free, freemium or premium – choosing your business model - transcript from podcast

Free, Freemium or Premium – Choosing Your Business Model August 6, 2012 | Hosted by Nancy Lin | (transcript from original podcast)

N: Nancy Lin | L: Lee Amon | C: Cynthia Typaldos

N: Hello and welcome to Business Reinvention.

N. This program is sponsored by Change Agent SF, coaching and consulting services and I’m Nancy Lin. Well I hope you are off to a decent start to the week. Technically we are out of the recession. But we’re still very much in the economic downturn and made the dot com bubble of 2000 seem far away. Do you remember the days when we had tons of internet companies that offered free content or services without any source of revenues to support their businesses? Google was one of them and it found a way a few years after it started to sell advertising on site based on keywords, and that created a whole new business model for many internet businesses that followed. But now the online advertising market is starting to get a little saturated. So what’s the next viable monetization strategy for businesses? And is giving product away for free a strategy that companies should consider? Let us discuss that with our guests today. Joining me are Lee Amon, the principal consultant for MarketQuest, and Cynthia Typaldos, president and founder of Kachingle which focuses on monetization platforms. Lee and Cynthia welcome to the show.

L: Thank you Nancy.

C: Thanks Nancy.

N: Welcome. So Lee, what I will do is start off you with you first. Like I mentioned, some companies do become profitable after first offering something for free. So what are different ways that companies leverage free offers to help them eventually drive business goals?

L: If your offering is truly free then the key is your users become the product you are selling. So you’re either selling users to advertisers, or you’re selling them to other businesses as in the case of Google, and really in the case of most content providers. They provide the content and these companies will then sell advertising. Essentially they are selling eyeballs.

N: Very interesting. There are also companies who use that model for different marketing purposes which we can talk about a little later as well. So on the other side, there are many incumbent companies or market leaders that actually feel very threatened when upstarts in industries start offering products and services for free. But the truth is that many of these startup companies with free services do not survive. What questions do you think they fail to ask themselves before launching the free offer?

http://www.voiceamerica.com/episode/63469/free-freemium-or-premium-choosing-your-business-model


http://kachingle.com/

http://marketqwest.com/

http://changeagentsf.com/radio_show



L: The main questions that they fail to ask is one; “How they’re going to monetize?”, and two; “Is their product really good enough to attract a large number of users?” A quote that I only recently heard is “Software is like sushi”. People really will only be interested and will spread the word on it if it is the best around. If it is not, people won’t use it. Free software really is meaningless unless it is a really good product. Free does not fix a bad product.

C: Yes, that was actually Chris Weltzien in our Freemium Meetup where you (Lee Amon) were both speakers.

L: Right.

N: I think that is a very good point and just because people get it for free doesn’t mean that they are free of expectations. They still expect your product to work really well and if you are a service company, they expect your services or customer support to be still very good.

People have a notion that if it is free it will just take off on its own or get lots of viral marketing and lots of people will use it. But in the case of having a low performing product you may actually get negative reviews that go viral instead. That will be bad news for the company. L: That is correct. The other point that you bring up about service is really key. Whether people are paying for something or not they still want good service on it.

N: Exactly. So now the shift of focus is to the market leader. Because there are startup companies some industries are offering products for free and that puts some of the leaders in a position where they have to decide whether or not to respond to the free offer by a competitor. So I wanted to mention this very interesting presentation by a business school professor, David Bryce, who made some really interesting points during the Harvard Business Review article titled “Competing Against Free”. He talked about how challenging it is sometimes for established companies to actually monitor free offers. And one of the reasons for that he mentioned is that in a big company, a manager is responsible for the revenue and cost associated with their own product line, and because the free offer does not generate any revenue, how do you restructure the profit-loss allocation to reflect their marketing value of a free offer for another product line, which he may or may not be responsible for. It can be an issue. And the professor also suggested that the companies can review the percentage of defection and growth rate before determining the level of threat from the free offer and then decide whether or not to respond. So, Lee in your experience, has it also been very difficult for some of your clients to compete with a free offer from established companies?

