Moving from Free to Fee: How Online Firms Market to Change Their Business Model Successfully

AMA Publishing
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Koen Pauwels & Allen Weiss

Executive Summary
Moving from free to “free and fee” for any product or service represents a challenge to managers, especially when consumers have plenty of free alternatives. This problem arises in many industries, including publishing, entertainment, and online content providers. After the bursting of the Internet bubble, which supported free online content by investor funding and high advertising income, many companies tried charging for their Web content, with varying success. For example, Microsoft entered the online magazine business with Slate, which unsuccessfully tried to charge subscriptions and now exists as a free site. Likewise, in September 2007, The New York Times abandoned the paid version of its editorial pages after two years, illustrating the challenge content providers face online.

This article addresses the following research questions on the move from free to fee: (1) What are the long-term performance effects of such a move? In particular, what are the sources of revenue loss that may offset the revenue gains from user fees? (2) What role do marketing actions play in the free- and fee-user response? In particular, which actions are especially successful in increasing free and fee subscriptions, for both short-term and long-term contracts?

For an online content provider, the authors quantify revenue loss from several sources, including the direct effects of charging for part of the online content and the reduced effectiveness of search-engine referrals and e-mails. As a result of the move, the company forgoes 1031 free subscribers a day, representing an advertising revenue loss of $1,680 a year. However, this loss is dwarfed by the annual revenue gain of more than $100,000 due to new short-term and long-term contract subscribers. Marketing actions have a different impact on free versus fee subscribers. Search-engine referrals generate more free subscriptions than e-mails do, whereas free-to-fee conversion blasts actually hurt free subscriptions. However, these blasts (together with referrals and e-mails) increase long-term contract subscribers, whereas price promotions are more effective at stimulating short-term contracts. Notably, the analyzed company ran many more promotions on long-term than short-term contracts during the data period.

This research suggests several managerial implications. First, managers should focus their price promotions on stimulating new monthly subscriptions, instead of the current promotional focus on stimulating new yearly contracts. In contrast, e-mail and search-engine referrals appear to be effective at generating yearly subscriptions. Meanwhile, free-to-fee conversion e-mail blasts are a double-edged sword; they increase subscription revenue at the expense of advertising revenue. Finally, further analysis shows that the company first succeeded in creating momentum in new free subscriptions, which allowed it to later this growth in a successful move from free to fee. Indeed, the authors expect lower revenue benefits for companies that (1) make the move from free to fee before momentum in free subscriptions has materialized, (2) set prices too high compared with consumer willingness to pay, (3) are up against a dominant for-free competitor, (4) charge fees for all (previously free) content, and (5) fail to ramp up marketing communication efforts and execute them effectively.

Biography
Koen Pauwels is an associate professor at the Tuck School of Business at Dartmouth College, where he teaches and researches statistics and return on marketing investment. He won the 2007 O’Dell award for the most influential article in Journal of Marketing Research and built his research insights in industries ranging from automobiles and pharmaceuticals to business content sites and fast-moving consumer goods. His current research projects include the predictive power of market dashboard metrics, the impact of brand equity on marketing effectiveness, retailer product assortment, price wars, the dynamics of differentiation, and performance turnaround strategies. Professor Pauwels received his PhD in Management from University of California, Los Angeles, and he won the EMAC 2001 best-paper award. He publishes in Harvard Business Review, Journal of Marketing, Journal of Marketing Research, Journal of Retailing, Management Science, and Marketing Science. He serves on the editorial boards of International Journal of Research in Marketing, Journal of Marketing, Journal of Marketing Research, and Marketing Science. Koen is a reviewer for these journals and for Management Science, Marketing Letters, Journal of Retailing, Journal of the Academy of Marketing Science, Journal of Advertising, Statistica Neerlandica, and International Journal of Forecasting.

Allen Weiss is a Professor of Marketing in the Marshall School of Business at the University of Southern California. He received his undergraduate degree from University of California, Santa Barbara; an MA from Ohio State University; and an MBA from University of Wisconsin. He teaches Marketing Management to students in the executive education program. Professor Weiss’s research is focused on high technology and Internet marketing. Before joining the faculty at the University of Southern California, he was on the faculty at Stanford University and was a consulting member of the technical staff at AT&T Bell Laboratories. He has published in Journal of Marketing Research, Journal of Marketing, Management Science, Organization Science, and Journal of Financial Economics. Professor Weiss consults primarily with high-technology and Internet firms, including Intel Corporation, Texas Instruments, COMPAQ, and IBM.

Journal of Marketing, Vol. 72, No. 3, May 2008
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