Winning with 'Freemium' content

Eden Zoller, Ovum
15 Apr 2011

Making money from digital content is increasingly difficult, particularly when much of it is available for free - a state of affairs that is creating an expectation among consumers that all content should come without a price tag. Under these conditions, finding the optimum business model for a digital content service is critical, and yet it is something that few service providers get right, particularly with 'Freemium' models, which are attractive but hard to execute well.

In a review of a range of digital content business models Ovum found that freemiums are generating the most excitement among service providers and in our view is a good model for digital content services.

The essence of a freemium business model is one that mixes free and paid elements of some kind. The paid element might be in the form of a fee paid by users, but could include another form of exchange such as users?personal data or their time. The aim is to encourage free users to take the paid element of the service. The average conversion rate appears to be anything between 2% and 10% of the total free customer base.

Freemium business models have many attractive qualities. A key driver is the basic fact that people like and are attracted to things that are free. The free element in a service mix can be an effective way of driving traffic to a site, which creates value for advertisers and builds a core base of users that will hopefully convert to a premium offer. Another attractive quality of 'Free' is that it lends itself well to viral marketing. Consumers get excited about free things and like to tell other people about them - free creates buzz with minimal marketing investment.

Difficult to execute

The biggest problem with freemium models is that service providers tend to think they are easy when in fact they are hard to execute, and thinking otherwise leads to poor implementation and failures. Services in a freemium package must be designed from the bottom up so that the free and premium elements are finely balanced and complementary. Service providers will need to think carefully about exactly what features are required to create the tipping point that converts users from free to paid.

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