Free to Paid Digital Business Models – 12 Key Concepts

Image of free vs. paid digital business models.

It’s not hard to witness the challenging digital media environment in which we are currently living.  Layoffs, companies going under, print businesses going all digital… and the list goes on.  Inevitably, the conversation amongst digital media executives focuses on what the right business model is in order to survive and drive sustainable growth.

Is advertising going to come back in vogue with higher CPMs and material improvements in sell-through?

Should digital media businesses listen to the strong words from investors, board members, or Rupert Murdoch to charge for their content? <Thanks Fred Wilson for the contrarian point of view.>

I’ve spent most of my digital career (since the 90’s) working with some of the premier media brands (WSJ, Time Magazine, United Media, NYTimes, Better Homes and Gardens, Ladies Home Journal, etc.) on these business model, content, and operational challenges.  I also ran a sizable digital subscription business for Rodale Interactive (MensHealth.com, RunnersWorld.com, Prevention.com, SouthBeachDiet.com, etc.) and raised capital, co-founded and launched my own digital business that relied on a hybrid digital business model.  That said, I thought it would be helpful if I shared my list of items that executives need to be thinking about when evaluating their digital business model strategies.

Before I go through my list, it should be noted that I have a bias against a single business model. I’ve witnessed the many iterations of digital businesses and participated in think tanks and conferences on the topic of digital business models.  Net net, over time, the pendulum swings in both directions (great advertising market and a poor ad market) and in order to sustainably compete, media companies need to identify strategies and operational effectiveness that allows for delivery and business model flexibility given market conditions and macroeconomics.