L: Yes. There is definitely a bias among a lot of companies, especially if they are established companies, and they have got what they view as a working business model, who then change the business model, and then start offering something for free that they have been getting revenue for. There is another point made in the article; most companies have a tendency to think in terms of average cost as opposed to marginal cost.



http://hbr.org/2011/06/competing-against-free/ar/1

http://www.youtube.com/watch?v=mEY_J40p59c&feature=plcp

http://www.meetup.com/Freemium/events/63960202




N: Exactly, that is another great point. So what are your thoughts on his suggestion for evaluation to determine how to respond or whether or not to respond?

L: The first question you have to ask is “Are your users defecting to this new product?” The second question you have to ask is “What kind of market share is this new product gaining?” And you have to monitor those really closely. If the new product, the free product is really competitive and gaining millions of users, or if more than 5% of your user base defects to that new product, you have to respond.

N: Thank you. Thanks for the clarification. Exactly the points I think you mentioned and I think they were very valid points. Cynthia, do have anything you want to add?

C: Well I do. In fact, interestingly years ago when I worked Sun Microsystems I had first started in the hardware division with the workstations and then I moved to the software division which was headed by Eric Schmidt, who later became the CEO and chairman of Google. We had this issue where the software division was measured on how much add-on software was sold. The operating system called Solaris that we sold was bundled and included in the workstation product. And, of course, the margins and the profits of the company were dependent on workstations. When I moved divisions, it was kind of shock to me that the software products division did not have this kind of over-arching goal which is to make the company profit and revenue the greater goal, rather than just from our division. Solaris got short shrift from the division because its value was not measured. I have actually seen this first hand, and a bundling strategy where you bundle the things that help promote the entire kind of eco system can be quite successful, but the team has to be measured on the success of the bundled product, not unbundled add-ons! Bundling is one of the four strategies discussed in that HBR article “Competing Against Free”.

N: You touch on another value of offering something for free, and that is to provide a marketing upsell to a paid product. And there is a new term out there called Freemium. Lee can you help us understand what that means?

L: The Freemium model is used by companies, and there are a number of them that have pioneered. SurveyMonkey is one that has pioneered. Constant Contact is where they have been offering free and that stays free forever. Evernote is another one where as long as you’re using it within whatever guidelines they have, and it could be anything from the number of users to the amount of memory space that you have, anything along those lines, that product is free. Then if you want additional capabilities, or if you want more storage space, more options, whatever, there have products you can pay for and you can buy those additional capabilities.

N: That expanded on what you said earlier about what vendors use free for–to get user base, but the other way to use free is really using it as a marketing teaser to get people into the door and then up sell them or bundle them with something else.

L: Right.



http://evernote.com/premium

http://www.constantcontact.com/pricing/email-marketing.jsp

http://www.surveymonkey.com/pricing/details



N: Are there other companies that might be bigger example of using this model very successfully?

L: Yes.

N: One thing that I can think of like Zynga. Zynga would be a good one.

L: Yes.

N: Actually, the interesting thing is they have only a very small percentage of users, free users who use something for free who actually converted to the paid product. Is that usually the case for this freemium model?

L: Cynthia, why don’t you take that when you’re working right now with a number of freemium companies?

C: Right. In fact we have developed a new product that we call Kachingle Premium based on our interactions with freemium vendors and some of them actually contacted us because we have a micropayment engine. The problem that they have been having, and this is not true for all freemium vendors, but seems to be true for, I would say for the majority, is the conversion rates are very low. And when someone thinks about freemium…if you go by how hard it is to convert 5%–well it is very, very hard. I believe Evernote says that they are around 4%, and they are considered wildly successful. It is difficult. Freemium vendors’ conversion rates are around half a percent to 2 percent and the problem with that is you have to be very careful that it actually covers your cost for all the other 99% who are the free users taking bandwidth, taking up some support time, and all kinds of costs. Even if these costs are very low per user when there are millions of them it can really add up. So there is definitely a class of freemium vendors that are not able to get the conversion rates need to be profitable. But I would say along with this there is a push by some VCs to create, to push their portfolio companies into the freemium model because if an application can build a lot of market share, the ability to sell that company to one of the larger players in the industry is higher. You can see the VCs building, pushing a number of their portfolio companies into freemium, knowing that one of them will be wildly successful. The others, well it is a portfolio, so they are not too concerned about that.

