This article is excerpted from Scaling Innovation: How Smart Companies Architect Profitable Growth.
For the startup company seeking to scale innovation, the first question to answer is a basic one: How can we attract customers to try our product? After all, you can’t acquire customers without first sparking their interest in your offering.
One of the most effective answers to this question is the lure of free. Merchants have long known that a free offer can attract curious individuals and convert them into customers. Social scientists have used experiments to demonstrate and quantify this power.
Behavioral economist Dan Ariely performed a simple experiment that highlights the lure of free. His team offered students a choice between a Lindt truffle, priced at 26 cents, and a Hershey’s Kiss, priced at one cent. The result was an evenly split, with half choosing the truffle and half the Kiss.
In a second trial, the team lowered each price by a penny, making the truffle 25 cents and the Kiss free. Now 90% chose the Kiss. The relative prices remained the same, but the introduction of the word “free” drastically shifted customer preference. The experiment demonstrated the powerful impact of free in shaping customer demand.
Beyond the Basics: Insights, Tips, and Tricks About the Lure of Free
To take full advantage of the lure of free, let’s consider some advanced insights, tips, and tricks you may find useful when crafting and implementing an effective free offer that can help you achieve scale.
Measure the activity rate of freemium customers. The most important KPI to track for freemium users is their level of activity and engagement. Those with high engagement over a period of time—usually the top 10% to 20% of customers based on usage—are the ones you should prioritize and focus on converting.
When possible, default to the best free trial experience
Perhaps, like many companies, you have two or more versions of your products—for example, good, better, and best. Which version should you use for a free trial offering? When possible, give your customers the best product for your trial experience. Loss aversion kicks in, encouraging more people to select the best version when the time comes to convert to paid.
Don’t obsess over whether customers will game the system
Some of your customers will find a way to squeeze unintended value out of free offers. Don’t go crazy about trying to stop them. Instead, focus your energy on minimizing the cost of serving each customer and— even more importantly—converting free users to paid customers.
Gamify to increase engagement in free
Dropbox provided additional “free storage” (the primary metric by which it fences free products) when customers engaged with the product in designated ways—for example, by filling out checklists, by referring others into the system, and by being active in their user community by posting comments. Incentivizing engagement by gamifying such activities will help turn casual users into committed customers.
Always remember that attaching a price to a product makes it more attractive in the eyes of customers
The price often serves as a signal of value to customers, especially when the product or service in question is one that most customers lack the expertise to judge or evaluate themselves. An experiment by Stanford marketing professor Baba Shiv demonstrated this in dramatic fashion. Shiv had a group of subjects sample red wines from five different bottles, each of which was tagged with a price ranging from a low of $5 to a high of $90. The subjects believed they were tasting five different Cabernet Sauvignons, but in fact they were tasting just three. One wine was offered in two bottles: one bearing the real price of $5, the other bearing a fake price of $45; another wine was served in two bottles: one with the real price of $90, the other with a fake price of $10. (The third wine was served in a bottle showing its real price of $35.)
The results: Not only did the experimental subjects claim that the wines labeled with more expensive prices tasted better, but functional MRI scans showed that, when tasting the supposedly higher-priced wines, their brains exhibited higher levels of neural activity in the medial orbitofrontal cortex, the region where pleasure is experienced. In effect, raising the apparent price of the wine actually made the wine “better.” Remember this experiment when developing your fencing strategy, and make sure you are not inadvertently minimizing the value of your product or service in the eyes of your customers.
Don’t overdo free
There are many ways to boost customer acquisition, from cleverly designed pricing models to tailored promotional offers. [These are explored in other chapters in the book.] Don’t become overly addicted to the lure of free, powerful as it can be. To scale innovation, you need a holistic acquisition strategy that is well-balanced with acquisition, monetization, and retention.
How This Strategy Avoids the Single-Engine Trap
Free is powerful—but dangerous when used in isolation. The strategies described in this chapter help avoid the Disruptor trap of chasing customer acquisition without a path to monetization, as well as the Community Builder trap of giving too much away to please early users. When designed with a clear migration path from free to paid, it fuels both market share (by lowering the barrier to try) and wallet share (by converting to meaningful revenue over time).
That’s what Profitable Growth Architects do—they use “free” not as a giveaway but as a gateway.
Excerpted with permission from the publisher, Wiley, from Scaling Innovation: How Smart Companies Architect Profitable Growth by Madhavan Ramanujam and Eddie Hartman. Copyright © 2025 by Simon, Kucher, & Partners Strategy and Marketing Consultants, LLC. All rights reserved. This book is available wherever books and eBooks are sold.
MADHAVAN RAMANUJAM is Co-founder and General Partner at 49 Palms Ventures, an early-stage venture firm that invests in and helps technology companies monetize and scale. He is one of the world’s leading experts on monetization, pricing, and growth strategy. Previously a Managing Partner at Simon-Kucher, Ramanujam has advised more than 250 companies—including over 30 unicorns—on launching and monetizing products and services, generating billions in incremental revenue and profit. A recognized thought leader and sought-after speaker, he is also the co-author of the bestselling Monetizing Innovation, which introduced proven frameworks for designing products around price to maximize market success.
EDDIE HARTMAN is a Partner and Board Member at global consultancy Simon-Kucher, where he advises high-growth startups, unicorns, and major B2B enterprises on monetization, pricing, and go-to-market strategy. A seasoned entrepreneur, Hartman co-founded LegalZoom and has launched multiple companies with a combined valuation of more than $3 billion. He specializes in helping companies achieve recurring revenue excellence and sustainable expansion. He has worked extensively with SaaS and multi-sided platform businesses, professional services firms—including AMLAW 100 members—and organizations seeking to align pricing with long-term growth. A frequent keynote speaker and lecturer at Stanford, Yale, and Harvard, Hartman also served as internal editor of the previous bestselling book Monetizing Innovation. He holds degrees from Yale and Wharton, is a licensed attorney, and serves on the Hague Institute on International Law’s Task Force on Justice.
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