1. Staff Teams with Smart Left – and Right-Brained Thinkers – You will quickly find out that the secret sauce for one media company’s success is not likely the secret sauce that will propel your business.  You will need creative thinkers and quantitative experts working together, challenging each other, to interpret the data and test new thinking and execution.  Success is achieved through synthesizing many variables… an art and a science.
2. Incentivise Performance with Equity and Real Dollars – I do not believe sales people are the only ones that get motivated by financial incentives.  That said, I am a fan of a quantitative (some qualitative can be good as well) quarterly incentive plan that financially compensates effective thinking and successful execution. Please do not cap financial incentives.  If your team over-delivers that is a great problem to have and not something to use to discourage motivation. Actually, use it to find better ways to give performers more cash for even better performance.
3. Build a Team Culture of Innovation – This concept is not unique to digital business models, yet super important and unfortunately typically overlooked.  Digital groups that work as self-directed teams with clear objectives and goals usually perform well.  Limiting corporate politics, promoting transparency and authenticity does great things for a positive work experience and overall motivation.  When smart people work well together cross training happens and the focus clearly gets set on continuous improvement.  One point to note here – quickly get rid of bad attitudes, even if they perform well.  These folks can spoil a team and become a cancer.
4. Weekly/Semimonthly Team Meetings and Quantitative Objectives – I am always amazed when meeting with individuals from a digital group that have limited exposure to the metrics of the business.  With limited staff, each resource needs to be clear how their contributions affect acquisition, retention, and overall business model metrics.  The metrics should not just be a report given to the financial person as that would be a big mistake.  I suggest weekly or semimonthly meetings with key cross-functional digital team members to review historical metrics, understand trends, formulate test plans, and strategically test ways to improve the metrics.
5. Test Test Test – As I mentioned in #1, what is successful in your market with your customers is likely to be different from others.   Much of digital success can be attributed to effective direct marketing and this means doing research, determining a strategy and tactics, testing effectiveness, reviewing results, making necessary changes, and testing some more.
6. Do Research and Know Your Customer, Today - Another interesting point that frustrates me is how media companies think they know their customer’s wants, needs, and relationship to their brands because they did some research several years ago.   Understanding your customers should be an ongoing effort, especially as it relates to your acquisition and retention efforts.  This does not mean I suggest hiring a Madison Avenue agency every six months to do customer research.  There are cost-effective ways (especially for digital businesses) to keep on top of their current and prospective customer’s wants/needs.  You will likely find that customers appreciate when you reach out to them and are happy to tell you exactly what they want.  Having up-to-date quantitative data on the details of your audience is vital in determining the overall strategy which includes the business model, operations, and associated tactics.
7. Customer Segmentation – Once you do the appropriate research and data crunching you may find that you have different types of customers and one business model may not be the best path to success.  For example, heavy (usually loyal) users of your products or services may be the appropriate folks to test alternative business models.  This is appropriate and yes, they do understand that good content and tool sets cost real dollars.  Speak with your customers first and validate (quantitatively) if your business model hypothesis make sense.
8. Be Careful of Substitution Value as Rash Decisions can be Costly – If you are planning to put-up a paid wall based upon your belief that your customers have such a deep relationship with your brand and content and they will pay – I caution you.  There are many consumers today that are willing to migrate (substitute) from brand to brand if they feel the substituting brand has (somewhat) equal content and brand equity, and a free business model.  There are several types of media content that may struggle here… general news, health, etc.
9. Opportunity Cost Equation – This is a basic commercial concept (choose the most financially beneficial path,) yet critical when evaluating an overall business model.  It can also be keenly driven by the type of content, audience of users, and their commercial appeal to an advertiser.  For example, if you are a web site that has a large user base and traffic to crafts content, an advertising model may be attractive given the scale of the audience.  However, what kinds of advertisers will pay real dollars to get next to that audience?  Likely not a very lucrative path.  In this example the web site executives may want to take a closer look at the craft-loving audience and identify tools or content offerings they are willing to pay micro-payments for.  On the contrary, a premier health destination site with significant user and traffic scale will likely have lots of pharmaceutical companies willing to pay healthy CPMs to get in front of that audience.
10. Make Your Switching Costs High – When evaluating entrepreneurial concepts for investment one of the variables I like to see is high switching costs.  It’s the measurement or impact cost a customer must endure to leave one relationship and migrate to a competitor.  An example is if you were leaving an overseas back-up vendor to migrate to another overseas vendor that is $1 less per month.  Since it is ‘a pain’ to get back all of your data that is backed-up on the existing companies site you may just leave the current relationship in place and pay the higher per-month cost.  This concept is healthy in determining an overall web strategy and evaluating a business model.  The concept here is to use your brand and content expertise to customize an end consumer’s experience at your site so you are capturing and storing personalized consumer data. These consumers will think hard (high switching costs) if your competitor offers a similar service for slightly less money.
11. Hard to go From Free to Paid — Use the Smell Test – It is important to remember the obvious variables when determining business models.  Just as media companies are trying to survive and grow so are consumers.  Managing family expenses for most consumers is a challenge when household income is down.  When choosing whether to pay for premium news services or online gaming when these families are struggling to pay for their kids school supplies – the decisions are obvious.  Consumers are used to free on the Internet and there must be a very compelling concept for them to open their wallets.  Don’t just go from free to paid – you will fail.  Be strategic and make sure you first do the research, analysis, and testing.  Lastly, make sure it passes the smell test.  It is a simple common sense test.. Does this strategy or price point seem right?
12. No, An iPhone (or Android, or Palm, or Nokia, or BlackBerry, etc.) App is not Always the Right Answer – There are instances where smartphone applications make perfect sense and have generated significant brand, content distribution, and revenue growth for media companies or entrepreneurs.  However, I urge you to peel the layers off the onion before jumping to invest in a smartphone application as there are many challenges.  First and foremost, look at the data as it is consistent with the carrier deck applications.  Bottom line, there are few success stories and many more not.

In summary, I am a BIG fan of hybrid business models for digital businesses.  The success is based upon analysis, good strategy/execution, and ongoing testing and refinements.  However, in my experience, the key secret sauce to any successful digital endeavor is finding ways to build scale as that enables you to translate a large quantity of users and traffic into multiple business models based upon quantitative data analysis.

What digital business model concepts works for you?