sure, I would offer them a free meal to sample my cooking. I would lose about $3 on that, and I wouldn't attach any strings to this offer, but my risk would still be low because I take the time to get to know each of my customers personally. If I had a customer who was routinely causing me to lose money, I would just stop sending them the weekly order forms. Large businesses don't do this because they don't spend the time to create a personal relationship with the customer. This works to the bargain shopper's benefit when they resort to loss leader sales to try to draw in customers. But it can also work to the shoppers' disadvantage when they can't negotiate as they could at smaller establishments. A chain grocery store is not likely to lower their price for me on strawberries just because I want to buy 10 lbs of them - but a stall at the farmers' market would.

I'm going to take the opposing side here and say that they're just two different and equally valid business models. One gives up the responsibility of personal relationships and then to maintain a steady flow of new customers has to have gimmicky sales. The other has no loopholes for bargain hunters to take advantage of, but has to stay smaller in order to keep the personal relationships that keep their customers coming in. I'd be more than happy to hear you argue with me though since it is very possible that I am biased as one of those bargain shoppers!

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Richard Dey
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Venture capitalism, even like the Adventure companies of the 17th century, are inherently immoral but not inherently unethical. And it was men of such ilk who made numerous corrections in the Age of Enlightenment to the models in operation at that time, Smith being a good example.

What is unethical, to my way of thinking, is the failure of vendors to state clearly the implied risk of caveat emptor. What is unethical is to rely on a battery of lawyers to protect those offering products from calculated risk.

I think the real-estate marketeers were unethical in offering the 'products' that they did which has bankrupted hundreds of thousands in the present market crash. It had to fall sometime, but the warnings were not there.

Notwithstanding, caveat emptor is something that schools should be emphasizing, and they are not. Therefore, schools are in part responsible.

Vendors, however, are not responsible for the greed of their willing clientel, and the buyer or user runs his own risks. If he's paying 18% interest on short-term credit, he even becomes culpable.

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LoneSnark
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quote:
Loss leaders still seem questionable to me. Sure they are designed to lead to long term profit...and this would seem to have worked out as intended in the past, judging by how often they are used, even by long-established businesses. However, the discrete transaction is one that doesn't make economic sense.
Doesn't it? Well, let us pick apart a retail store to see what is profitable.

Profits are sales minus costs. Each item sold had to be purchased from a factory, stocked by a worker, and checked out by a worker; these are variable costs. But the store has more costs than these; it also has vast fixed costs involved in building and maintaining the physical store, paying to light, heat, and cool the store, and paying managers to manage it. All of these costs are fixed: the store owner must pay them whether he sells one item or many thousands.

Since loss-leader products are a form of advertising expense then what we are asking here is whether or not advertising makes since from everyone's point-of-view. Well, if giving away a million dollars brings in many more customers then these fixed costs will be shared among a far larger customer base. Instead of $2 of every item sold going towards fixed costs, with double the customers we can get away with only putting $1 of every item towards fixed costs. If the advertising bill comes up to less than $1 for every item sold then it was a good deal for everyone; even if prices remained the same the owner enjoyed higher profits.

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