N: Very interesting insight. When we come back I do want to learn a little bit more about the Kachingle monetization model.

N: Back to our discussion. Cynthia, you raised some very good questions about the market challenges a lot of startups are facing when they’re offering something for free. There is more and more of a need for the freemium model. Your company actually offers a really interesting new monetization model. I think it is called Kachingle Premium, if I’m right? Can you tell us how it works?



http://kachingle.com/



C: Sure. We had already built a micropayment engine and what happened is that we were approached by several freemium vendors about how if they got micropayments, and I’m talking below a dollar a year, they would actually start to become profitable. And these companies might be charging $30 a year for the product but the conversion rate is so low. I started looking into that and I realized that there are a lot of barriers for people who pay, and one is called “the penny gap” (Bob's Buzzword of the Day: ‘Freemium’). Which is a very interesting concept. If you Google it you can find the original blog posted by Jeff Kopelman at First Round Ventures. But it’s the concept that getting users to pay anything, even if it is a penny, it’s very, very difficult. And how do you leap over that? What we have done is we have created this platform where independent app vendors can actually bundle their products together so that when the user tries to think about “Should I buy this freemium product?” or “Should I upgrade from freemium to premium?”, they are not deciding on the basis of one app. It is the whole set of the apps they are considering; “Do all of those add up to something that is of more value than just a single one?” And of course it is heavily discounted. We distribute the revenues based on the usage. This is a tried and true mechanism…bundling. From cable TV, to when in the old days you would buy little packages of cereal all together. And it is appealing to customers especially in our system where they are only paying for the apps used. We have the capability to do a virtual bundle where the apps that you use can change over time. Another thing users just don’t like when they are forced to upgrade to premium, or asked to upgrade to premium, is having to ask themselves “Am I going to need this next year?”. So there is also a high churn rate. If you have a system by which it is very user centric there is a possibility of getting more conversions.

N: So is this solution most suited for mobile apps only?

C: Actually, our initial solution is for web apps and PC apps and we will be moving into mobile by the end of the year. We are launching our initial platform at the end the summer 2012. We already have quite a few app vendors in the integration process.

N: How do you decide what to bundle together? Do you try to make sure that the demographics of the users are the same or does the marketing partner pick and choose what bundle partner they want to have? How does that work?

C: It is such an interesting question. We are at the beginning of this. So I would say it is of all those. We have one partner who is part of an ecosystem who actually integrates data between different vendors and that partner is bringing in a bunch of vendors that are already in the ecosystem. So if you are using one of those apps you are likely to be using the others. That is an obvious niche bundle. And another bundle that we are working and creating is a bundle we call indie apps. They are apps from independent vendors, I mean small vendors, maybe a few people as developers…they have a great app but it is truly hard to discover. It’s really hard to find it. But you could bundle the apps together and it starts to be a useful package. One vendor, which has already committed is Avira, has an antivirus software and is coming with a hundred million



http://redeye.firstround.com/2007/03/the_first_penny.html

http://redeye.firstround.com/2007/03/the_first_penny.html

http://www.youtube.com/watch?v=APfnrGSfVNs

http://www.flickr.com/photos/puuikibeach/3069977898%00%E5%A1%B9%EF%92%81%E1%B4%BB%E4%A1%BF%E2%B2%AF%E5%B6%82%E8%97%84%E6%8C%A7%00%00%EA%AE%A5



free and paid users. They are able to reach out to the users on a daily basis because they have a pop-up that comes out every day saying, “Hey, wouldn’t you like to upgrade?” So that can be the core of a prosumer consumer package which can include a lot of things. Many users have basic things that they use to maintain their PC or basic applications. But we are also letting the market help us decide by seeing who approaches us. That is one of the reasons we participate in the Freemium Meetup which we started because we wanted to get out there and talk to vendors…see what their issues were, and here how we can help them.

N: Okay, so I just want to make sure that the listeners understand this concept. Can you give us another real life example with more details or specifics and information, so that we can get a better understanding of difference between the marking partners and the vendors?

