Learn About the Freemium Business Model

Learn About the Freemium Business Model Chris Anderson: Where the newspaper industry is actually going to do over the next few years is exactly what all of you as companies are going to do, which is figure what's the premium to your free. Not to reject free, but to find someway to make money to sell, to sell to your free consumers, to take some fraction of your audience and upsell them on a paid service. Premium, I would argue, is the first 21st century business model. Freemium is, you know, is free plus premium, and it's the inversion of the free sample. Rather than giving away 1% of your muffins to sell 99%, you're giving away 90% of your goods for free and selling, to sell 10% or 95% or 80% or the majority of what you, you, you make you give away, and you do that as a form of marketing to, to, to, to reach the largest possible audience. That audience is not just exposed to your message, they're exposed to your product. They're allowed to use their products, and if they choose to convert, if you've found someway to get them to start paying, they're paying for the right reasons, which is that they get it. They understand it. They, they, they find out, they know what the value is. They figured out how it fits into their life, and they're happy to pay. And when you look at the difference between services that force you to pay up front, and those who convert you to pay through freemium, the churn rates are much, much lower for the freemium models. Because the people converted, converted with full knowledge of why this was a good deal, and they tend to pay more, the price incentive. So, what does freemium mean for the "Wall Street Journal"? Al Murray, who runs, runs wallstreetjournal.com, gave these sort of five principles, and it's, again, it's kind of parochial. I'm talking about media, but I think you might be able to find some relevance in all of your own businesses. First of all, you've got to use free and paid. You need both. You absolutely need both. You can't make it entirely paid, and entirely free has shown its limits as the advertising market has, has, has hit the skids. Interestingly, the things they charge for, or rather they things they give away for free are maybe what you would, the opposite of what you would think. They give away their, their most popular stuff. So if you come to a story by Google News, that's free. Much of the front page is free. Their exclusives are also free. Now, you would say, well, isn't exclusive scarcity? Isn't that exactly what you would charge for? It turns out that it's just the opposite. If you don't make your exclusives free, other people will, will report on your exclusives, and they'll get all the traffic. So, you know, as TMZ exclusively reported last night, Michael Jackson has died, TMZ gets no traffic. Whoever was reporting it would get all the traffic. It turns out that, you know, to reference my last book, "The Long Tale", you've got the head of the curve, the most popular stuff, that's best to monetize with advertising. And then you've got the tail of the curve, the niche stuff, a very narrow, a, you know, more narrow interest, and there people become, and, and that's best to monetize with direct payments because people, because there's less competition in that space. People understood the value of that. They tend to be driven by professional interest, and they tend to become price insensitive. And I, I, so again, maybe, you know, the stuff they're charging for is niche stuff. It's the archives. It's the metal commodity trading stuff, etc., and they want to get very, very niche on that stuff. Again, less competition, clear value to the user, less price sensitivity. So give away the head, sell the tail is, is, is their model. Now, I think the two most interesting markets to look at freemium business models and evolution are the video game markets and the Apple iPhone apps. Let's start with video games. Video games are a fascinating, fascinating industry in transition. They're going from a silver-disc business to an online business. Music did that whereas they moved from silver discs to online, the core product became free. Software, as it went from silver disc to online, software to service, the core product went to freemium. Most software service companies use the freemium model. Video games, as they go from a $50.00 box you buy in the store to an online model, are going to free to play. Now, this was started in Korea and then China, is moving to U.S., but what you're seeing with free to play is a general, is the general, it's a psychological, it's a psychological endeavor, which is to say OK, free to play, at some point you want them to pay. How do you entice them to do it? How do you make it non-punitive? You're not saying, ding, time's up, pay, but more sort of ooh, shiny, you could have that. So, I, I showed a picture of "Maple Story", which is a Korean game very popular with kids. But, it's, it's a good example of this. So what will people pay for? Well, they'll pay to save time. When