As we've discussed in this course, the four Ps serve as a toolbox for marketers that help them attract customers and compete against competitors. Although marketers usually lump these four Ps altogether, price is very different than the other three Ps. Product, promotion, and placement are ways in which firms create value for customers. In contrast, price provides a way for firms to capture this value in the form of financial payment, thus setting the right price is very important, is a key part of the marketing equation. Although the prices that marketers set may be driven by a variety of different approaches such as cost based pricing or competitor-based pricing, every product or service charges some type of price. In essence, the offerings provided by marketers cost something, they're not free. When was the last time that you walked into a physical store and walked out with a product that you didn't pay for? If you did, you were probably breaking the law. Our traditional understanding of how pricing works is becoming increasingly challenged by the rise of new digital tools. For example, platform such as eBay flip the way prices are set by allowing customers to bid on the price of a product. Another intriguing development is the rise of the freemium model which allows customers to access a portion of a product or service for free and then pay only for the additional offerings they'd like to have. The freemium model is quite common for smartphone apps, can also be found in a number of other digital domains such as software, social media sites, and communication platforms. In this video lecture, we'll take a look at how freemiums work and the potential advantages they offer to both firms and customers in our new digital world. Here are a few examples of some familiar firms that successfully employ the freemium model. First, Dropbox. Dropbox is one of the world's leading file hosting platforms with over 500 million customers across 200 countries. Perhaps you have a Dropbox account. Dropbox provides free subscribers with two gigabytes of digital storage capacity. Now, once this limit is reached which happens often quite quickly, customers could upgrade to different types of premium subscriptions for a low monthly fee. These premium offerings, Dropbox Plus and Dropbox Professional provide customers with at least two terabytes of storage capacity, which is a million times larger than what you would get with a free account. They also provide a variety of other features such as a text search function and a 30 day file recovery service. This far Dropbox has convinced over 14 million people to become premium subscribers. Second, LinkedIn. You're probably familiar with LinkedIn. Is one of the world's leading professional and networking services which currently has over 600 million users across more than 150 different countries. All LinkedIn members can create a digital profile, connect with other members, and contact potential employers or employees for free. In addition to these free services, LinkedIn also offers a variety of different premium memberships that range in price from around $30 to $120 per month. These various memberships are targeted to different segments such as job seekers, hiring firms, and salespeople. These premium subscribers have access to a variety of additional features not available to LinkedIn's free members. For example, individuals who subscribe to LinkedIn's premium career service gain access to hiring managers and can compare their qualifications against other applicants. Approximately 40 percent of all LinkedIn users subscribe to one of its premium services. Third, The New York Times. This is one of America's oldest, largest, and most prestigious newspapers. Like most newspapers, The Times has been affected by the digital revolution and has seen its subscriber base shrink over the past 20 years. In response, The Times has created a very nice online version of it's newspaper and markets it using a freemium approach. Non-subscribers, free users like me are allowed access to five New York Times articles per month for free. If they want more than that, they have to pay for a subscription. Now over the years, The Times has changed its subscription price and offers discounts to certain segments such as college students. At present, readers can gain unlimited access to all of the Times for a low price of only two dollars per week. This price is quite appealing to many customers and The Times currently has nearly five million paid online subscribers, which is about 10 times larger the number of people who subscribe to the physical newspaper. In essence, a freemium is a digital product or service that offers a set of basic features for free but then charges a price, usually a monthly or yearly subscription, in order to obtain a set of premium features. In essence, freemiums combine free and premium and this model can work well for digital products and services due to the fact that the marginal cost of adding a new user is close to nothing. Now let's take a deeper dive. There are lots of interesting issues surrounding the freemium model. For the purpose of this discussion, I'd like to focus on three key features about this new way of pricing. First, the five percent rule of thumb. A freemium model is based on the assumption that a small percentage of paying customers can provide enough revenue to cover the cost of all of its free customers. So an important question is, what percentage of paying customers does a freemium business model need? Now the answer to this question depends somewhat upon both the size of a business's user base as well as its cost structure. However, five percent is a good rule of thumb. In general, most freemium platform seem to have a conversion rate somewhere between two percent and five percent. For example, Dropbox appears within this range. However, some freemium offerings like LinkedIn have a much higher rate of conversion. Second, the zero price effect. In order to succeed as a freemium offering, a business needs to strike a balance between offering enough free features to attract new customers while putting enough premium features behind a paywall to convert these customers, at least some of them, into paying members. Now if too many of these viable features are free, a business runs a risk of the zero price effect. This occurs when the free option provides so much value that the free customers have no incentive to subscribe to the premium version. Now, one way to reduce the risk of this zero price effect is to allow free users to temporarily see and use the features available to premium subscribers. For example, at times, LinkedIn will provide free users with temporary access to its premium offerings. Third, twin roles. We usually think of customers providing value to a firm through their purchase activity. So according to our traditional perspective, customers who don't pay aren't worth much. In contrast, freemium customers who don't initially pay anything provide value in at least two ways. First of all, free users can provide value by upgrading to a premium membership. Second, free users can provide value through positive word of mouth and telling others about a free offering. We combine these twin effects, we find that a free user is typically worth as much as 15 percent to 25 percent of a premium subscriber.