C: Right. So let’s say you are on an app, it could be freemium or it could be premium, and it says “Okay, you want the premium features…Pay now…5 bucks a month.” So, as an alternative to that, an app vendor can offer to their free users or their potential users is “Hey, for 10 dollars a month you can get all the premium features of our app plus all the premium features of these other 15 or 20 apps.” And we actually have APIs that allow that vendor to display those other apps that they want to feature and that they believe would be appealing to their users (and to get them over that penny gap).

N: How does that help with conversion and the market saturation issue that we talked about earlier? What kind of results have you been seeing?

C: We haven’t launched yet. But we think it helps in conversion because, first of all, users are only paying for things that they want and if they stop using something then they stop paying. They are getting a discount. It is very easy, there is a single signup. Just sign up with Kachingle, we will do all the billing. It’s a single monthly payment, and of course, you are getting the premium features of all of these apps that do have additional value without constantly being bombarded by each app “Do I want to do this?” or “Do I want to do that?”, and people just tune out after a while to all of that noise out there.

L: There is another point I want to make about free. One of the interesting things about free is that free is a relationship. And what I mean by that…I’m going to use an example that comes from World War II. Back in World War II, the Red Cross, they had eight stations all over Europe where they gave GIs doughnuts and coffee for free. It turns out that the British aid stations, comfort stations, actually charged the British soldiers for the doughnuts. So this was causing some tensions and our secretary of war asked the Red Cross to please start charging the soldiers for the doughnuts. This created such bad feelings that 70 years later if you go and find a World War II vet and ask them what they think about the Red Cross, they will have a negative impression of the Red Cross. The reason is they had that expectation of the relationship of free. Kind of like if you go to your aunt’s house for Thanksgiving dinner and at the end of it she hands you bill for 10 bucks. Well it may be a reasonable price for that dinner, it is not the relationship you were expecting. And one of the things which Cynthia’s software does very nicely is it changes that relationship without having to change the relationship for each individual company.



http://www.npr.org/blogs/money/2012/07/13/156737801/the-cost-of-free-doughnuts-70-years-of-regret

http://www.npr.org/blogs/money/2012/07/13/156737801/the-cost-of-free-doughnuts-70-years-of-regret

http://www.meetup.com/Freemium



So all of a sudden your company, if you are an app vendor, is in this paid relationship if you are a part of that bundle, as opposed to having to convince the user to go from the free to that paid relationship, which is again a change in the height of the relationship that you would have to go through.

N: Very interesting. Cynthia, do you have anything you want to add?

C: Yeah. This is also one of the most difficult decisions of any app vendor if they are looking for the freemium model. And we have app vendors come to our Meetups and always ask this question of the speakers who have been with companies like SurveyMonkey. We have Podio coming up and YouSendIt, who all have the freemium model. Where do you draw the line? Where is it that you start making the free users pay up? We call these markiteching decisions because if you do them wrong you flop from success to failure–or vice versa. They change over time too. We had the Don MacLennan, Senior VP of Product Management of AVG talk about how at one point one thing worked and then later they had to change it. That means when you develop a product you have to think very carefully about this. Where do I draw this line and it could be wrong or right for certain users. Where, if you are able to say as Lee was saying our platform allows, you pay something from the very beginning then you don’t have to implement those features which can be quite a bit of engineering and very tricky both from a marketing and engineering point of view to get right. I am not saying we know for sure this is going to work, but we do talk to vendors and they are just agonizing over this because they cannot figure out where to draw that line. And like I say, this is not even the line you draw once and then it is done. Then when your competitor comes in and instead of giving away 2 gigabytes, you now have to give away 5 gigabytes. So you drew the line and you have to change the line later.

N: Very, very good point, and so you could foresee that bundle changing over time as well. Right?

C: Well, what our vendors can do is they can just say they’re premium from the beginning–you have to pay something. But that something can be very small and it is seamless. We can accommodate freemium vendors too. Users only pay for the premium features when they are using them. It is really up to the vendor to decide if they are a premium app or freemium app. But what we do is we make that hard decision by the user, “Should I pay anything at all” much easier and leaning more towards yes than no. Vendors get users over that penny gap because they are making such a good offer. And it is going to be a heavily discounted offer. I will just give you some examples of some things vendors have told us. I can’t tell you which vendors, but there is a vendor that has a $1000/year product. He would be happy to get $40/year. There is a vendor that has a $30/year product–50 cents/year would be great. That just shows you how heavy the burden is on vendors who have freemium offerings. How the burden of free can be very, very high, and yet just getting a small percentage more of people paying something can really make or break a company.