you die in "Maple Story", as a free user, you have to, you got to get back to a respond point. You need to trudge your way back to where you were. Or you can buy a reincarnation stone, and you get reincarnated right there on the spot. If you want to go to another world, you have to wait for the bus as a free user, but if you're, if you, if you bought a teleportation stone, you can get there instantaneously. And, you know, and if, if any of you have kids who are playing "Club Penguin", "Club Penguin"'s also free to play. At some point, your kids, and my kids have done many times, will come to you and say, "Mom, can I, dad, can I have a credit card, can I have your credit card?" "Why?" "I want to become, I want to subscribe to Club Penguin." "Why?" "I want a pet for my penguin." Status. I want a, I want a better igloo. I want to go to this cooler land. I want hair, clothing, etc. These are psychological things. You can still play the game. It didn't go, ding, time's up, but you can play the game better or more or faster or more, with better status if you become paid, if you're a paid user. Now, this is a decision they only make after they decide they want to play the game more. But that, but they continue to reap the value in it. On "Second Life", if you, you, it's free to play. It's not really a game, but you get the idea. It's free to play. If, however, you want to put down roots, build something, you've to rent the land. You're lowering your risk. It doesn't disappear. You know, status is, is a classic example. You know, people will, you know, the Internet has largely shifted to a reputation economy, and reputation is about status. I use Ning, the, the, the social networking platform for one of my aerial robotic sites, DIY drums, and I pay them $35 a month to, you know, take the Ning branding off and take their ads off, and to otherwise make it look more professional, like a better site. It's, I'm, I'm happy to do it because I'm so invested in that service. Ning is a classic freemium model. And, and, and, and, you know, you could force people to pay. You know, time's up, etc., but you know, that's, that's generally not best. The, the fermium models tend to fall under a couple categories. You have, you do have time limits. In 30 days, free. Then you pay. Not the best one. You have seat limited. Five seats free, more paid, better. You have feature limited. Flickr, Flickr Pro. You know, basic version free, more, cooler, better stuff paid. If you're an engaged user, if you're a power user, if you really, if you really get it, you'll happily pay for that kind of stuff. It's terrific, by the way, to be able to have your best customers self-identified by using a service and then upsell them on things that, that they value because these are not only happy, people who are happy to pay, but they are your evangelists. They are your, your best promoters. These are, these are the people who are driving the rest of the traffic to you with their heavy use of the service, and they're also paying you for the, for the privilege. You can have, you know, storage and capacity. You can add more storage and capacity. Things like Gmail use that, that model, and I probably, you know, there's probably others that I'm not thinking of. But those are the basic things that you will get people to, to pay for. A simple think like the time money calculus that we see so often in games. You know, young people have more time than money. Fine. They're free. But older people have more money than time. They'll pay to save time. You know, we see this across the board. Open Source versus, versus, versus source is often a time money calculus. Open Source is free, but sometimes it's more trouble, and Microsoft, I mean, I'm not just saying this because we're enjoying their air conditioning. Microsoft will always tell you that, that Open Source is free like a puppy. That's, that's the time money calculus at work. Now, by the way, I'm a huge Open Source ad, advocate, and everything I do outside of my pay jobs is, is Open Source. So, so I would say, I think it's a little. I, won't fully endorse that theme, but there is, there is some truth, some truth at the core of that, which is, which is that, you know, you have to understand that you have the monetary economy and then you've got all these other economies. The tension economy, reputation economy, time economies. It's true. There's no such thing as a free lunch, but only if you consider these other economies. With you and I have lunch, and you know, I pick up the tab. Lunch was free to you in a monetary economy, but it wasn't free in time. It wasn't free in reputation. It wasn't free, maybe you passed some information to me which is worth much more than the cost of the lunch. If you consider these economies into the non-monetary economies, the books balance. You know, you know, it, it is, you know, ultimately, you do pay, but importantly, you're not paying in money. And the question is how do you convert these reputation and attention credits back into cash one way or another.