Beware the free giveaway: They often reward the wrong customers

COMMENT:

Conventional wisdom would have you believe that delighting customers is a sure way to win their hearts.

Based on that logic, the recent decision by BP to giveaway free fuel at two service stations for an hour and McDonald's today offering 50,000 free cheeseburgers should be a foolproof way to gain undying love of consumers.

However, the theory doesn't always match up to the customer behaviour we see in the real world.

As far back as 1995, a Harvard Business Review study showed that rather than promoting brand loyalty, freebies were creating a segment of chronic shoppers, who routinely hunt for the best bargains around town.

In most cases, there's nothing to preclude the consumer from coming in for the free item and then not returning in the future. In fact, these are the exact customers that businesses would do best to avoid. They're not driven by loyalty as much as the opportunity to get something without paying for it.

A separate HBR study published in 2010 found that companies interested in establishing strong relationships with repeat customers should instead focus on reducing the effort customers must make in order to use the product or service. The study showed this would increase the likelihood of customers returning to the company, increase the amount they spend there and ultimately lead to more positive reviews.

Based on these findings, freebies only work well when they operate to show customers the supreme quality of the service offered by the business. The best examples of this today would be Spotify or Netflix, which offer a free month to customers who sign up to their services. Once customers have experienced that first free month, they come to appreciate an effortless, digital experience worth paying for.

In many ways, the freebies offered by McDonald's and BP do the exact opposite of showing customers a good service experience. Instead of convenience, customers find long queues and slow service in these examples – the exact issues that often lead to customers turning off petrol stations and fast-food restaurants.

That said, the point of these initiatives is clearly not to bring in repeat customers but rather to get these brands noticed – and in this regard, they've definitely succeeded.

The estimated $70,000 (based on retail cost) that BP spent on giving away free petrol is well worth the free media exposure the brand was given as media across the country picked up the story. The same goes for McDonald's, which will certainly welcome the interest in the brand – and maybe even benefit from customers who happen to feel like a burger after reading about the freebie at work all day.

This is really the tightrope businesses need to walk if they engage in large-scale giveaways. They need to decide whether the media exposure is worth rewarding customers often interested in little beyond the freebie. Get the balance wrong and all you might end up with is a long queue that annoys the people who were actually willing to spend money at your establishment.