Tag Archives: apps
The idea of offering your product or a version of it for free has been a source of much debate.
Pricing is always tricky. Unfortunately, many entrepreneurs don’t give it enough thought. They will often copy the pricing strategy of similar products, base their decisions on pompous statements made by “experts” or rely on broken rationale (we worked hard so we should charge $X).
Free is even trickier and with so many opinions about it, we thought it would be refreshing to take a critical approach and dive deep into why some companies are very successful at employing the model while other companies fail. We’ve looked into economics academic papers, behavioral psychology books and strategies that worked for companies to come up with the key concepts below.
The Law of Marginal Cost
Pricing plays a huge part in competing for customers. Here’s an economic law that holds almost as much truth as the law of gravity: in a perfectly competitive market, the long-term product price (aka “market clearing price”) will be the marginal cost of production.
Guess what? Because of declining hosting and bandwidth costs, for most Internet products the marginal cost today is practically … zero.
In other words, if the cost to serve a customer (support aside) is zero, the long-term price of the product in the market will be zero (because of competitive pressure).
An Experience Good
At the core of the “Free” models are the products or services being offered to the customer. Most Internet products or services fall into the definition of an Experience Good: a product that needs a period of use before the customer can determine the value they can derive from it.
A good example is Dropbox. Consider Drew Houston’s words: “The fact was that Dropbox was offering a product that people didn’t know they needed until they tried.”
There are plenty of academics who looked into the pricing of Experience Goods. In 1983, the Economist Carl Shapiro wrote a fascinating paper about this subject. His conclusion was that since customers tend to underestimate the value of a product, the optimal pricing for an experience good is a low introductory price which is then increased when the customer realizes the value of the product.
In some cases, a customer might overestimate the value of the product. In that case, the optimal pricing strategy is to charge as much in the beginning or to lock in customers with long-term contracts.
This is why customers are reluctant to buy when someone asks them to prepay for a service or product or sign a long-term contract.
Hence, the introductory price is a signaling mechanism. The conclusion? A low entrance price signals that you are confident that your product will create value for the customer.
The Psychology of Free
Much has been written about the Psychology of Free. Two books that looked specifically into the subject are “Free” by Chris Anderson and “Predictably Irrational” by Dan Ariely. Putting it simply, Free is an emotional hot button that immediately reduces the mental barriers for the customer. Free makes people think that they have “nothing to lose” since many ignore time as an investment.
From this perspective, free is a huge accelerator of adoption. The flip side of this is that after using the product for free, it is very hard to get the customer to start paying for it. This phenomenon was broad enough to get its own name: “The penny gap”—the hardest part is to get your customer to pay you the first penny. This is why it is so critical to choose your premium features wisely.
If all that is true, it seems like Free (or Freemium) is the answer. Well…. not so fast. The decision is definitely not easy. Here’s a basic framework to help you make a more informed decision. A word of caution though: for every complex problem there’s a simple solution … and it’s wrong. The framework is helpful as a thinking tool but there’s no magic formula.
Here’s a set of questions that you’ll need to ask yourself:
- How big do I want my company to be? If you are looking to build a lifestyle business that’ll make you $8,000 a month and you have a good product, you can probably do without Freemium. If you want to build a dominant company that has a substantial market share, Freemium can help you accelerate adoption.
- What is the value of the free users? Across all successful Freemium companies, there is a way of making money or saving money from the free users. Either by saving on marketing costs (Dropbox) or by making money from ads or data (Pandora, Evernote, Mint) or both. If you cannot turn your free users into savings in marketing costs or revenues from third parties—figure out how!
- What is the cost to serve free users? This is a critical aspect of the model. If you spend a lot of money and/or time servicing free users, you are going to lose a lot of money. The cost of servicing free users must be lower than the dollar value they provide.
- How big is my market? “The easiest way to get 1 million people paying is to get 1 billion people using,” says Phil Libin, the CEO of Evernote. Free adds another conversion step on your way to revenues. You need a big market to have enough people who will be paying you at the end of the day.
- Is there value to one customer from other customers using the product? This will determine how many new users the free users will refer. There are three levels of value:
- Inherent value – You can use Skype only if the person you talk with also uses Skype. You can share a Dropbox folder only with other Dropbox users. In this case, Freemium can be a powerful strategy.
- Added value – You wouldn’t want to be the only user of LinkedIn. You derive value from other people using it. In this case, Freemium can help you gain traction if you use an effective invitation mechanism.
- No value – You don’t care if someone is using Evernote or not. The only reason for one person to tell another about the product or service is if they think it is awesome.
