Law of free
But this is part of the problem with freemium. While it's almost
necessary for businesses such as Moshi Monsters, where Smith was
reluctant to use an ad-supported model because the site is targeted
at children; for most businesses a freemium model yielding an
average conversion rate of around 5% isn't enough and some, such as
Spotify, have to use advertising to back up their income from the
subscriptions. Even Club Penguin, which doesn't use an ad-supported
model, has seen reported a 20% drop in revenue during its third
fiscal quarter this year.
The major challenge, explains Alastair Mitchell, whose
collaboration workspace website Huddle is one of the most
celebrated offerings to come out of the UK tech scene in the past
few years, is building up the number of paying users websites need
before they can support themselves.
"There isn't money available from VCs and investors to throw at
these things and people are having to rapidly figure out how to
make money and keep their team and business going," he says.
"I'd love to be able to tell you I have it all figured out, but in
reality there are very few people who have," he says. "If you look
at people like Spotify, who are still figuring out how to get
people to pay, or Skype - who pays for Skype calls?
"It's so complex and so different for every business that we're
going to see a lot of change in the next year or so. If there's one
thing which is going to change, it's this law of free, if you
It's this 'law of free' which is causing so much uproar on the
internet at the moment. As their readerships and ad revenues
plummet, newspapers are having to work out how to make money, and
improving how they monetise their online content seems the most
obvious answer. The Financial Times has decided on a freemium model
- users can view 10 articles a month before they are asked to pay -
while the Wall Street Journal has opted for a nominal charge of
$1.99 a week.
Both have been reasonably successful - so successful, in fact,
that media magnate Rupert Murdoch has confirmed he plans to charge
for access to content from some of his own newspapers including The
Times, The Sun and The News of the World. "The extent of the
downturn has only increased the drumbeat for change," he told The
Guardian. "Classified revenues will never again reach the levels
once seen in print."
"My customers were very angry. They formed the Society
for the Protection of Free Websites for Kids and demanded we make
the site free or they were going to shut it down"
The trouble is, internet users expect free. How would you feel
if Google charged you 10p each time you wanted to perform a search?
Or if suddenly, one of those scary emails warning Mark Zuckerberg
wants to charge a monthly subscription for Facebook was actually
true? Users would be in uproar. But despite this, would they really
leave in their droves?
According to Smith, it's workable. Moshi Monsters didn't start
charging for its content until a year after launch. "My customers
were very angry," he laughs. "They kicked and screamed and shouted
and wrote letters. A few kids even banded together and formed a
group called something like the Society for the Protection of Free
Websites for Kids and demanded we make the site free or they were
going to shut it down - like Russian cyber hackers.
"They eventually calmed down when they realised they could still
play the game for free - possibly even too much of it - without
having to pay. But getting that balance right has been tricky. You
can't give too much away, nor can you hold too much back."
The major challenge for web entrepreneurs is to find a way to
meet users' expectations of free while getting them to bear the
cost of running the site right from the beginning, which will give
the business the opportunity to experiment with that balance.
According to Mitchell, it's all about creating the perception of
"The science behind what people will pay for is phenomenally
complex. It's about making the payment almost invisible to the
user," he explains.
"I'll give you an example: I am invited into a phone conference.
It looks free to me, but I'm still paying for it because the cost
is consumed in my phone bill which I don't think about. And that's
the most amazing business model for a company. It's all about the
perception of thinking you're not paying for something when you
actually are. And that's the next challenge for Huddle."
'Anything free is worth what you pay for it', goes the old adage -
and it's a shame that particular one hasn't quite filtered through
to online consumers, whose increasingly unrealistic expectations
mean struggling online businesses are being forced to give away
their offering for free.
Still. While freemium goes some way to providing a solution,
except in the most successful examples, it isn't always realistic -
which means someone, somewhere needs to work out how to persuade
consumers to foot the bill without realising they are spending
For Mitchell, and for other freemium businesses which still
haven't yet reached the scale where a marginal percentage of paying
users can support the rest of the business, that's the ultimate
goal. "And the person who does that," adds Mitchell, "will be very,
very successful indeed."
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