Trends in Pricing
Posted on March 14, 2007
Filed Under Marketing, web 2.0 |
"The lie of the Web 2.0 bubble is that free is the way to succeed in the new economy. That’s not true. The rules of economics have not changed. The best way to make money in the new economy, in the Web 2.0 economy, comes down to the same fundamental business model that has always existed: create something of value for people who will pay for itâ€
This post on Gigaom was dead center in an issue I am working my way through right now.
In the case of Teqlo there are three potential sources of revenue: users, advertisers, and/or web service vendors. I’ll spare you the details of what each consists of in order to focus on the key issue, which is how you maximize consumption while at the same time not leaving any money on the table. In other words, it’s easy to remove economics as a reason why people won’t use your service, but if the issue is really that there is a group that will pay how do you target them without giving up the rest of the market you are capable of reaching.
The principle dilemma about advertising is that it requires a high degree of pageview traffic, which implies people using your service even if just occasionally, but at the same time requires a high degree of demographic targeting in order to maximize the ad unit price, otherwise known as the RPM. For a good explanation of how the economics scale, I would suggest you read this post from O’Reilly.
So in order to make advertising work we have to achieve high levels of usage while at the same time targeting a high value demographic.
To pull off a freemium pricing model I have to put a consumption or feature trigger in place. Examples include:
- You use the service free for 30 days, or some other arbitrary number even though you intuitively know that if your prospective customers don’t use it in the first 30 minutes they will never come back.
- You have, in our specific case, are subscribing to and using 5 applications, in order to get to number 6 you have to pay us.
- There is a base set of free features and to get to the premium feature set, e.g. messaging and storage, you need to subscribe.
The temptation is to want to run the advertising model to subsidize the low end of the business, the free part, while converting users to the premium service and taking away advertising. What I am unsure about is the degree to which people will pay to remove advertising, and correlated to that is whether or not the successful conversion of users is actually suboptimizing the advertising stream.
Lately, I have begun to think that you have to go all-in with one model or the other, but it’s also evident that you have a clear understanding of who your customer is when you are making this choice.
Tags: web 2.0, pricing, advertising, business models, marketing
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My name is Jeff Nolan and I write Venture Chronicles. These are my thoughts on technology, innovation, management, public policy and pretty much anything else that I find interesting.
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