The Types of “Free”
One of the key factors in making Freemium work is the structure of the offering. What is it that you offer for free vs. charge? There are different types of free strategies. Let’s take a look at the popular ones:
- True Freemium – Give a version of the product for free and charge a fee for the other versions. There are two ways to go about this:
- Value based – The most successful type of Freemium strategy. The more a customer uses the product, the more value she derives, the higher the switching costs are, and at some point she’ll hit a usage limit and convert to a paying customer. Evernote and Dropbox are beautiful examples of this.
- Characteristic based – For example offering the product for free for one user (so it is based on company size for instance). Let’s think about a B2B application. If I’m a freelancer, I will use the application forever and I will never have to upgrade. If I’m a 3-person company, I can’t add more users and try the application for real and hence might not get to the point where I see the value in using it.
- Free Product for a Cross Subsidy – Give one product for free and charge for complementary products.
- Time Based Free Trial – Give a free trial for X days and start charging once the trial ends. The issue here is figuring out what X is. On one hand you want to create a sense of urgency, on the other hand you need the customer to see the value in the system.
Open Source as a Free model
Lately I’ve seen many entrepreneurs confuse Open Source with Free so I thought it would be helpful to make the distinction. An open source model can definitely accelerate the distribution of your product and is a viable free model. It has two main advantages. You might get developers to contribute to your product (see WordPress). By doing that you can accelerate the development of your product. The other advantage is that you give customers peace of mind as they have control over the source code. You can then make money from selling pro features or value added services. There’s a critical distinction here and that is that your code is out there and anyone can start a company to commercialize this code. Bear in mind that it is very hard (often impossible) to reverse a decision to open-source.
The Last Bit And The Secret To Success
There are many factors to consider when you are evaluating whether to use the Freemium model or not. However, there’s one last secret that I didn’t share with you. During the study, while looking at the successful Freemium companies, a pattern emerged. They all had phenomenal products. All of these decision factors are useless if the product or service you are offering is nothing short of amazing. If your product is not creating great value for its users, no tactic in the world will make Freemium work for you.
Retailer Mothercare launched its first mobile commerce site this week.
The user interface was designed in-house, while the site was developed by Usablenet, which has also worked on mobile sites for John Lewis and M&S.
Site search and navigation
Mothercare has opted for a simple mobile site design, and one which has been optimised for smartphones. Visitors to the site from other devices will see a more basic version.
As well as a prominent search box, the site has very clear navigational options, represented by 12 ‘buttons’:
This is a good approach for a site which will be accessed by people on touchscreen phones, as it avoid the problem of clicking on the wrong link.
As users navigate through the various sections of the site, filtering options allow them to narrow the available product range, and make the remaining results more relevant:
Research suggests that people want the user experience on mobile commerce sites to match that of desktop sites, meaning the same level of detail, product information and functionality that helps them decide on and make a purchase.
Mothercare achieves this with its product pages. There is a good amount of detail (product specs, suitable ages, dimensions etc) for items such as prams and car seats, as well as multiple product photos:
Any product reviews from the main website are shown on mobile, and calls to action are nice and clear:
The checkout has been optimised for mobile users, and also avoids making new customers go through a registration process before checkout, only asking for an email.
The checkout is well-designed and works well, but it is split over several pages, which means more page loads for users who may be on less than perfect 3G connections.
The more page loads, the slower the process is for users, so having things like selecting delivery options on a separate page should perhaps be avoided.
Mobile commerce is growing, with 10m UK consumers conducting a transaction by mobile last year, but unfortunately, 83% experienced some kind of problem when making a purchase.
This means that retailers need to ensure that mobile commerce sites are usable and designed to make payments as easy as possible, and Mothercare’s site fits the bill.
Just as the browser rendered AOL’s walled garden of content obsolete, the application experience is replacing the web page.
After fifteen years of building an always-on, ubiquitous network, we now have the right interface for it: the tablet.
In a recent post, I offered some solid research to support the end of PC dominance and the dawn of a new era, the tablet era.
One of the things that make this emerging market so exciting is that tablets offer a new user experience that expands the digital canvas. This breaks out of the web page metaphor, and significantly expands the ecosystem for online communication.
It’s about time
For fifteen years we’ve poured billions of dollars into making an always-on, ubiquitous network, and though my recent skiing excursions remind me that coverage isn’t perfect, it’s close.
But having ubiquitous access begs for a ubiquitous interface. One that activates instantly without the “boot and wait” experience of the PC, and that is great at grabbing connections and switching applications on-the-go.
There are three things that define the tablet a bona fide new user experience rather than a scaled-down laptop:
The combination of ease-of-use of the device itself, its awareness of location, and its ability to serve rich content anywhere makes it a ubiquitous access point to the always-on network. This montage is having a profound effect on user behavior.
