With the release of Chris Anderson’s new book called Free: The Future of a Radical Price, there have been a number of debates cropping up all over the Internet about the sustainability of any business model that puts “free” as the price of their core product or service.
Fred Wilson, a venture capitalist in New York City, has been given credit for coining the term “freemium”. (In his latest blog post he reminds us that it was a reader named Jarid who actually coined the term and Jarid in turn said the term would not have gone anywhere without Fred’s backing. As an aside, I love seeing that kind of graciousness on the Web.) Freemium is the idea that you can gain the critical mass of customers — and their trust and confidence — by giving away your quality offering. Then you can offer upgrades or other premium-priced offerings and start to make real money. Fred gives an example where the monetization can amount to only $0.20 to $0.25 per user per month and still be sustainable. Keeping 200 million people happy each month costs so little with today’s technology that this is possible once you reach that kind of critical mass.
In the comments to Fred’s article was this from a comScore employee, Gian Fulgoni:
The challenge today is that online ad CPMs [costs per thousand impressions] are under huge pressure. They are falling far faster then the costs of distribution, production, storage and marketing. Something has got to give. Either am increasing proportion of companies will fail or someone needs to prove that publishers can charge higher CPMs for online advertising if they can show a branding ROI and not just direct response. At comScore, we’re trying to show that the Internet is terrific as a branding vehicle. That is sorely needed if we are to prevent further price erosion.
I had posted the same thought back in May and I really believe it is one of the keys to accepting any sort of free model. Advertising effectiveness still means reaching more eyeballs, even if not all of them respond directly. On the other hand, the people that do respond directly to online ads are more qualified sales leads than ever before. In the past, someone may have seen a little classified ad and had more questions. They would call or write to have those questions answered. Something about the ad had appealed to them, but they were still only “kicking the tires.” Now, an ad click brings someone to a page with far more information about the product or service, so anyone contacting the company after being “funneled” from an online ad is often a much higher-quality sales lead.