Lately, there’s been a lot of discussion in several business communities about the business models of freemium vs. premium, and the two most recent issues that sparked my interest to finally blog about it was the BIG change that recently took place with social media site Ning as well as recent interviews I’ve watched from Mixergy.
What’s Up With Ning?
Instead of paraphrasing more relevant news than I can provide, it’s best I deliver the story from the source to give you the full extent of the position I take, and why I take it, as well as what the moral of the story is.
“Things are starting to look up at Ning” — the once high-flying social network platform provider, which recently buckled under the weight of its no-fee business model. That’s according to a headline over at Forbes.com, anyway. The story itself questions whether Ning will even be around in five months.
Five months ago, Ning chief executive Gina Bianchini abruptly left the company, the company admitted that it couldn’t survive with charging some users a fee, and laid-off about 40% of its workforce. According to Jason Rosenthal, Ning’s chief operator-cum-chief executive, the company’s 300,000 free communities brought in only 20% of revenue and 25% of traffic, while 15,000 paying customers footed the rest. “Ditching free, 35,000 Ning networks have signed up for paid plans,” writes Fortune. “265,000 presumably have not, but no matter: those numbers mean Ning wooed nearly 12% of its non-paying customers into opening up their wallet–more than double its previous conversion rate. Ning’s paying customer base is now three times its previous size.” Adds Fortune: “If the company can survive the fallout, in another five months from now it could be the Valley’s latest great turnaround story.”
I think the story of what happened to Ning speaks volumes about rather or not the freemium model works. For Ning and most all other social networking platforms thriving to only make money off of paid advertisements, the ground was almost swept right from underneath them. The doors almost closed at Ning until they ditched freemium and switched to premium.
From Ning’s story, the moral is pretty obvious… Freemium doesn’t work.
Source: Media Post
Andrew Warner of Mixergy.com recently published a video interview with Dmitry Buterin; the founder of Wild Apricot. I watched the video this morning and AGAIN, this idea of freemium vs. premium was brought to my attention. When Dmitry began discussing his profit sources, he mentioned his membership options. Wild Apricot allows both free memberships and paid memberships.
Of the 10,000 free memberships, Wild Apricot only recently made a $334 commission payment for one month from Google Adsense. That is INSANE! Delivering such a high volume of traffic with thousands of free members should certainly yield more than a $334 commission payment right?
Of the 3,000 paid memberships, Wild Apricot runs $2,000,000 annually. So for 66.6% less members, Wild Apricot generates a SUBSTANTIALLY higher R.O.I.
This issue of revenue brings in another issue that I think is also of great importance in the tech space. Running a membership based website/business, costs thousands and potentially millions of dollars to operate based on the disk space and bandwidth used by members. It’s quite obvious, that Wild Apricot is likely losing substantial revenue just from server hosting alone from the free members who are essentially just taking up space. Literally.
So what should memberships sites like Ning and Wild Apricot do? Kick off all of their free members? It might not seem very nice, but I say do it! No business deserves to pay for someone to get a free ride. After all, there’s “no such thing as a free lunch.” Right?
Case Study: Linkedin
Linkedin is perhaps my favorite example of a social media/membership site that has really hit the mark with their revenue model. Instead of developing delusions of grandeur as many social media sites have, Linkedin decided to focus their site on a niche of people who REALLY truly wanted to connect with other similar people and wanted to connect so badly that they would pay for it.
Linkedin, unlike many other social media and membership sites who offer free and paid subscriptions, severely (in my opinion) limits “the good stuff” of value you can do on their site until you sign up for a paid monthly subscription.
Linkedin has 10% of the members that Facebook has, but yet Linkedin has severely less debt owed to investors and has much larger profit margins taken in annually.
The big picture here also is that Linkedin does not place the majority share of their revenue model in the hands of advertisers, whereas Facebook does. Linkedin, is smart enough to diversify.
“LinkedIn is supposed to generate $100 millon this year, and breaks down the revenue stream for the NYT:
LinkedIn will get only a quarter of its projected $100 million in revenue this year from ads. (It places ads from companies like Microsoft and Southwest Airlines on profile pages.) Other moneymakers include premium subscriptions.
Source: Business Insider
In this day and age, so many businesses are trying to be the next Myspace or Facebook, and amass millions of free members globally, so they can cash in on the online advertising craze of big business.
I am adamantly opposed to freemium. The revenue simply isn’t there. There used to be a time in which websites could charge $10 – $50 CPM rates for banner ads. Then 10 years later, big business finally realized banner ads are terrible at generating conversations. This ultimately caused CPM banner advertising to drop to a current average rate of $.10 – .50. So what then do you do when you’ve built your business based on an advertising fad like banner ad sales, and it turns out to be ineffective, and drops your asking price for advertising down over 1,000%?
It would put you out of business!
One thing I also see wrong with freemium is that it’s often times a lazy attempt to get people to join your site easier, but website owners eventually realize, that since the member joined for free, often times they are un-targeted and therefore have a severely diminished value because many free members don’t stick around to actually use your site and engage for the purpose intended.
It’s great that you may have a million free members on your site, but how many of them are active and how many of them are supporting your advertisers and sponsors to prove to them that advertising on your platform is generating a positive R.O.I?
Another issue is the sheer psychological value in free. Social experiments prove year after year that people don’t perceive ANY value in free. Remember Candid Camera? It was that show that was on decades ago. They did an experiment once in which the host tried to give away $100 bill for free to passers-by, and no one would take it. Why?; because they didn’t see any value in gaining something for free.
We’re trained in society to think that “nothing in life is free.” This is the same mindset freemium members have. You’ll never get money out of them, so why even keep them around?
I know business owners have reported higher sign up rates to their membership sites by charging paid premiums as opposed to allowing free memberships. They attest the increase in sign-ups to people seeing more value and exclusivity in a paid site.
If you’ve ever been a member of a paid site like a forum, you’d know that there’s tremendously less spammers, hackers, and other degenerates. The overall experience is substantially better!
The mindset of big business and even small and medium businesses is to advertise to any warm body no matter who they are and no matter what the platform of the ad is. Just as we saw 10 years ago with the downfall of banner and CPM advertising, I believe online advertising as a whole in it’s general form will greatly suffer and decline unless businesses wise up and start delivering ads in ways in which it’s 100% relevant to the end-user.
Mint.com is an excellent example of this, and they are very successful as a result with zero dollars spent in advertising (as they claim).
My general consensus on this debate is that when developing a membership-oriented website, you have to determine what your purpose is. Do you care more about having a larger membership base with less quality members and instability of revenue or would you prefer to have a smaller site with a strong community of individuals and more diversified revenue?
For me, the choice is obvious. What about you?
Original image credit: Chaos Addon
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