How to offer free version – Google Fiber Pricing

 

Google is getting into ISP business with its Google fiber offering. There are several relevant questions about this attempt by a business whose core competence is in organizing world’s information.  There are questions about the pricing strategy, cost structure and whether they have the operational wherewithal to pull this off against others whose core competence is in running a network.

Here let us look at one specific topic – their Free version. Some will see this as significant evidence supporting freemium model. It is anything but a case for freemium. Let us take a closer look at this free version.

The service is available in one city that is likely not the one with hunger for high-speed internet. This in essence is a test market and what they offer here has nothing to do with what they will eventually offer in other markets.

The Free internet is technically not free. Customers either pay $300 upfront or pay $25 a month.

The $300 price is labeled as construction fee which is waived for other premium versions. That is a clever presentation for two reasons. First, the $300 is a high upfront cost for any customer and even more so for someone attracted to free. Right there it limits the most price sensitive customers from opting for this. Second, by explicitly waiving this cost for other two versions, those who choose Free are made to think they are losing out on this value.  Pain from this foregone value will push most to opt for the higher priced versions.

Free is also not free forever, customers who pay the upfront fee will get free service for 7 years. This limits the liability for Google and sets clear expectation among customers. It is likely that most customers who would choose this option do not stay in the same house for 7 years.  If they did stay, they are less likely to switch to another ISP because of sunk cost bias. In essence Google captured upfront value and locked away these customers for up to 7 years, making them unavailable to others.

There is indeed an option to pay-off the $300 fee over twelve months which will help reduce the barrier for some. Prospect theory suggests that paying $25 a month for twelve months will cause more pain than single payment of $300. So even fewer customers are likely to chose the installment option.

Netting it out, this free is not the run of the mill Chris Anderson school of free. There is a well defined segmentation strategy with  carefully crafted free used as a tactic to support it.

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