Archive for the ‘advertising’ Category

My Thoughts on “Freemium” Business Models

A few days ago, I read an interesting post from Andrew Parker on why freemium business models (users can pay a monthly fee to remove ads from a service) are bad for advertisiers. Here is the money quote:

Advertisers pay a premium in order to reach people in their specific demographic with disposable income. This idea of people paying to remove ads ensures that the audience for your ads are actually CHEAPER than the average internet audience.

I’d never thought about this before, but Andrew is right. Why would an advertiser pay high CPM to reach a customer who can’t (or won’t) pay to remove ads? This is a bit of a catch 22.

That said, I wouldn’t totally discount freemium (no pun intended). I still like the “upgrade to a premium version with more features or unlimited access” business model, as long as you create a premium version that is compelling enough to the customer.

In fact, Rhapsody’s freemium strategy converted me into a customer. Like most people my age, I was used to downloading music for free… Napster was hitting its peak in popularity during my freshman year of college. However, I hated Napster for two reasons: 1) the songs were of suspect quality, and 2) I couldn’t always find what I wanted. So, I decided to try Rhapsody on a recommendation from a friend. I started with the free service, which gave me 25 free on-demand streams and unlimited access to a handful of radio stations. After I used the 25 streams up in 2 days, I decided I was willing to part with $14 a month to listen to all the music I wanted, whenever I wanted it.

Even though there are many flaws to Rhapsody (no user-generated recommendations, no playlist search, nothing from Tool’s catalog…), I am now addicted. I can honestly say I would have never bought Rhapsody if it weren’t for freemium.

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Making Money Through Advertising: Harder Than It Seems…

I seem to be reading a lot of articles recently on why internet services must be free. Everyone from Seth Godin to Fred Wilson makes the argument that free is the internet strategy de jour.

However, when most people think of providing a free service, most people like to fall back on one simple revenue model… sell advertising. However, building a sustainable business around internet advertising is harder than it seems.

According to some reasonable assumptions on page views and RPM (revenue-per-thousand page views), you need to find a pretty big audience before you’ve built yourself a health business. Let’s say you have a well-targeted website with an active base of users. If this is true, than a RPM of $10 is high, but reasonable. In order to build a US$25 million business, you will need over 208M page views per month. To put it in perspective, you need to be close to becoming one of comscore’s top 100 most visited sites… That’s a lot of people viewing a lot of content.

Key lesson – don’t get lazy and fall back on advertising. Get creative… if you’re smart enough to create a product that people find valuable, then your certainly smart enough to turn that value into cash.

P.S. – Lightspeed Venture Partners wrote an good article with some useful assumptions for building an ad-supported online business.

Why are t.v. ad rates still so high?

I was having a drink a few weeks ago with a couple of friends, and the conversation veered towards the Internet. I argued that Internet advertising was much more effective than traditional media (i.e. television) because:

1) at it’s best, online advertising is active, as opposed to passive,

2) customer have the ability to spread your message virally online (I use the term “viral” based on Seth Godin’s definition of word-of-mouth versus viral), and

3) you have more transparency tracking online channels.

This is nothing ground-breaking, but I got the following question from my friend:

“If this is true, why do company still pay more for television ads, or pay for t.v. ads at all?”

I didn’t have a good answer for him… I tried the “marketers use what they know” argument, but this did not sway my price-focused, economist buddy. However, I think that I have an economic concept that helps to make my point:

Path Dependence

In short, path dependence states that adoption of new technologies is subject to its own history. By nature, businesses are conservative and have trouble adapting new technologies. However, the one that learn to adapt succeed, and the ones that don’t fail.

Hopefully, this helps me win the argument with my friend. That said, I’m going to research more into how people/organizations/companies overcome path dependence, as I’m sure it will be valuable someday

Social networks are a valuable asset because…

… they give companies access to a incredibly large and accurate personalized customer data set.

When MySpace was sold to News Corp, I saw the value of the purchsae not in advertising on web pages and profiles (which have become a nuisance), but in the enormous data asset of potential customer profiles that thousands of B2C companies could use.

According to the Wall Street Journal, Facebook is building an advertising system that utilizing all that data to target ads for clients. This will be great for companies and customer alike, since it should raise click-through rates, increase per-ad revenue, and improve the customers’ experience by showing ads that actually interest them.

This is interesting, but I think that an untapped revenue stream for social networks is market research. Using the data you have already collected, you could create market research consulting business that could effectively serve both large CPGs and down-market niche brands.

A Slew of Interesting Advertising Articles

This week, the New York Times has been good to us who enjoy advertising, media, and content. Here are a handful of the articles I found most interesting:

Now, the Clicking Is to Watch the Ads, Not Skip Them

They’ve Just Got to Get a Message to You

It’s an Ad, Ad, Ad, Ad World

I might do a longer post at some point about one of these articles, but I have been bogged down with “stuff”. However, I have read a lot of good stuff this week, so I may write a post this weekend.