To paraphrase one of my daughter’s beloved authors, “I would use it in a car, on a train and in a tree; it is so very convenient you see”.
If Dr. Seuss were alive today he would be a tablet user and would find himself using it in places he would never consider taking his laptop. I know I’m now introducing 1960’s Addams Family reruns and science animations to my kids’ bedtime.
This wouldn’t have happened with my laptop, which gets so hot it could be used as an electric blanket.
Everyone’s all about the apps, and apps are about usefulness
In our new app-driven world, a.k.a. Web 3.0, users are thirsty for usefulness, time-savings, and truly interactive user experiences.
The tablet’s whenever/wherever capability puts apps at our fingertips at any given time, without the limitations found with other small-screen devices. No-one wants more invitations to be a “friend”; we want technology that can help us get specific things done, and we don’t mind paying for it.
In 2010, app sales topped $5.2bn. Gartner estimates sales to explode to $15.1bn in 2011 and reach $150bn by 2014. (That’s the combined revenue of Apple and Microsoft springing up in the midst of a disaggregated market. Translation: Gold Rush.)
This is a true revolution
Just as the browser made AOL’s walled garden of content obsolete, the application experience is replacing the web page. Developers have heard the call.
Today, 350,000 active apps are already out there (source: 148Apps.biz). Users can tweet, check the weather, book a trip, check the snow report, report a pot hole, mark where they parked and follow a GPS path back….ah, to never lose your car in a parking lot again!
Where there is a need, there probably is an app (or there will be).
This is just the beginning…
If you’re sorthing through how to integrate ‘Web 3.0’ into your own business and brand, you’re certainly not alone.
In future posts I plan to address the paths marketers are following to deliver cutting edge experiences for their brands, and how different industries are changing their processes because of this richer mobile experience. There is absolutely more to come.
We keep saying that, and it just might be true this time, says Mobile Roadie’s CEO
Do you prefer Microsoft Word or Google Docs? How about Mac Mail or Gmail? The question of “apps” vs. “websites” has been around for quite some time on the desktop.
The same question has now gone mobile. Should you get eBay’s iPhone app or go to m.ebay.com? Most major properties today have both an app presence and a website. Why do they need both?
Users don’t care if they’re using an “app,” a “website,” or any hybrid of the two. They care about a clean, well-designed, engaging experience that lets them do whatever they want as quickly as possible. Right now, the best user experience – by far – is a native mobile app.
Like many of you, I’m a big fan of openness, and believe in the long run the mobile web is likely the future. However, we are a long way from mobile websites acting and feeling to users like native apps. That key difference means real money.
eBay did $2 billion in mobile commerce sales in 2010. 70% of this came from their app, 30% from their mobile website. Even more interesting, users of their iPhone app spent an average of $65/week, and iPad users spent $85/week, which is 50% higher than the average desktop web user. Think about that – the same customers spending 50% more for the same products. Why? It’s a better and easier experience to buy. To put it another way, in 2010 eBay did $400M more on their mobile app than their mobile website.
A few predictions for mobile in 2011:
1. Android (Google) will become the biggest mobile operating system in the world, surpassing Symbian (Nokia) and iOS (Apple). The combination of great user experience, every major device manufacturer, and every carrier on board will overwhelm others
2. The current gap between mobile advertising rates compared to the amount of time we spend on mobile will narrow, increasing mobile CPMs and giving publishers more value for their content. This will lead to a shift in advertisers paying more for ads on mobile, and shifting more of their spend to mobile overall
3. Apps will continue to explode and be a key factor in driving growth for any smartphone OS
4. By the end of the year, there will be three major mobile smartphone operating systems; the world simply doesn’t need more. The rest will be consolidated and/or fizzle out
5. Tablets will continue to find their place in our busy lives; the future of a 7-inch tablet vs. 10-inch remains to be seen
6. Mobile commerce will explode across the board; iTunes remains the best way to sell digital content easily, requiring users to only enter a password. Other properties selling both digital and physical will continue to play catch up to this gold standard. Two things to watch out for are increased carrier billing and more built-in Paypal integration
7. Near field communication (the technology that allows short range exchange of data, wirelessly between two devices) will explode into the mainstream and be built into cell phones. It’s already built into Android 2.3 “Gingerbread” and rumored to be built into the next major release of iOS. Using our phones to pay for everyday things (think “paypass” on credit cards or London’s “oyster” card) via our phone will be commonplace.
Michaeel Schneider is CEO of Mobile Roadie, notably makers of MIDEM’s official mobile apps. He hosts a special “How to Make and Monetise your Artist’s Mobile App” session for managers at MIDEM, January 23, 12.00.