Did you say “free?” I’ll admit that I was slow and hesitant to dive into the world of online and mobile media content. I’d had my iPhone for quite some time before I ever opened the App Store, and I was only recently introduced to Spotify, the on demand music site that has quickly become a favorite. I’ll also admit to being somewhat price conscious; thrifty, you might say. Imagine my delight, then, at finding that many apps and the services of many media content sites are offered for free. I am continually trying them out – after all, what have I got to lose? – and in the end, won over. Until now, I’ve never questioned this method of marketing content for free. As a consumer, I think it’s great; but I wonder, is it an effective model for businesses?
Why Free Works
Research suggests that consumers are inordinately drawn to things that are free (Sampanier, Mazar & Ariely, 2007). This may be because “free” actually changes people’s outlook on the thing being offered (Sampanier et al., 2007). Sampanier et al. (2007) propose that it works like this: when something is offered for free, not only do people perceive the benefit of not paying, but they also perceive the intrinsic value of the thing being offered as higher than they otherwise might (Sampanier et al., 2007). In other words, a cupcake for $1.00 might be tempting and probably looks tasty, but a free cupcake becomes irresistible – a gourmet bakeshop delicacy.
Free is also effective at convincing people to lower their barriers toward trying something new (Schmilovici, 2011). This was certainly true for me, with my “what have I got to lose” approach to trying new apps. It also appears to be true for most other users as well, as 96% of apps downloaded in 2011 were free (“Free Apps Win,” 2012). Based on this evidence, marketing free content is a popular approach; but does it truly allow businesses generate revenue?
The Freemium Model
One way that businesses are able to leverage free to build revenue is by using a Freemium approach. Freemium, a combination of the words free and premium, is a marketing concept where businesses offer free basic versions of their products and services while reserving upgraded features for those willing to pay a fee (Column Five, 2012). If you’ve downloaded a free app such as Pandora or Angry Birds, among many others, you’re probably familiar with some form of a freemium structure.
While there are several approaches businesses can take to a freemium model, the most successful, according to Schmilovici (2011), is the “value based” approach (p. 1). Under this structure, businesses set a limit on usage; once users reach their limit, they must either pay or stop using the service (Shmilovici, 2011). The hope here is that users would be so invested in the product or service by the time they reach this limit that they are more than willing to pay (Shmilovici, 2011). Examples of businesses that effectively use this model are Evernote and Dropbox (Shmilovici, 2011).
Still, getting users to stick around until they reach the preset usage limit is another matter altogether. Data reviewing smartphone app downloads suggests that most users have to interact with an app at least 10 times before they’ll make a purchase in the app (“Free Apps Win, 2012). Some companies used the Freemium model with great success and projections show that by 2015 64% of revenue generated by smartphone apps will come from in-app purchases (“Free Apps Win, 2012). Perhaps Evernote’s CEO, Phil Libin has the right approach; he says, “The easiest way to get 1 million people paying is to get 1 billion people using” (Macsai, 2010).
References
Column Five. (2012, May 16). What’s the freemium economy all about [Blog post]. Retrieved from http://talent.adweek.com/gallery/The-Price-of-Free-Whats-the-Freemium-Economy-All-Abou/3942013
eMarketer. (2012, January 27). Free apps win out over paid downloads. Retrieved fromhttp://totalaccess.emarketer.com.libproxy.usc.edu/article.aspx?R=1008796
Macsai, D. (2010, July 1). Evernote CEO Phil Libin’s 3 steps to “freemium” success. Fast Company. Retrieved from http://www.fastcompany.com/magazine/147/next-tech-remember-the-money.html
Shampanier, K., Mazar, N. & Ariely, D. (2007). Zero as a special price: The true value of free products. Marketing Science, 26, 742-757. doi: 10.1287/mksc.1060.0254
Shmilovici, U. (2011, September 4). The complete guide to freemium business models [Blog post]. Retrieved from http://techcrunch.com/2011/09/04/complete-guide-freemium/
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