Loss Leaders and Customer Acquisition Cost (CAC): Price Discrimination in the Market for Free Resume Templates

The loss leader strategy, in which a business sets the price of an item to zero (or below) in order to acquire new customers who it hopes to charge later, represents one of the most fundamental ideas in industrial organization. The customer acquisition cost (CAC) is heavily linked to the idea of loss leaders; it quantifies how much a business invests in acquiring a paying customer. Within the context of digital labor platforms, free resume resources are a strong example of the loss leader strategy in practice.

For example, think of how Monster's free resume templates appear to be a free service being offered by the company for positive reasons. Economically speaking, the free resume templates can be categorised as free goods that are provided with the intent of increasing the lifetime value of the customer. On a per-unit basis, the template has a near-zero marginal cost to the company, as the marginal cost of producing and providing additional electronic copies of the template is virtually negligible. As such, the free resume template is a perfect example of a loss leader.

Loss Leaders in Platform Markets

Multiple-product and multiple-sided marketplaces are generally most successful when using loss leader strategies. For example, job matching sites such as Monster and Indeed facilitate connections between prospective employers looking to fill vacancies and employees looking for jobs. Revenue for this type of employer typically comes from paying for job postings, advertising or recruitment tools, while job seekers are not.

Job boards offer free templates to job seekers to reduce the friction for job seekers as they look for work. Job seekers need a resume, which means they are preparing to enter or re-enter the job market at a time when they are highly motivated to do so. Capturing job seekers at this point in the process also increases the likelihood that the user will use the site again in the future.

When considering the cost of acquiring customers (CAC), offering a free tool is often less expensive than purchasing an ad to entice users to the site. By embedding value into a feature of the product that attracts users through organic search and other referral driven methods, the cost to acquire customers through traditional advertising channels is much higher than utilizing organic search and referrals to acquire customers.

Price Discrimination and Lifetime Value

With traditional price discrimination methods, companies divide consumers by their willingness-to-pay. The Freemium model takes advantage of this concept. The Free Resume Template tracks users that have a low willingness-to-pay but tremendous future value / lifetime value.

After registering with a free account users:

• Upload their own data
• Enter their employment history and experience
• Specify their target salaries and skills
• Search for job opportunities in the marketplace

Having this information helps run algorithms to better match job seekers and job openings, and also locks users into the platform long term. Even if a user never pays for premium visibility on the website, resume reviews or coaching services offered through the platform, those free users still bring additional value to the platform because their being on the platform attracts employers who want to grow their candidate pool by having access to the thousands of candidates already in the system.

By pricing one of its products at zero, the firm can drive revenue opportunities outside of the immediate sales to consumers.

Economic Forces Driving the Strategy

There are numerous reasons that explain why loss leaders are effective in recruitment:

Almost Free To Produce: Digital products can be produced at a very low cost on a large scale.
High Lifetime Value Of Users: Recruitment services make money by charging employers a large amount for posting job vacancies.
Network Effects: An increase in job seekers results in an increase in the value of recruitment services to employers.
Data To Create Capital: The data contained in resumes helps recruiters to match candidates with jobs using algorithms, making them more attractive to potential advertisers.
Behavioural Lock-In: When a user develops and stores their resume on a particular recruiting service, the cost to switch to a different recruiting service becomes higher.

The online recruitment industry produces billions of dollars in revenues every year worldwide. Slightly increasing user acquisition rates can have significant effects on revenue.

Real-World Illustration

Like LinkedIn and many other recruiting services, there are now many online tools for building a digital resume. Most of these have free profiles included in their service. To create revenue for these recruitment companies, they may use their résumé building tools as loss leaders or market them as part of their recruiting model for third party subscription services or advertising revenue for other companies or as consulting services for staffing solutions.

The résumé template acts as an open funnel, showing prospective users (here, employees) the "value" created during one of the most important steps in their decision process about whether to become a user of the recruiting service. Once an employee engages with a service, they will also become part of the entire recruiting service network.

Ramifications

Using loss leaders from a welfare standpoint can enhance the amount of consumer surplus available to customers through the free distribution of useful products. Job seekers can take advantage of the availability of free resume building tools offered by a company.

However, there are downsides to this. By accumulating so much data, the platforms using loss leaders gain more power over the customers because users may fail to realize that the data they provide has long-term value. Also, as platforms use their network effect to solidify their market presence, they create impediments for competitors who want to enter the marketplace by creating a barrier to entry.

Additionally, because users are using platform generated resumes, we may see more standardization in the way applicants are presenting themselves to potential employers, which may have an impact on the labor market and the process used to screen applicants.

Conclusion

Free resume templates continue to exist on competitive employment marketplaces as a result of loss leader pricing and the model of customer acquisition cost. By charging nothing for a resume tool, a company will lower its cost of acquiring a customer, access users who have a high intention to use their products, and ultimately earn money from the actions of those customers later. Digital products are frequently viewed as the tool itself; however, the real value is the long-term relationships and information developed from those relationships.