Free To Fee

Sooner or later businesses are going to realize the difficulties in running a high fixed cost business and free business model. Specifically newspapers that have been giving away their online version for free.  The free online version not only cannibalizes print sales but also sets a low reference price that makes moving from free to fee difficult if not downright impossible. For any neswpaper the simplified revenue model can be written as:

Revenue =  Subscription revenue + Single copy revenue + Ad Revenue

In the past, newspapers made the assumption that Ad Revenues are going to grow and drive total revenue, hence they did everything they can to increase “eyeballs” and number of page views. What they failed to see is what they are giving up and whether the increase in Ad Revenue is better than loss from subscription revenue.

The question is ,

Is ↑Δ Ad Revenue  > ↓Δ Subscription revenue?  Or is this an assumption they used to make the newspapers free.

As the assumptions turned out to be false, they are starting to look at subscription revenue (online and paper versions). There are two challenges to this reversal to pay-to-read scheme:

The first problem is the reference price. Readers have been getting it for free and will be reluctant to pay for what used to be free despite the value they get. Any price increase that does not first focus on improving the reference price in the minds of customers will fail.

The second problem is making sure the newspapers offer unique and differentiated content that is not available for free elsewhere. Editor of Financial Times, which charges for complete  access to its online version FT.com, has  this to say

“If they feel it’s distinctive enough … you’ve got to be different” … “it’s the people in the mediocre middle that are going to be the meat in the sandwich”.

Let us look at these problems with The New York Times as our case study.

Recently The New York Times is polling its readers for their willingness to pay. They asked their website readers if they are willing to pay $2.50 to $5 per month for access.  Instead of asking their readers for their willingness to pay for a monthly fee, NYTimes should focus on improving the reference price for access to the web version.

One way is to have a “value meter” that is running prominently in each page and showing how much a reader saved from the free version. This is similar to what Amazon.com does with free shipping.  There are many other ways to improve reference price. ( I admire Amazon.com for its strategy and decision making based on analytics rather than on fads and gut feels).

Regarding unique and differentiated content, it is a hard task. One way could be is to create scarcity. For instance they could make available only the current day edition free and charge for access to all archives including the previous day version. If the article is adds value to readers even after a day, week, month or year then they should be willing to pay for it.

Going from free to fee is an uphill battle. Unfortunately all these could have been avoided if the newspapers have did the analysis and scenario planning before they made their online versions free.