Tracy has spent the better part of her career studying and designing implementable marketing communication, sales and branding atrategies.
The Human Character
In a room filled with 200 people, if you asked for a show of hands from people who didn’t like the word free attached to a product or service they wanted, less than 10 people would have their hands up. People like free stuff. The idea of not giving away money in order to get a desired product or service results in euphoria, and several million dollar business enterprises have sprung up on the back of this innate human characteristic.
But just how have they done so?
Free! (Or is it?)
In their book Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, authors Alexander Osterwalder and Yves Pigneur explain three business model patterns through which companies have succeeded in the Business of Free.
Advertising at inception was left only to newspapers, radio, television, and billboards. Today, advertising has extended its reach to our social media feeds, instant messaging apps and the likes. Advertising continues to evolve and maintains its relevance because a large chunk of its operations are based on providing free content.
Any platform that gives individuals or entities the liberty to share and consume content freely, is a platform capable of raking in a whole lot of money in revenue. This is because free content-educational, informational or entertaining-is highly sought after to satisfy a number of human needs and desires, and thus attracts attention. If the content contained therein is high quality, this attention definitely grows infinitely. Businesses looking to attract customers, and organizations simply in search of public awareness are constantly in business with platforms like these, exchanging tons of money for advertising privileges.
Since Infrastructure and maintenance costs are really low for these multi-sided platforms, they can afford to host lots of free content. And payments gotten from advertisers ensure that the platform continuously serves and satisfy all consumer groups.
Freemium is a term referring to business models that combine the offering of free basic services with paid premium services. It is a model mostly adopted by web-based businesses.
Here, a large user base enjoys the privilege of using a service or web-based product at no cost (free version), but are then presented with the option of increased access to more features on that product or service, for a fee (premium version).
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The thing is, most free users never upgrade to premium. I personally have lost count of the number of free subscriptions I am quite satisfied with, despite heavy marketing on paid versions.
So just how do businesses operating with this model make money?
Research shows that about 10% of these free users do go on to become paid users. That seems small to the myopic eye, but remember the human lust for free stuff?
An example is this app I use to teach my son (find image below). It’s a fun platform to keep your kids busy, entertained and educated. They have had over a million downloads. For the sake of this article we will assume they’ve had just one million downloads (its definitely more). This means they have one million people actively using this app for their kids. 10% of 1,000,000 comes to 100,000. In app purchases are NGN 1120 PER ITEM. This basically means that if you want a premium version (in-app ads gone and want to unlock some other lessons or features) you would need to pay NGN1120 or more, depending on your preferences. Lets just assume all 100,000 users who upgrade to premium decide to buy just one item. This amounts to NGN112, 000,000 per month. I will leave you to determine how much maintenance or other operations costs are, and then deduce their annual revenue.
It is worthy though, to note that in order to reap the most out of this model, the average cost of serving a free user must be kept low, and the rates at which free users convert to paying users must be kept growing.
3. Bait and Hook
This pattern as the name implies, refers to the business practice of luring customers with an initial offering. The offering usually so juicy, incurs losses to the company. But that isn’t much of a problem because follow up sales as a result of that initial offer accounts for the losses and soon the company breaks even.
Telecommunication companies (Mobile Network Providers to be specific) are a sterling example of businesses that adopt this pattern. Cellphones bundled with service subscriptions are offered to customers for free or at very low prices, and then subsequent sales on airtime and data accumulates revenue.
For instance, I once got a high-end android phone for a quarter of its original price from a telecommunications company. The caveat was, the phone is configured to function only when a sim card from that telecommunications company was inserted in it, otherwise it won’t work. I got the phone for about NGN 20,000 (ordinarily it should cost me NGN80, 000), but ended up spending hundred of thousands on calls and data in the 2 years I used the phone and 7 years I used the sim card. Now this stat is just from one person-me. Think of millions of other users with similar experiences. Do you see the cumulative value?
The key to successfully operating with this model pattern is to ensure a close indispensable link between the free initial offering and the follow up sales proposition or product. There should be an almost symbiotic relationship between both products where one cannot function without the other (just like the phone and sim in my case). The continuous purchase on the follow-up product or service is the main revenue generator.
Humans are dynamic and change so fast; it's almost hard to keep up. But since they make up a large percentage of consumer base for many businesses, it is pertinent that Business Models are continuously innovated, and the book Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers is an insightful step in that direction.
Adopting any of the above business models for your start-up or new business is a great idea, but you must be adequately informed on what to do and how to do it, a Business Model Canvas provides both visual and mentally stimulating direction.