N: Very good point. Hold that thought, we are going to come back after this break. But just one quick comment. On the other side of that is by bundling all these apps together you are also



http://www.youtube.com/watch?v=2YzxyNf8K9M&feature=plcp

http://www.youtube.com/watch?v=0lpJElyZy5o&feature=plcp

http://www.youtube.com/watch?v=0lpJElyZy5o&feature=plcp




making the sum look much bigger than the individuals together. So I think that is another interesting perspective.

N: Before the break we had a very interesting conversation going on. On one hand we have app developers who are having a hard time to get people to pay for their apps. A $5 bundle will actually be more attractive than trying to make somebody pay 50 cents for each one of the apps. And then on the other hand you have marketers who are really trying to get more people, or a marginal increase of user base, in order to expand their market share and their revenue base. So, it sounds like Kachingle Premium would be a very interesting solution and I will be interested to see how it goes. And when are you scheduled for launch?

C: We actually have our sandbox up and running. We invite any vendor to contact us or contact me directly at [email protected], and begin integrating his product. We have the first vendor that integrated. It took him about eight hours. Ours is a very simple API integration. It will be launching at the end summer 2012. I will give myself a little leeway, in September, but the product is already up and running in the sandbox with vendors integrated with it.

N: So up to this point what are some of the largest product categories, networks for vendors and marketing partners?

C: It is so interesting that it is not what we expected at all. Well, we knew that there would be quite a few vendors in the PC maintenance space because we were first approached by Avira, which is antivirus software. So we have a number of companies that do PC tune up and things like that. But we thought we would be of interest to companies that do consumer freemium products and what I realized actually, there is hardly a dividing line anymore between consumer and prosumer and enterprise products and services. People use whatever apps they like for whatever mode they’re in. The main set of vendors that have approached us and we are in discussion with us are small businesses app vendors. A small business, of course, can be a single consultant or an actual small or medium business. So that looks like it is going to be the initial sweet spot for us in our bundles. The other area that we really want to reach out to is these independent app developers who have a really great app that is used, maybe infrequently by users, but it is very focused, it is very specific, and it is very good. And if they can just get reach and awareness and the ability to make even a few cents a month per user, it starts to make sense for them because they are such a small team.

N: Sounds like a very interesting mix of vendors and categories and I guess that also shows how technologies integrated into every part of our lives. So what will be your revenue model on that?

C: For us or for the vendors?

N: For you.

C: Well for us, we’re a transaction system where our core is a financial system where we take a transaction fee. We also handle all of the billing for these vendors so they don’t have to do any



mailto:[email protected]



integration with credit cards or PayPal–we do that. We pay the fees for that. We also provide our vendors with finders’ fees. So with every user they bring in they continue to get a finder’s fee because customer acquisition is very expensive and even though they are sharing that user with the other vendors, all are benefitting from it, so they are happy to share that revenue. And about 75% of the subscription revenues are shared amongst the vendors apps based on each user’s usage of that app. So if one user is using your app a lot more than someone else’s app, you get a higher percentage of that user’s revenue. We feel it is very fair for both the user and vendor.

N: How much is the transaction fee and how much is the finder’s fee in terms of percentage?

C: Our transaction fee is 15% and that includes all of the financial transactions. The finder’s fee is somewhat of a variable, but it is around about 10%. (Cynthia had misquoted this in the actual interview)

N: Okay.

C: Then 75% is the revenue sharing that is distributed fairly amongst the apps.

N: You talked about allocating revenues based on usage or traffic. I guess that means you’re going to be collecting and tracking user behavior data. Are you monetizing on that in the future? Is there any privacy policy in place?

