VIDEO PROFESSOR: A LESSON IN BASIC ECONOMICS

For several years I have noticed the TV ads for Video Professor, a company that gives away free CD's that will teach you how to operate popular computer programs such as Microsoft Excel and Word.  Recently they added a CD to tell you all you need to know about eBay.  I can only assume that their products are effective and well accepted by their customers because they continue to advertise. Businesses do not generally persevere in spending money on a product that is not returning a profit.  My concern is that they advertise the product as being "free", when they charge a shipping and handling fee of up to $6.95.

I used to own a business that duplicated computer diskettes for manufactures of computers and software developers, so I know something about the business.  I eventually sold the business to a minority partner who is now operating the business and duplicating CDs for the same basic customer base, but on a low-volume basis. 

 There are two ways of producing a CD.  The low volume method is to make copies on a computer system that is designed to make multiple copies.  The high volume method is to make what is called a glass master on the CD and then press copies in a similar way that vinyl records used to be made. My ex-partner was gracious to provide me with some costs for making CDs so that I could approximate the cost of a "free CD" that Video Professor is giving away.  Since I am using the costs of production for a low volume situation, the costs for a high volume production process would be somewhat lower in some cases.

 The basic cost for a blank CD is about $.30, a printed label costs about $.10.  A mailing envelope costs about $.20 and first class mailing is roughly $.63.  The cost of any additional printed material would have to be added, but the cost of postage could be substantially reduced by bulk mail discounts offered by the USPS.  The highest cost we could come up with for the entire operation of mailing you a "free" CD is a maximum of $2.00.  If you are paying the maximum shipping and handling fee of $6.95, this leaves a gross profit to Video Professor to cover operating expenses and provide a profit.  Not bad for a product that you are giving away "free". 

 Again, I have no argument with the Video Professor product.  It is quite brilliant to give something away for "free" and make a nice profit.  It just proves the old adage: there is no such thing as a free lunch. In addition to the profit margin, they also have your name and address to advertise to in the future, or perhaps to sell to other marketing firms.

 We see this marketing approach again and again.  Periodically local car dealers will advertise something like this:  Buy a New Ford Expedition and get a new Ford F 150 Pickup Truck for free.  They don't discuss the price that you will be paying for the Expedition, or the features included on the F 150, or the interest rate if you finance the purchase.  I worked for a large industrial supply company that would add a $.50 insurance charge to each invoice with the guarantee that if your shipment did not arrive, we would replace it immediately at no cost to you.  This program made the firm hundreds of thousands of dollars each year.  In the unlikely event that a shipment did not reach the customer, we would immediately replace it and file a claim with the shipper so we could be reimbursed. 

 Remember the Latin phrase: caveat emptor, let the buyer beware.  There is no free lunch; we pay for everything, one way or another.