Free, Freemium, Pay-to_Play: Business Model Implications
Posted by Hindol Datta
“Free” has become ubiquitous in the digital age. It has been touted widely as the only mechanism which is a necessary condition or an iron law for providing digital products and services across the Internet. More exactly, there is an inexorable pressure upon price points on digital products whose marginal cost of production is minimal. So business models are cropping up and encouraging the consumers to chart an “Internet Consumer Bill of Rights”: the business models painfully and reluctantly argue that the consumers’ personal information is being exchanged to get these “free” products which can be monetized by advertisements and the like. However, these toutings and exclamations by the pundits of “Free” have adversely impacted many industries that have been forced to go along with it, absent any immediate choice in that matter.
Chris Anderson in his book “Free: The Future of a Radical Price” has argued that there are two markets – the Free Market and the Not-Free Market. Thus, when you give something for free, you have the potential of capturing 100% of the market, while a slightly differentiated product that is minimally Not-Free will lose 100%. He admits though that Free creates an abundant mindset which leads to a waste of resources during the consumption process.
Low quality, waste and lack of integrity of Information are the natural byproducts of Free. So business models that espouse free products and services also inherently sow the seeds of their own destruction. The marginal cost of producing an idea or stuff in the digital world is never ever zero. And what is worse: giving something for free anchors a value in the consumption mindset that is hard to backtrack from.
So now we move to the Freemium model. The basic premise is you provide some teaser services and products for free, and then you can upsell the consumer later. At the upsell point, you are dealing with conversions and monetization models and processes that the company must institute. So now the company also has data scientists, visualization experts, business intelligence folks, marketing propeller heads and psychologists … all of them working to toggle the levers to increase conversion. Essentially, there are two different processes that exist on either side of the paywall: Processes that encourage huge traffic and processes that figure out how to monetize the traffic. These are different DNA’s that are working in the same company addressing two different value sets for the same consumer. And this schizophrenic outcome is on account of the pricing decision by the company: what is lost in translation along the way is the ultimate value to the consumer.
In Batman: The Dark Knight, the Joker says –“If you are good at something, don’t do it for free”. That is a very relevant dictum that should be heartily embraced by all businesses. This will drive the business to focus on value: they will not presume the consumption curve vis-a-vis price points; rather the company will serve different sets of values across different price points.
So how about going the other way! Start with a pay-to-play model wherein you charge for your services, and then reinvest some of your proceeds through pricing mechanisms to draw in consumers. Since you have already focused on what provides value to the customer by setting precedent of charging for services and products; you will now have additional insights into the various layers of value that the consumers have paid for at varying prices; now you can make strategic calls around what constitutes the minimal value that can be provided to the customer for Free while ensuring that the brand value curated on account of selected strategy is not impaired. In other words, going from pay-to-play to free would actually not draw hordes of customers that will use your product but it will attract a large but selective market that are intrigued by the overall value proposition of your business model. And then having them scale the paywall is a lot easier.
Giving something away for free is not a sustainable solution! Very few companies can succeed using this price mechanism. Those who actually succeed using the “Free’ as the price mechanism have invested significant amount of money, resources, processes etc. to create very rich user experiences that generate virality and stickiness to support a meaningful stream of revenue through advertisements. And once these very few companies can get a critical mass of loyal traffic, they can then explore alternative monetization paths. But let me reiterate… this is far and few between.
Posted on August 28, 2012, in Free, Freemium, Native Monetization, Pay-to-Play, Pricing, Risk Management, Social Gaming and tagged brand, business model, chris anderson, curate, free, free to play, freemium, joker, paywall, price. Bookmark the permalink. Leave a comment.