The tech world is an interesting one when it comes to companies making money. Some at the top like Microsoft, Apple and Google are raking in billions in profits every year. And each of those do it with different models: Microsoft through software, Apple through hardware and Google through advertising. But at the other end of the spectrum, most startups, even the very popular ones, haven’t yet figured out how to make money beyond their costs.
While the advertising-based model is working for a select few, for most, it’s simply not proving to be a very good stand-alone model. Pandora is one of the companies that web-based advertising is actually working pretty well for. But even they’re not expecting to turn a profit until next year — and that’s based on projections. I bring them up because they recently decided to move forward with a freemium model in a serious way for the first time last week. As a large service with a rabid fan-base, this seems like a brilliant move. And I wonder if the time isn’t right for more services to try this?
The freemium model is hardly a new idea. VC Fred Wilson has been talking about it since 2006 — though the name came a little later — but the model was around well before that also. The idea that you have a core set of features that are free to all users, and charge a fee to the smaller subset of users who will want more advanced features, makes a lot of sense. But now it’s easier than it has ever been for startups of all sizes to be able to take payments for such a structure, thanks to a number of companies and new platforms, like app stores. And there are plenty of startups popping up around this space to further help with this, like the soon-to-launch Contenture.
But I think for the freemium model to work in today’s environment, it has be along the lines of the opening paragraph of Wilson’s post in 2006:
Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.
Rather than launching a service with a freemium model, I think it’s important to gain a large and passionate user-base first. That’s exactly why I think the model will work very well for Pandora. And that’s the same reason why it would work for Twitter, if it ever decides to go that route. Jason Calacanis has been talking about his desire to pay for premium features on Twitter since 2007. And plenty of others have since brought up the idea.
As part of its bid to make money, Twitter is said to be launching premium tools by the end of this year. But that would apparently be for businesses — I think a lot of personal users would be just as willing to pay at this point. I know I would. And that got me thinking: What services would I pay for?
I’ll start with the ones I already pay for:
And here are some ones would I pay for:
Those are just the ones I would personally be willing to pay for. I’m sure everyone else will have their own list that they would pay for as well. And that’s why the freemium model is so great — it gives users the options to pay for only the services they use the most. And for certain really popular services, I think this could be huge. Pandora CTO Tom Conrad told me last week that he expects only 3-5% of Pandora’s users to sign up for its premium version, but I wouldn’t be surprised if it goes higher than that — especially if Pandora adds more features to the service over time.
One of the keys to this in my mind is the yearly fee. While it might look nice to offer a service for $3-a-month, that recurring charge is ugly. I’d much rather pay a still low $36-a-year and not have to worry about it after that. And let’s add it up. Even if I paid for all of the services I listed above, depending on where the prices fall in the ranges I gave, it’s only $200 – $250 a year. That’s for 10 services, that I love and use every day.
Think about it this way: Before I was able to move away form the colossal rip-off that is Comcast cable, my cable bill was nearly $200 — a month! How people pay companies like Comcast over $2,000 a year for mediocre content and shit service is beyond me. I would rather pay a bunch of hard working start-ups (and yes some bigger services like YouTube — owned by Google — and Flickr — owned by Yahoo) all that money. And I wouldn’t even have to, under the rates I outlined above, I would be paying them just about 10% of that!
The freemium model doesn’t always work. It didn’t for Pownce, for example. But to go back to what I said earlier, getting the users is they key to this. If you can get a ton of them, and get a certain percentage to be very loyal, they’re more than likely going to be willing to pay. And while it may not be enough for every company to only use that model, it at the very least would be a nice compliment to the ad-based model.
And, as I hinted at above, there are other ways to look at this now. With the rise of mobile app stores, it’s becoming a decent business model to have a service that has a pay app. This has worked for the aforementioned Tweetie. An app can be a very simple advanced feature under this freemium model, and extends the possibilities for the model.
But back to the web, just imagine if Facebook has a few percent of its users paying each year. They have over 200 million users, so say just 5% paid. That’s 10 million people paying, let’s say, $30 a year. That’s $300 million — or in other words, nearly its entire projected revenue for this year. If it were able to get 10% to pay, it’s be more than it’s projected revenue. Of course, Facebook isn’t likely to use that model, instead it will focus on micro-transactions and other means of making money — but still, it’s worth thinking about.
There are quite a lot of services out there that I would pay to use, but they won’t let me. Maybe they should.