C: Yes, we have a very strict privacy policy. We have an existing micropayment service and we do not share, distribute, or even capture that kind of data. What we do capture, and only for the usage splitting, is the activity…at one single point. We do not keep track of all activity. We are just not in that business. We are only using that data to fairly share the revenues. And there are other pieces of information that go into that which are the list price of the product and the intensity of the use. We have a kind of a secret sauce algorithm that we feel is fair to the vendors and again, it’s also fair to the users because users like to know that they are paying for the stuff they are using and they are not paying for the stuff they are not using. We do give the users a way to turn off applications. In our point system, which is for the virtual bundling, users can even create their own personalized bundle of apps. They can say I want to start using this one and stop using that one and make that tradeoff. We came from a mindset of being very user centric and we thought about what would users really like, and then how can we reward the vendors based on what users are valuing.

N: Yeah, We would definitely need more of that in Silicon Valley. So Lee, I know you work with a lot of startups. What do you think about this offer? Do you think that it will solve a lot of problems? Will that be a very attractive solution?

L: It sounds to me like a very attractive solution. I do have two clients that are in early stages and when they are ready, their products move further down the line, I am definitely going to be calling Cynthia, and will be looking for ways to get involved. Both clients are B2B companies,





both of them are aimed at small businesses, and I do think that this is where a lot of upcoming cloud migration is coming. I have one client who currently runs a very small company and runs an older management system locally off of Access. Access had worked for them until they got a new computer in, and now they can’t get that computer into the network. Just the idea of being able to, for example, move all the management to the cloud, even if it is a small monthly payment, would be very attractive. And so I think small businesses are going to be moving to the cloud in a very, very big way over the next several years.

N: Okay, so I actually want to move on to the next concept, but before that, I just want to say this is also a very interesting concept in the sense that it is almost like a co-op because your vendors are sharing their marketing resources or spending, and then sharing their revenues together in a sense as well.

C: Yeah. It is exactly that. I don’t know what the future is going to be and I know you are probably going to ask “What’s the future?” I don’t know. But let us see. There are two possible scenarios, and maybe they can even co-exist. One is a very large vendor-built ecosystem like a Google or an Intuit, and they capture all of the relevant apps. And then users have an ecosystem to work from although it does not work across these

vendors. Another is just like you described, that the vendors find a way, hopefully working with us, to co-market together, to share users, to share their marketing reach, to share the revenue, and to build something that is very user centric so that individual app vendors can participate. All of the really interesting innovation is going to come from indies in the beginning, new startups. You are not going to see a lot of big innovation or really interesting innovation from the bigger vendors. But I think those are the two possible scenarios, maybe they can even co-exist.

N: Yeah! And I can see how this could help ignite another wave of new startups by helping them to find a sustainable way to generate revenue. So, I will be watching Cynthia. This is a great segueway to take a break.



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N: So we have a fantastic conversation going on here. Cynthia, I know that the other interesting product that you have is something to do with donations because freemium is really not the only alternative to free offers. Some companies or some sites actually generate revenues from donations such as Wikimedia. So how is your solution for donations different from what we have seen in the market?

C: This is where we started and we call it Kachingle Anything, which is built on our micropayment engine that uses a similar widget that we’re using on the premium offering. The difference between Kachingle Premium and Kachingle Anything is that we do bundling in the Premium and it’s built on top of the same micropayment engine. What we found when we spent two years in the donation marketplace and we went after mainly the media sites, and particularly the news media sites, and one thing I really learned, is these are incumbents and it’s very hard to get the incumbents to change their business model. If I knew then what I know now I would not have chosen the media market as a target. That’s why we are very interested in the app market because these are generally non incumbents, or at least they’re relatively new companies with new technology and a new mindset. The system where people voluntarily make contributions continues to exist in Kachingle as a bundle. It’s just one bundle of many and a bundle that you can pay for optionally…it is a donation rather than a required payment.

N: Okay. So let us just elaborate a little bit so people understand how it works. People can choose, from what I understand, from sites that are in the Kachingle Anything ecosystem. They can also nominate a site and then choose the sites that they want to donate to. So once a user nominates a site for his or her donation, “Do you then help them promote their site to other users or that’s what it is?” Once you’re nominated you just respond for revenue allocation.

