The Market Function of Piracy

In marketing the most effective way to introduce new products is the free sample. In 1978 Lever Brothers spent $15 million ($47.55 million in today’s currency) delivering a free sample of Signal Mouthwash to two-thirds of all US households. The strategy was a success and the product remained on the market well into the 1990s.

The significance of the free sample is product trial; it gets the product into consumers’ hands. If consumers use the sample and like it, they may go on to buy the product and buy it again and again, that is, become repeat purchasers; they may even spread the good word to others. When repeat purchasing and favorable word of mouth kick in, the product’s sales will experience a shift from slow to rapid growth and management will consider the product a success.

Free sampling is the best method of introducing new products, but it is also the most expensive. Not surprisingly, then, Forbes ASAP magazine[1] reports this alternative way to practice free sampling:

One security manager for a major manufacturer, who asked not to be identified, says she is sure some companies actually view being counterfeited as a boon to their efforts to build brand awareness. After all, she says, if some companies give away merchandise to expand market share, what's not to like about having someone else take on the expense of manufacturing and distributing the goods, as long as they’re high-quality copies?

Imitation is a universal trait of human behavior, ranging from the use of phrases and mannerisms of admired others to the reuse of hummable themes in music, recognizable images in paintings and well-known plots in literature and Disney movies. Imitation is a normal part of the competitive process in growth markets. As the sales of an innovative new product takes off, competitors enter the market with their own, often cheaper, versions.

If the innovative product is patented, competitors make minor design or functional changes to secure their own patents. Knock-offs are unauthorized, usually cheaper copies. And, of course, the innovative marketer often produces its own cheap version, sometimes called a fighting brand, to fend off the competition. Over time real prices in the product category decline and quality improves.

Knock-offs are pirated products. Because they are usually cheaper than the original, knock-offs tend to appeal to a more price-conscious segment of the market; that is, the buyers of pirated products are probably not legitimate prospects for the innovative new product, either because they cannot afford, or do not want to pay, the higher price. Message to the innovative marketer? Either drop the price of the new product or produce a cheaper version—or be the first to exploit a new technology, something the movie and recording industries chose not to do.[2] Many, including these two industries, would rather sue than practice good marketing.

One study found that users of pirated software sufficiently influenced—by word-of-mouth communication—eighty percent of the software’s prospects to buy the legal product and another described several scenarios in which piracy can help increase the sales of legal products.[3] The pirated product functions as a free sample that the innovator does not have to fund.

So what about free copies? How do you compete with free, to state the battle cry of the new Luddites who fear digital technology? It’s done all the time. One of the most dramatic recent instances of this was the strategy of science fiction writer Cory Doctorow who, over the course of three years, gave away 700,000 electronic copies of Down and Out in the Magic Kingdom. Sales of the hard copy went through six printings and surpassed his publisher’s expectations. Many of the downloaders, Doctorow said, did not buy the hard copy and probably would not have regardless, but the giveaway created considerable buzz and a significant minority did buy the hard copy. Compare the experience of the Mises Institute with Omnipotent Government.

Free—no matter where it comes from—can help sell.


1. “Faker’s Paradise,”April 5, 1999, 54.
2. See Ray Beckerman’s "How the RIAA Litigation Process Works" to read how the Recording Industry Association of America uses questionable legal tactics to sue teenagers and grandmothers instead of designing creative money-making uses of P2P file sharing.
3. Moshe Givon, Vijay Mahajan, and Eitan Muller, “Software Piracy: Estimation of Lost Sales and the Impact on Software Diffusion,” Journal of Marketing, 59:1 (January 1995), 29-37; Julio O. de Castro, David B. Balkin, and Dean A. Shepherd, “Knock-Off or Knockout?,” Business Strategy Review, Spring 2007, 28-32. Thanks to Gil Guillory on the Mises Scholars List for alerting me to the former study.

Cross posted on the Mises blog.

Describe, Don't Evaluate

“Superlatives belong to the marketplace,” says David Ogilvy, founder of the Ogilvy and Mather advertising agency, not in “serious advertisement; they lead readers to discount the realism of every claim.” The same could be said about praise given to others: superlatives should come from the recipient of the compliment.

