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Free Products are Toast

By: Steve Johnson

3/10/2008 - 13 Comments

In an inflationary economy, many things change.  Low margin products disappear as inflation drives up interest rates making it more profitable to invest money then using it to produce low profit products.

The only products that are worth investing cash into are high margin products that produce more profits than would be produced if the money was put in the bank. This is much different from the previous decade of low inflation, low interest rates and easy access to money.

Some argue that ‘free’ products are the future of business, as ‘free’ has become a very effective marketing engine to draw in customers. 

Reference Article: Free! Why $0.00 Is the Future of Business

But, the ‘free’ marketing trick only works in an economy of easy money supported by low interest rates, low profit margins and lots of competitors.  An inflationary economy does not support any of these. 

Only High Profit Products will Survive

Over the next few years inflation will change the US economy.  The last time the US economy had this much inflation to deal with was between 1971 and 1982. At which triggered wage and price freezes across the country by President Nixon in 1971 – when inflation was only 4.7 percent.  Despite the government efforts, inflation continued to rise until 1979, when it peaked at 13.3 percent.

In a purely recessionary economy, marketing departments grow to increase sales and revenue. But, don't be fooled, inflation is climbing very fast. In an inflationary economy, marketing departments shrink and accounting departments grow, as the daily management of money becomes more important than selling more products. This is the time to increase your cash reserves and reduce investments in low margin products.

This is not to say that some companies may offer ‘free’ product samples. But this trend will likely disappear as the need to attract customers becomes less of a concern when there are fewer competitors in the market. Customers will be plentiful, as the recession will drive your competitors our of business.

These ideas are important to start thinking about today, so that a business can be in the best position to survive the coming inflationary economy.

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