C: Yes, we add that site to our system. We contact the site owner to make sure they would like to receive sponsor contributions. We get the PayPal address and we start putting money into their account. We actually have conversations with Wikipedia who are very excited about what we are doing because we are able to bring in micropayments and they are very interested in not just large donations, but the whole world making a contribution. We market the sites to other users by them being part of our system. However, the issue that we ran into, which is why we did the pivot to Kachingle Premium and are now reaching out with bundles to app vendors, is that we were not able to get a single large media site to implement our system. Unless you have that market visibility it’s very, very difficult to get the word out. We still very strongly believe that there is a place for voluntary contributions, especially for content. It’s just really hard to do any kind of paywall. For example, the HBR (Harvard Business Review) article you pointed out to me…I thought I had read everything on freemium, premium, free. But I hadn’t seen that one because it’s behind the HBR paywall. It is just really, really hard I think for content behind a paywall to succeed in the future and we believe that a voluntary contribution system is going to be successful. But we also believe we were too early in the market with that.

N: So I want to make sure I understand this. If a site wants to accept donations they need to implement some sort of system or?





C: Well first to be visible to the users they needed to put our widget on their site. That was harder than expected for many sites so we moved away from that to a browser extension. But the problem with that then of course is it wasn’t visible on their site. And that lessened our visibility. Many of these sites actually did not have, because they were content sites, just did not have the technical capability to even do something like implement a very simple widget. We learned a lot in that process. This problem doesn’t exist with the app vendors–a sophisticated developer can implement our APIs in a few hours. Developers understand how to do that and they understand that they need to make money and they’ve got something that is an app as opposed to content. I just think the whole content monetization arena is very, very different than the app monetization. I think people are much more willing to pay for an app than they are for content, at least at this time.

N: It will be interesting to see. So then you mentioned paid content, of course there are also companies that had decided that best way to resolve the revenue issue is not to offer anything for free at all. But instead make their product only available at a premium. Like you said, Harvard Business Review and, I think, Financial Times has also done a very good job and their readership and revenues have been increasing even during recession while other competitors in this industry are still struggling. So how do you know if you should offer freemium or just straight premium? Lee, let’s go with you first.

L: It is for content or for an app?

N: Anything.

L: It is a very difficult decision to a certain degree and it is going to require experimentation. One of the biggest, Microsoft, basically does not have any free products. There is a real issue facing them right now…it is Google Docs, and Open Docs gets better and better. Up until now they have been able to maintain their edge because people were reluctant to move away from the Microsoft Suite of office products. In fact, right now Microsoft is saying that they are going to charge tablet vendors $50 per tablet for the operating system and Office Suite bundle together on their tablet.

N: Very interesting point.

L: Microsoft makes the point that they think the total cost of the ownership of anybody shipping less than 9 million tablets is actually lower by $50 a month than it is if they went to Android/ Google Docs route for free. It’s in the integration cost that the cost of ownership is higher with the free products.

N: I think you raised a very interesting point and that is deciding whether or not to offer something for free or premium. If you want to offer a premium product first you have to have product differentiation, but with product differentiation that product gap needs to be substantial in order for you to sustain that position. I think that is a really good point. Cynthia, do you have anything to add? We have probably one more minute, but love to hear your thoughts.





C: It all gets down to the penny gap and how to get users to pay. I think users have got a fixed amount of money they are willing to pay for apps and content and all that stuff, and I really do think that there has to be some kind of way that apps are user centric and users are getting what they need for a fixed price. That could be large vendors creating some huge ecosystem or a bunch of smaller vendors bundling things together. I think it’s going to have to go one of the two ways. For example with news, the amount people look at is 50 times or 100 times what it used to be and media providers just can’t make what they used to make. It’s just going to be evolving–there has to be a way for people to try the product whether it is some form of premium or even a free trial, or being part of a bundled system.

N: Yeah! So there is definitely an urgent need for a new monetization model and I think your product may be very timely when it’s launched. So I wanted to thank you, both of you for this thought provoking conversation. It has been such a pleasure to have both of you on this program.



free, freemium or premium – choosing your business model - transcript from podcast

Documents

world war ii

harvard business review

monetization model

micropayment engine

business model

business modeln

original podcast

nancy lin