Making Money From Free

Coinstar has figured it out. Has your business?

by Ric Merrifield

I have been following Coinstar for a really long time, in large part because the founder went to my high school (as did Bill Gates and TVs Batman Adam West for what it’s worth).

If you don’t know Coinstar, their model is pretty straightforward (Coinstar now also owns the video rental company Redbox by the way). You take all of your coins into a participating store, dump them all into a Coinstar machine and you get a voucher for the cash value (less a percentage fee they keep). Pretty good model for the participating stores, not just because they have people with money burning a hole in their pocket that are in their store, but also because the store can use the machine as it’s source of coin replacements so they don’t have to have the Brink’s truck stop by to re-supply them with coins (I am assuming that last part – it has to be true).

Sounds great?

It’s OK, but the fee they take is 7%, which is a pretty big chunk of change.

That hasn’t stopped me from using the machines, but it always leaves a bad taste in my mouth and I have heard other people grumble about that amount as well.

But now it’s free!!!!

As it should be.

Where’s the business model in free? That’s actually pretty easy when you look beyond the “boundaries” of the transaction between the consumer and Coinstar, which is something Alice.com did in their industry and I expect we will see a LOT more companies figuring this out in the short term.

Now when you cash in your coins, you can select the store you want to spend the money in. If you commit to spending your money at, say, Amazon, then of course amazon is willing to cover some or all of the “7%” fee the consumer has been paying. That’s almost as close as you can get to 1:1 marketing, and the odds of the consumer spending that money at amazon are really, really high. I will concede that there’s some speculation on my part about exactly how this rethinking of the fee structure works (and feel free to correct me if I am wrong) but when I saw this advertised last weekend in The New York Times, I smiled as big as the Cheshire Cat because it seemed so obvious that they had shifted who pays the fee.

There are a couple of fairly actionable themes emerging:

1) Look at the transaction. Look at the transaction between the business and the consumer and see if there’s some other way to get more predictability or even to get someone else to pay the fees. Groupon obviously figured out a way to get big blocks of revenues to local companies – very clever, and now Coinstar has figured out how to get someone other than the consumer to pay their fee. It’s somewhat like looking at something that’s two dimensional (consumer and merchant) and making it three dimensional. Think about the basic needs or goals of the merchan. Groupon figured out how to deliver big revenues before products and services are really purchased/delivered. Coinstar needed a fee, but realized that making the consumer pay it was a very limited way to think about it.

2) Ask how the transaction matters. Alice.com doesn’t make any money selling their products. Neither does Costco. And Swayable is a good example of a company that has re-defined what the transaction is. In all three cases the transaction is a necessary but secondary piece that gets them their profits. You have to pay to be a member of Costco and shop in their stores and that’s where the profits come from (the dues). Alice collects age, gender and zip code of the person buying stuff, and that data is hugely valuable to marketers and thus, that’s where they get their money. In the case of Swayable, the “transaction” is you giving your opinion on something, and because they, like Alice and Groupon collect age, gender, and zip code, that information is valuable to lots of people who can marry you opinion with non-personally identifiable information.

All of these companies are great at illustrating the simple point that a lot is changing.

P.S. Back to Batman Adam West – does anyone know who his famous brother is? He was a lot more famous 20 years ago, but is still a name people on the West coast recognize.

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Ric Merrifield is known at the “Business Scientist” at Microsoft Corporation in Redmond, WA and is the author of Rethink and the upcoming Surviving Business Earthquakes. He blogs about ways to rethink through getting out of what he calls “the ‘how’ trap”.