Only five percent of respondents would choose to pay for news, if their favorite news site suddenly begins charging for content, according to a study by market research firm Harris Interactive, commissioned by PaidContent UK. The vast majority, 74 percent, said they would "find another free site."
But can giving away most content to gain a small percentage of paying users ever be profitable for a company? “Freemium” advocates say “yes.” In fact, that’s what the freemium business model is about: Most customers get basic services for free, while a small percentage pay for premium access.
There are two main principles behind this: 1) free marketing, 2) economics of scale.
Wired editor Chris Anderson wrote the book Free on the subject. He says on his blog: “Free is not a business — it’s zero-cost marketing for a business. And it works best at the largest scale: a small percentage of a big number is a big number.” As freemium uses the near-zero marginal cost of online distribution to reach the maximum possible audience, converting a small fraction of them to paid users is not only possible, but a smart strategy, says Anderson.
The success of some companies has validated this idea for some products. For example, a survey by mobile advertising agency AdMob shows that Android and iPhone users download approximately 10 new apps per month, according to Cellular News. Of users who bought paid apps, the top reason cited for their purchase decision was that they liked the free version of the app.
Another example: When Random House’s Del Ray imprint offered the first book of Naomi Novik’s Temeraire fantasy series for free, sales for the other Temeraire novels increased by more than 1,000 percent, says The Associated Press. And it’s not an isolated case: the AP notes that the top three Kindle sellers – that is, the most downloaded e-books on Kindle – in recent days have been free e-books.
But perhaps the best examples can be found in the virtual gaming world. For instance, The Guardian reports that Club Penguin, which targets child gamers, was said to have 12 million users, of which 700,000 were paid subscribers, when Disney bought it in 2007. At a rough average of $5 monthly subscription at the time, the site was estimated to be generating $42 million in annual revenue. “About 80 percent of the site is free,” Anderson told Journalist Charlie Rose at the recent MIXX advertising conference in New York. “Eventually, young users will ask their parents for a credit card and say, `I want to buy a pet for my penguin.’”
Freemium may in fact be necessary for the Web, says Ranjith Kumaran, CTO and co-founder of online file transfer and e-mail service YouSendIt. Because “without traction, it doesn’t matter how good your product is or how much you spend to market it,” he tells BNet.
Of course, success based on freemium is not certain, nor easy. In fact, YouSendIt still needs more premium subscribers before it will become profitable, notes BNet. Currently, the company has 10 million registered users and 100,000 paid subscribers, not including corporate accounts or pay-per-use. While the overall conversion rate from free to paid is over 3 percent, for the company to turn a profit, around 5 percent of all customers will have to be “paid.”
So when is freemium a good idea and when is it not? Michael Mullany, VP of marketing at online hosting company Engine Yard, tells CNet News that companies should consider the following four factors: Cost of marketing and selling to a user in a paid model, cost of serving a free user, cost of acquiring a free user, and how successful you are at converting users from free to paid.
CNET reports that the highest freemium conversion rates fall anywhere from 2 to 8 percent. Mullany notes that for the freemium business model to make sense, your cost to serve and acquire a free user must be from between one-twelfth and one-fiftieth the cost of acquiring a customer under an alternative paid model.
Non-online companies that have to physically package or ship products should beware, however. Freemium will likely not work for you because of your actual costs. You won’t enjoy the Web-based near-zero marginal cost model. As Anderson says, “You can't mail a brownie to everyone in the world on the hopes that a tiny fraction of them will come back for more.”
Is Walmart a threat to Amazon? Back in 2000, BusinessWeek reported that the race between the two companies wasn’t even close, as Walmart.com lacked Amazon’s key features that made online shopping fun and easy — namely, simplified site navigation, customer reviews, product recommendations, and a wide inventory selection. But a lot has changed since then. Walmart.com has since made incremental but significant improvements. For example:
In 2006, it underwent a major redesign, which among other things speeded up its checkout process (less than four clicks to product checkout from any starting point).
In 2007, it enabled customer reviews and ratings. It also linked to a newly-created company blog (checkoutblog.com), to give shoppers a first look at upcoming products, explain the company’s purchasing decisions and seek buyer feedback.
