The Freemium Frenzy: Is This the Right Monetization Model for You?

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Article ImageFor electronic content providers and digital publishers, the age-old question remains: fee or free? Today, the answer for many lies somewhere in between-in other words, freemium.

As a business model, freemium-offering a completely gratis but possibly feature-limited product or service that also allows options for premium upgrades/
options that users can pay for-is increasingly in vogue, as evidenced by the popularity of Facebook, Twitter, Skype, LinkedIn, Dropbox, Google, and countless other businesses offering free versions of products used by millions today. (Case in point: IHS recently revealed that an astounding 96% of all smartphone apps downloaded in 2011 were free.)

Whether it's providing everything on the virtual shelf at no initial cost (such as Flat World Knowledge, Inc., the world's largest publisher of free and open college textbooks) or just a small sample (a la The New York Times, which makes some articles available for free but provides unlimited access only to subscribers), the freemium paradigm has proved to be successful for many producers of articles, books, apps, games, and more.

But can freemium work for any digital publisher? That depends, say the experts.

Creating Content Demand

"The nature of a freemium model provides for a free taste," says Jeff Tinsley, founder and CEO of MyLife.com, Inc., Santa Monica, Calif., which provides free core services as well as pay-for-premium upgrades. "By offering some unrestricted access, you are giving users a taste of what you have to offer, and they can decide to upgrade at a later date. At MyLife, we've found that once they use the service, there is an opportunity to convert the user to paid services over time."
Peter Froberg, a Copenhagen, Denmark-based freemium consultant and Freemium.org blogger, said freemium works well because "the underlying rationale is that the bigger supply you have for one product, the bigger demand there can be for complimentary products. Think of the iPhone. There's a huge demand for different iPhone cases because there's such a huge supply of iPhones. So if you want a huge demand for your premium products, create a big supply of free products."

Ultimately, in a world where content is distributed at marginal cost, if you're not using free, someone else will, says Froberg. "You need to adjust your business model accordingly," he adds.

Scott Abel, chief content strategist for The Content Wrangler, a content strategy firm located in San Francisco, doesn't believe freemium is necessarily better than any other business model. "You can still have bad content, and, even though it's free, it can ruin you. But employing the freemium model as a teaser (to build a following) can be a great way to recruit a new audience," he says.

The best candidate for freemium is a publisher with a wealth of valuable content it's willing to give away, Abel adds. "You also need to offer a product that can be packaged in a way that's harder for people to get without your help," says Abel, who cites Ancestry.com, which gathers genealogical data from various databases and census records, as a good example. "[Ancestry.com] doesn't create the content-they add value to it. When you can provide content as a service to help someone, you can do great things."

Proper Planning Leads to Profits

Tinsley contends that every publisher can make money following a freemium model regardless of size. Content providers only need a tiny fraction of readers to be willing to pay for content to see a significantly higher yield than that of a pure ad-driven model," says Tinsley. "These premium offers can actually generate far more revenue than just advertising alone."

For example, if a company attracts 1,000 people to its website, it would ordinarily make $1-$3 (in ad revenue), according to Tinsley. However, if you use a freemium model and attract 1,000 visitors, and 2% convert to paid customers at $5 per month, you can earn $100.

Tinsley cites The New York Times and The Wall Street Journal as publishers who are each using the freemium model effectively, "and there really hasn't been any consumer backlash."

Zhihua Yan, principal of Z. H. TANK, a newly formed digital publisher of business management webinars based in Shanghai, says she admires Financial Times' freemium strategy, which, by using cookies, allows nonsubscriber readers to access up to eight articles every 30 days for free, with the option to pay beyond that.

"What's good about this policy is that it's very user-friendly," says Yan. "It remembers users' basic information after the first login and recommends content according to users' preferences. And it works in different devices, including PCs and cell phones."

Tinsley says freemium customers should be able to share both free and paid content, if they choose to pay a fee for the latter.

"While publishers are charging to use content for a reason, every site wants more sharing to drive more users to that information," Tinsley says. "Sharing allows for the widening of the opportunity for a publisher. The free shared content is a traffic driver and an opportunity to convert another reader."

Monetizing Methods

Publishers can monetize their freemium digital offerings via a number of approaches, including instituting a paywall, as The Guardian has done; offering tiered services (free for basic, with incremental charges assessed to access premium content); providing ad-supported content/software; and allowing for in-app purchases.

Likewise, publishers can restrict a product/service in their no-charge versions in a variety of ways, including limited capacity (allowing access to only a limited number of articles); limited time (such as a 30-day free trial); and limited features (offering a "lite" edition that lacks the more robust features provided with a premium version).

To successfully monetize the freemium model, "Every publisher needs to communicate to readers clearly-and up front-both the limitations of the free offer as well as the benefits of the paid-for offer," says Jenny Victor, senior director of marketing for Aria Systems, Inc., a San Francisco-headquartered subscription billing and management solutions provider.

Z. H. TANK embraced freemium in its early days. The company offers some free content to customers with individual accounts, but it makes its money upselling users to value-added corporate accounts.

"There is a huge demand from the corporate community for the type of e-learning solutions Z. H. TANK offers," Yan says. "However, in the individual netizens' community, there is a long way to go before people are used to the concept of paying a fee to view digital content."

The goal of applying freemium to a digital publishing strategy, according to Yan, should be to "increase the consumer's loyalty and stickiness without sacrificing the customer experience on either the free or premium segment. This really takes a lot of insight into the marketplace you are operating in and (requires properly) aligning your organizational structure to the optimization of monetizing content."

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