Priceonomics

In what is probably a marketing stunt (or a stunning display of wrong-headedness), an Australian store has decided to charge people $5 to enter its store. If the visitors buy something, however, they receive a $5 credit on their bill.

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Now at this store, window shopping is no longer free. The store argues it made this change because too many customers were coming in to check out a products and then going home and buying them on the internet. It’s providing a service to these free-riders, so it should charge for it, right?

This might be the first retail store to grapple with a question that perplexes software entrepreneurs - should you charge for access to your product up front, or let everyone try it for free and only charge a subsegment of users that need advanced features? This later approach is called the “Freemium” business model. 

Whether going Freemium is the right answer can be quantified. More people will try out your product if it’s free than if they have to pay right away. So, if you have a decent ability to convert free users into paying customers, you could end up making more money than if you charged everyone.

So, this store that’s charging for window shopping is boldly abandoning freemium and moving to a paid model because the data suggested it was a good move, right? Intuitively, we know that’s not the case. Why not? Bill Gurley of Benchmark Capital has written extensively about the freemium business model: here, here, and here.

Gurley’s central point elucidates why its a bad idea for a retail store to start charging people to walk in the door:

The key question for anyone in business is, “Can someone do what you do for free?”.  If the answer is “yes” you have a problem.

So yeah, every other retail store on the planet can let people window shop for free. In fact, they do.

And the results of this initiative to start charging customers to enter the store? Four people have paid the $5 fee in the first two months.

This post was written by Rohin Dhar. He likes free things. Follow him on Twitter here or Google.



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