It is not what you can give away, it is what you can charge for

In one of my previous posts I talked about why free is not a viable business model.  With every Web2.0 business based on free model, can anyone hope to charge for services? The answer comes from an essay by Gordon Crovitz, on online news media pricing:

For years, publishers and editors have asked the wrong question: Will people pay to access my newspaper content on the Web? The right question is: What kind of journalism can my staff produce that is different and valuable enough that people will pay for it online?

Applying this to Web based businesses, which for some reason are looking at their marginal cost of production ($0.00) to price their offering,  “It is not what it costs a marketer to produce or whether people will pay for your service but does their service add unique value that is not available for a lower price anywhere else?”

Of course this depends on whether people who recognize the value are still willing to pay for it even though no such service is available elsewhere. That depends on whether or not the marketer gave it away for free in the beginning and is now trying to move from a free to fee model. If you had trained your customer by giving them your service for free it is not going to be easy to switch them to a fee model.

So why not charge them from the beginning? Why worry about freemium/ freeconomics and building users base? Why invent complicated schemes based on growing mind share?

Crovitz says,

The truth is simpler: People are happy to pay for news and information however it’s delivered, but only if it has real, differentiated value.

True for any online service.

For related discussion on this see a post by Peg Corwin in her Score Chicago blog. She discusses Chris Anderson’s model  and the proposal by Walter Isaacson on newpaper.

See also a case for Unbundled Wall Street Journal in my Unbundling blog.

Web2.0 does not obviate Strategy

I attended a two day class on Web2.0 marketing taught by Andreas Weigand. There is nothing new that came about. I do see generalizations of certain concepts, like free is the next business model. One important impact of Web2.0 that gets lost in the hyperboles is the ease, speed and scale of the customer conversations. Customers were always talking to each other, tinkering with the product, and exchanging experiences and their product adaptations. Now all these happens at a much faster rate and across a large audience.

In my conversation with Professor Rashi Glazer, he described Web2.0 world as Marketing Communication, he added “today your customers are having conversations about your product and your decision is whether you want to be part of it or ignore it”. In other words, Web2.0 is not a substitution for bad strategy or lack of one, but a tool that companies cannot avoid but use to communicate with their customers. It is an effective marketing communication tool. Having a blog, user participation, social network, a tag cloud etc does not help your firm if it lacks strategy. If the firm ignores these tools in its marketing mix, it stands to be excluded from the conversation.

When a firm decides to enter a market it still has the fundamental questions to answer:

  1. Who are the customers and how do they make purchasing decisions?
  2. How is the market segmented?
  3. What are the holes that we can fill? Why haven’t someone else filled it?
  4. Who are the current players in the market?
  5. What is their strategy? Will they accommodate us or fight on price?
  6. What should be our firm’s strategy? Go for Profit or Market share?
  7. Do we want to stay small and capture one segment or grow to fill other niches?
  8. How defensible is our strategy? What is unique about our offering or the activities we perform to deliver these?

Web2.0 is part of the marketing mix tactics, letting you choose your price, channels and communication. It does not obviate strategy!

My Willingness to Pay for web services: $0

The concept of Willingness To Pay (WTP) is meant to convey what price a consumer is willing to pay to buy a product and still be left with a positive value. The idea of profit maximization is to price a product in such a way to extract every bit of value from the customer that they will be indifferent between choosing and not choosing the product.

I have not paid any for any of the web services I have been using. Search, blog, group collaboration, my own social network, surveys, documents, spreadsheets, etc.

Now when a new service that is marginally effective aims to charge me for using it, the choice is easy. Unfortunately the price of web services is now their marginal cost, $0 , not because it has to be priced at MC but because my reference price is $0.

Anyone who attempts to charge a non zero price without managing the customer reference price (that is improving it from $0) has a wrong business model. You cannot simply move from free to fee without first focusing on customer reference price.