[ photo courtesy ]
It’s an absolute inevitability that we’ll see more and more businesses looking to adopt different business models in 2009, as the old advertising-based model becomes less and less tenable, as the economy slows and the ad revenue dries up.
Chris Anderson’s original exploration of the the different models for free started to outline some of the different business models for free-to-consumer provision of content and services, of which advertiser funding is just one.
He’s followed this up with an article in the WSJ, The Economics of Giving it Away, in which he examines how models for free stand up in the current economy. Working through the list of usual suspects that arguably haven’t yet worked out how to turn huge numbers of users / traffic into huge money (Twitter, Facebook, Digg, et al), Anderson notes:
A year ago, that hardly mattered: The business model was ‘build to a lucrative exit, preferably in cash.’ But now the exit doors are closed and cash flow is king. Does this mean that Free will retreat in a down economy? Probably not. The psychological and economic case for it remains as good as ever—the marginal cost of anything digital falls by 50% every year, making pricing a race to the bottom, and ‘Free’ has as much power over the consumer psyche as ever. But it does mean that Free is not enough. It also has to be matched with Paid.
Freemium is one of the most flexible web business models, and it’s surely inevitable that 2009 will see a flood of organisations looking to adopt varying forms of the freemium model.
Anderson observed in his original article that although freemium is based on the age-old practice of product sampling, the significant twist is that ratio of free to paid is flipped. The traditional sample is distributed in very limited quantities, with the aim of persuading as many recipients as possible to go on and purchase the product or service for themselves. Yet in the digital world, instead of giving away 1% of your product to sell 99%, you give away 99% of your product to sell 1% (because, where the marginal cost is close to zero, the 99% cost you little and allow you to reach a huge market, so your 1% conversion may be 1% of a very large pool).
Free is changing. When you think about it, there are two economies, one of atoms and one of bits. In the atoms economy, which is to say most of the stuff around us, things tend to get more expensive over time. But in the bits economy, which is the online world, things get cheaper. The atoms economy is inflationary, while the bits economy is deflationary.
The 20th Century was primarily an atoms economy. The 21st Century will be equally a bits economy…the differences between 20th Century free and 21st Century free [ will be ] free moving from a marketing trick to a new economic model.
There’s some really interesting analysis of the different structures for successful freemium businesses on the Long Tail blog . Estimates for the number of free Flickr users that convert to paid Flickr Pro range from 5-10%. Ning says 3% of its 500,000 social network creators pay for the premium version. And shareware software programs often see less than 0.5% of users paying up. But other companies do much much better. But others companies are able to do much better. Intuit offer basic TurboTax Online free for federal taxes, but charge for the state version – with a reported 70% of users opting to pay. Although Anderson admits it’s a special case in that most people need to pay both federal and state taxes, it nevertheless still shows that high conversion rates are possible in the freemium model.
The classic subscription model for content isn’t anything new, and there’s no doubt that where advertising has been the preferred model for providing free content, persuading some users to pay won’t be easy. But the answer is, as it’s always been, that you need to make something valuable to the user, that’s worth paying for. Jason Fried at 37signals has written an excellent post outlining the benefits of a monthly recurring revenue model – but the key for the consumer is that they make great software that people are willing to pay for.
I reckon it’s a pretty safe bet that we’ll see more and more businesses moving towards the freemium model in 2009, but that whilst some will flourish, others will fall by the wayside. It’s not enough to rely on advertising bucks to fund shitty content, products or services – make something valuable, you’ll pull through. Make something crappy, and you’ll fail.
[see also Dave Rosenberg at CNET for some further thoughts on the rise of freemium in the down economy ]
