Robot Loves Kitten

Just saw a great article this morning, If Newspapers Were Stores, Would Visitors Be “Worthless” Then?, that compares search-engine traffic to walk-in retail store traffic.

It’s interesting because I think it highlights the benefits of the somewhat misunderstood and maligned “freemium” business model, in which a business offers a free version of its product in order to attract customers to paid premium versions.

Freemium is not a particularly easy model to implement or manage, so a lot of businesses are screwing it up. It requires a deep understanding of your customers and the purchase funnel, or how you’re converting free users to paid over time.

The Basics of Freemium
Freemium has become popular with Web businesses because it lets you turn your free-user base into a marketing tool. This isn’t the same thing as “viral marketing”, but it scales similarly well and is more predictable. Your free users paste your widget, for example, onto their websites, with a small branded logo that links back to your website. Each widget becomes an ad, attracting more new users. Then, its your job to upsell those free users to paid ones.

The reason this works is because (and this part is important) the cost of supporting this massive group of free users is LESS than you would otherwise spend in marketing to get the same number of PAID users that the free users create.

Hypothetically, you might be supporting 100,000 free users who each month attract 1,000 new free and 100 paid accounts. If your customer acquisition cost through paid marketing vehicles was $10, you’d have to spend $1,000 per month to generate 100 paid accounts. But those 100,000 free users might only cost you $200 per month in server/bandwidth costs to generate the same number.

Back to the store analogy, the walk-in traffic exists because of your prime retail location. And good businesses treat each new walk-in as an opportunity, not a burden. In the case of media, the fact that your business activities have built a brand and your free content is bringing in visitors means that the first part of the funnel is working. The fact that you feel these visitors are a burden because they haven’t converted to paying customers shows how completely deserving of a pink slip you actually are.

The traffic which comes in from Google brings a consumer who more often than not read one article and then leaves the site. That is the least valuable of traffic to us… the economic impact [of not having content indexed by Google] is not as great as you might think. You can survive without it.” — Jonathan Miller, News Corp.

So what are media companies doing wrong?
The biggest difficultly with freemium, as I see it, is how you structure your free/paid products. It’s easy to strike the wrong balance, and either have too many free users with no reason to upgrade, or not enough free users which chokes off your primary source of potential new customers. It’s really hard to do in practice.

Media companies have been the unwitting freemium poster-children for years now, and most are a great recipe for how to do it wrong. Most media sites give away their content, and then completely stumble when it comes to the upsell (Men’s Health used to be a great counter-example, generating lots of magazine subscriptions from their website, not sure how they’re doing today).

The root of the problem, in my mind, is that media companies have always had two business models: sell advertising, sell subscriptions. And a lot got screwed up in the translation to digital.

Online advertising has never been taken seriously by media companies with viable print products because the revenue and commissions generated by print vs. online ad buys are so disparate. There’s been very little serious effort to understand online advertising and the data behind it. It’s a mess, and will continue to be until we break out of the CPM/Pageview model.

Subscriptions are a difficult sell because it’s a completely different product. If I come to read an article on your site, it doesn’t mean I’m interested in what you do, it means I’m interested in the article you wrote. And I may even be wrong about being interested. That’s how searching works: I try different combinations of keywords in an attempt to generate a set of pages that is likely to contain the information I’m looking for.

So, to assume that someone who visits your website is ready to buy a print magazine subscription, only reveals how little you understand about the Internet. But you can afford these freeloaders, because they share and link to your content, bringing in more new visitors, and that is a valuable vein of new customers that you can mine.

You can work on generating more value from your advertising programs, and you can work on generating a range of paid products that visitors can purchase: exclusive reports, conferences, educational content, etc.

Regardless of what paid products you choose, you need to do some serious work in deciding how to create and manage your purchase funnels. When a visitor comes to your site and consumes your content, you need to approach them strategically. What do you want them to do? Share your content? View an ad? Buy a product? Read more content?

Most sites do all these things, peppering the reader with a million options (paradox of choice), and little of it is tracked. You need to set goals for your content and track the performance of these goals.

Once all these pieces are in place, it will be much easier to understand what parts of your business are under-performing, and what you can do to make the most of your freeloaders.