What Ogilvy means is that describing what a product can do for the customer, that is, explaining its benefits, is the essential requirement of good advertising copy. Hyping a product with evaluative “s-t” words—best, greatest, most wonderful thing since sliced bread—is seller’s puff and is devoid of the information prospects need to help them make a purchase decision. (Puffery is extravagant praise, a combination of exaggeration and evaluation.) If a “we” is included in the copy—we are the best, most wonderful, etc.—the advertising is called “brag and boast.” Evaluation, preferably of the positive superlative type, should come from the customer after product use.

This principle—describe, don’t evaluate—has broad application and includes relationships not just of sellers to customers, but also of parents to children, teachers to students, and employers to employees, among others. The principle is recommended as a replacement for negative criticism: “The milk spilled!” (describe) as opposed to “I don’t believe you did it again! How could you!” (evaluate). Name-calling, sarcasm, threats, berating, and the like, undercut self-esteem and cause defensiveness by attacking the other person’s character or personality.

Factually describing the incident helps the other person (child or student or employee) avoid drawing negative conclusions about him- or herself. The recipient of the criticism is then allowed to regroup and correct the situation. “Constructive criticism,” child psychologist Haim Ginott in Between Parent and Child says, “confines itself to pointing out what has to be done, entirely omitting negative remarks about the personality of the child” (or, by extension, student or employee).

Ginott goes on to apply this principle to the extravagant praise that is often heaped on children, such as the ubiquitous “Good job” or “We’re so proud of you.” Says Ginott, “Direct praise of personality, like direct sunlight, is uncomfortable and blinding. It is embarrassing for a person to be told that he is wonderful, angelic, generous, and humble. He feels called upon to deny at least part of the praise. . . . [and he] may have some second thoughts about those who have praised him: ‘If they find me so great, they cannot be so smart.’”

The same applies to the puffery heaped on students and employees. The Wall Street Journal said as much recently when it chronicled the current praise-inflated culture of schools and employers. One such employer, said the article, dishes out praise every twenty seconds. Concerning the praise mania, the article quotes education critic John Holt*, who asks, “Is not most praise of children a kind of self-praise?” Certainly the schools that issue bumper stickers saying “My child is an honor student at XYZ school” are bragging and boasting about themselves.

So what is the proper way to express compliments to another person? For Ginott the principle remains: describe effort, accomplishment, or effect on you; let the other person draw the evaluative conclusion. “Thank you for washing the car, it looks new again.” is one of Ginott’s examples of what he calls helpful praise; “I did a good job; my work is appreciated” is the child’s possible conclusion. “You’re an angel,” says Ginott, is not helpful. Note that it is the child who concludes “good job,” not the adult who says it.

The phrase “effect on you” must be qualified and used carefully. “We’re so proud of you,” for example, can be an appropriate emotional response to a child’s accomplishments, but it often is heard as an evaluation, meaning “You are worthy of us.” To a child this is worse than direct sunlight, because the implication is that sometimes the child is not worthy. Properly described accomplishments should produce pride in the recipient.

“Thank you” is an appropriate expression of effect, when used in moderation. Some companies in today’s age of excess apparently overdose on thank you notes, according to the Wall Street Journal article mentioned above. Unfortunately, the WSJ confusingly lumped accolades and thank yous together. The bitter irony of the praise culture is that strokes are supposed to promote self-esteem, but disbelief and the perception of being manipulated, as well as a defensive need for more praise, are often the result.

Now the praise culture of superlatives poured on a product is not quite the same as extravagant praise gushed on a person, but those “s-t” words have the same effect on the prospect, as does praise on a child, student, or employee. Superlatives produce a big “why?” in the mind of the prospect. “Why do you say that? Why should I believe you? The sunlight is so blinding,” to use Ginott’s analogy, “that I can’t see the product or its features in order properly to evaluate it.”

Just as prospects need the space to pronounce for themselves that a product is “the best, greatest, most wonderful thing since sliced bread,” children, students, and employees must be given the freedom to judge themselves as someone who is doing good work and as someone who is good.


*John Holt is author of many books, including How Children Learn, How Children Fail, and The Underachieving School. The WSJ article did not provide the source of Holt’s quote.