The Cost of Free

April 2018 Pricing, Selling

Customers are realizing there is no such thing as a free lunch.

The ad-based business model that supports much of the internet has been referred to as “the internet’s original sin” by Ethan Zuckerman, the creator of the popup ad. The popup ad specifically allowed websites to have a separation between their own content and that of their advertisers.

While the ad-based business model allowed for incredible proliferation of websites and services, it has always come with costs. The good was that sites didn’t have to convince customers to pay out of pocket to explore the internet widely. The bad is that people end up paying with attention and data, which are harder to recoup, quantify, and manage.

Facebook and Cambridge Analytica have laid bare what many people have already known or suspected: once you give away your data online, it is very hard to know where it will end up. While Facebook will probably still be around for years after this article is published, on the margin, this scandal doesn’t help the company attract more users or charge more for advertising. Data misuse is a headwind for companies who want to monetize through ads.

On the other hand, getting people to open up their wallets and pay for a service, especially if they’ve become accustomed to using it for free, is hard. That’s true for pay-only services and it’s also true of the attempt to split the difference between free and paid: freemium.

Only 2% of Dropbox users pay for a subscription. This is pretty typical of freemium models, which often see conversion rates of between 2% and 5%. Spotify is an outlier with a whopping 45% of its subscribers paying for an ad-free experience at the time of its Feb. 2018 IPO.

Obviously, these companies are in very different industries with their own dynamics. It’s not easy to apply learnings from one to the other. Additionally, if the goal of freemium is to attract a large number of base users, then a higher conversion rate isn’t necessarily a good thing. At the least, we can take away that companies’ experiences with freemium vary considerably. Flipping customers from free to paid is hard.

Even their flavor of freemium differs: Spotify’s paid version offers higher bit rate streaming and no ads. Dropbox doesn’t have ads to begin with; its paid version offers more storage. So, even within freemium, companies have different strategies as to which variables to adjust across different tiers of paying.

For Facebook, one intriguing option would be to offer two versions: ad-supported unpaid and ad-free paid. By giving customers the option to sort themselves, the company, the industry, and the world would learn a lot about how much people value their privacy. How much would you pay per month to use your favorite online services without being tracked?

While it may be too late for the Facebook tiger to change his stripes, their stumbling with data collection and protection should be seen as an opportunity for others to improve their services. Customers will pay for quality and convenience, and there may be a growing group of customers ready to opt out of the internet’s original sin by paying for a better online experience, too.

Many companies, especially online companies, are focused on volume before revenue, and revenue before profit. They attract eyes with the minimum necessary to hold them in place. They hope to earn money from advertising or convincing users to start paying.

Where are there opportunities to go upmarket and create a valuable service that early adopters are willing to pay for from day one? In what ways can you innovate where, instead of racing to the bottom, you can beat everyone else to the top?

About the author

Kyle Thompson-Westra is a Consultant at Wiglaf Pricing. His background includes digital strategy, marketing analytics, and international relations. He holds a BA from Tufts University and an MBA from DePaul University.

Kyle T. Westra
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