In 2008, it launched ElevenMoms.com, featuring videos and money-saving tips from influential mom bloggers by showcasing them on the site as well as linking to their individual blogs. While the women aren’t paid, the company updates them on new developments and suggests products for them to review.
It also created a “Connect & Share” community-building section. Currently in beta, the section includes customer stories, a customer Q&A exchange, and topics such as healthy living, meal recipes, environmental tips, etc.
In June, it partnered with richrelevance, which provides personalization and product recommendation tools for online retailers. (Note: richrelevance was founded by David Selinger, who formerly led personalization research and development at Amazon.com.)
And like Amazon, just last month, it opened up its doors to third-party sellers like CSN Stores, eBags and ProTeam.com. The move added nearly one million new items to the site’s inventory, with plans to add more retailers and products in the future.
These are all good improvements, but are they enough to challenge Amazon.com? Media and technology blog All Things Digital says maybe one day, but not for now. The reason? Walmart.com is still way behind when it comes to sales numbers, and will need time to catch up. Indeed, trade magazine Internet Retailer says Walmart.com took in sales of only $1.7 billion in 2008, compared to market leader Amazon.com’s $20 billion.
Imran Khan, an analyst at financial services firm JPMorgan, says eBay.com may actually be the online retailer most at risk by Walmart’s latest improvements. This is because much of eBay’s revenue relies on third-party sales and they can’t afford to lose sellers to other platforms like Walmart.com. Amazon.com, says Khan, still has an edge in terms of inventory size and fulfillment options. (It offers fulfillment services to third-party retailers, which both Walmart.com and eBay currently lack).
Walmart, however, still has unique strengths it could use against Amazon — such as free in-store pick-up of online orders. “While Walmart has had mixed success online, it established a clearly differentiated, strong multi-channel position for itself upon introducing the site-to-store services two years ago,” said Sucharita Mulpuru, an analyst at market research firm Forrester Research, in an interview with DMNews.com.
Indeed, Walmart.com may be lagging for now, in terms of sales and user traffic. But if it continues to ape Amazon.com’s strengths while capitalizing on its unique advantages, such as site-to-store service, the company’s tremendous buying power, promotional opportunities in its brick-and-mortar stores around the globe, etc., it just may have a chance to eventually catch up — if not overtake — Amazon in the online retail race.
In its most expensive purchase to date, Amazon snaps up rising rival Zappos for more than $900 million. This came as a surprise to those expecting the shoe e-tailer to hold out for an IPO, but what’s even more surprising was how Amazon announced the merger: CEO Jeff Bezos posted a video on YouTube, a move more characteristic of Zappos and its CEO Tony Hsieh, who himself broke the news on his company blog and Twitter account.
Indeed, Amazon may have the resources, technology and operational experience of an e-commerce giant, but it has long been criticized for not “getting” social media. A recent example is AmazonFail, where Tweeters lashed out at the company after it removed sales ranking of books with "adult content,” including LGBT-themed books. Amazon took a day to respond, and when it did, sent the statement to the Associated Press first, instead of fighting the fire where it started — at Twitter.
Zappos, on the other hand, has mastered Web 2.0 branding. In a recent survey by Abrams Research, the company was voted as having done the best job of using social media. Hsieh himself now has more than one million followers on Twitter, and encourages his employees to tweet, use Facebook and Multiply, or upload videos online to let customers get to know them personally.
“I think people worry too much about bringing their personal selves into business, when I think the way to succeed in today’s world is to make your business more personal,” says Hsieh in an interview for Mashable.com. That “personal touch” also means Zappos makes sure every customer leaves with a positive experience — whether through super-fast shipping, long phone conversations or 365-day refunds.
Will the Zappos culture be zapped, or will it be tolerated, if not emulated, by Amazon? That remains to be seen, but one thing is clear: social media know-how is becoming an indispensable tool in business success. As Hsieh concludes at Mashable.com, “Today anyone, whether it is an employee or a customer, if they have a good or bad experience with your company they can blog about it or Twitter about it and it can be seen by millions of people. It’s what they say now that is your brand.”
