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Insight/ Lifecycle Marketing

From Free To Fee: How To Convince Customers To Pay Up

by Elana Varon
Contributing Writer
CMO.com

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Industry

When a company decides to charge for apps, services, or content, marketers have a bigger challenge than merely getting their products noticed: If the product is already free--as are most mobile apps and online content--convincing consumers to pull out their credit cards for new features or premium versions adds an extra burden.

“Most companies cannot articulate the value of their product. It's shocking,” says Rafi Mohammed, a pricing consultant and author of The 1% Windfall. Ideally, he says, companies will define as part of their product rollout strategies some features that will be paid for, and why. If you haven’t done that already, “you definitely have to have something very differentiated.”

It’s becoming more likely that marketers of digital products will face this challenge. According to a recent forecast by ABI Research, three-fourths of mobile apps will remain free for the foreseeable future. But for companies that decide to charge for their apps or content, there’s money on the table. Mobile app revenues, whether from downloaded apps, in-app purchases, subscriptions, or advertising, is expected to grow from $8.5 billion in 2011 to $46 billion in 2016. In-app purchases--opportunities to sell upgrades, products, or services from within an otherwise free app--will overtake revenue from paid downloads this year, senior analyst Mark Beccue predicts.

The keys to marketing a successful transition, according to marketers and analysts, lie in collaboration with product developers, clear communication about product value, as well as a willingness to respond to feedback. This holds true even for companies that shift their pricing in the opposite direction, by making more capabilities free. If consumers don’t understand what you’re doing, then you risk a backlash, observes Evan Schuman, editor and publisher of StorefrontBacktalk, a retail-industry news site that launched premium options for its previously free content last year.

Define The Value
Schuman started Storefront Backtalk as a blog in 2006, and until last year, the site was primarly supported by advertising. Readers could access content for free. But Schuman anticipated online ad revenue shrinking. "Given that our value has always been in the quality of our content, making the content the direct revenue generator seemed to make the most sense," he says. "We really focus on our readers, and the advertisers are there to get a message to them. Since we're working for our readers anyway, that's the better source for our revenue.”

Schuman began to market the premium subscriptions in  February 2011, two months before the official April launch, enticing readers with a 50 percent discount for signing up early. “That worked out very nicely,” he says. He won’t reveal how many, out of a total 50,000 subscribers, have signed up, other than that the majority read for free. Those with free access can purchase exclusive content by the story, but premium subscribers get all content along with monthly special issues and other perks.

“If the story is substantially about our take and it’s information, you’re not going to get elsewhere, that goes into the premium range,” Schuman says.

Next Page: The importance of emphasizing a paid product's value.

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Sarah Hodges was director of marketing for RunKeeper, a startup that offers a mobile app and premium Web-based service for tracking users’ running, walking, and cycling workouts. “With our paid products, it’s more important that we explicitly market the value that the person will see,” says Hodges, who gave an interview to CMO.com before she left RunKeeper in February to launch Intelligent.ly, a Boston-based startup offering business classes to entrepreneurs and professionals. “It’s important to think about those user personas.”

RunKeeper originally offered free and paid versions, as well as third, paid service, RunKeeper Elite, which included features of the paid app along with advanced tools for analyzing fitness performance, discounts on fitness classes, and the ability for users to share live, with friends, their progress during a workout or race.

Although RunKeeper’s paid version was among the highest-grossing health and fitness apps on iTunes in 2010, the company decided to combine the paid and free apps and relaunch RunKeeper for free last winter. However, the company still offers the exclusive features of RunKeeper Elite for $19.99 a year. Part of RunKeeper’s message was that users of the free app would get more capabilities, but that Elite subscribers weren’t losing any. “It had the exact same value it did,” Hodges says.

Changing pricing is harder, consultant Mohammed says, if customers feel they’re on the losing end of the deal.

When Ning.com, which provides a platform for organizations to build their own social networks, eliminated its free service in 2010, many customers learned about it from online sources other than Ning itself. While customers waited for details about new pricing plans, the blogosphere filled with complaints that Ning had broken its promises to users, speculation about the challenges users would have migrating their networks if they decided not to pay, and questions about the impact the decision would have on nonprofit and educational organizations.

NIng weathered the storm. Forbes.com reported that in less than a year, Ning--which was acquired by Glam Media last year for an undisclosed sum (though AllThingsD reported it to be $200 million, mostly in stock)--has quadrupled its revenue.Glam Media did not respond to requests to talk to a company executive about the lessons from the transition.

Don’t Abandon Anyone
When companies offer a free app, the app itself becomes a marketing tool to entice customers to buy new features or products, either within the application or from partner sites, says Jessica Eckholm, a research director with Gartner.

Hodges says RunKeeper’s business plan anticipates new revenue growth through deals with partners, such as makers of health and fitness-monitoring devices that integrate with RunKeeper. RunKeeper will make money when users purchase products and services from its partners.

But the changes were confusing, Hodges admits. “We struggled with the messaging early on,” she says. She and CEO Jason Jacobs got the word out via company blog posts, emails to customers, posts on Facebook and Twitter, and in articles on sites such as GigaOm that cover technology, startups, and gadgets.

Customers got the message. It wasn’t likely, anyway, that they would complain about getting more features for free. And for the most part, they didn’t. Within the first three days of the relaunch, RunKeeper, which has more than 6 million users, was downloaded more than 1 million times, Hodges says. Elite subscriptions rose, too.

Nevertheless, a handful of customers who had bought the paid version shortly before the switch griped about it. “We had some users who spoke out and said, ‘I think it's kind of crummy, I just paid for this,’” Hodges says. Other customers came to RunKeeper’s defense, telling the complainers that the app was still worth paying for and suggesting they tout it to their friends.

RunKeeper has a vocal--and social--user community. “We always had that strong word-of-mouth marketing component,” Hodges says. Users are willing to correct misinformation about the products, without Hodges having to do much “policing or monitoring” of customer chatter.

Next Page: Not so easy for other companies.

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Other companies may not have it so easy. Schuman, at Storefront Backtalk, says that after the premium version launched, some readers cancelled their free newsletters because they thought all of Storefront Backtalk’s content had been put behind a paywall. The problem, editors realized, was labelling. They fixed it by indicating which stories were free and which were not. “The unsubscribes stopped,” Schuman says.

He continues to offer free access precisely to retain those longtime readers, many of whom remain unwilling to pay. “It’s psychological,” Schuman says. “A large percentage of our premium subscribers are new,” and they weren’t used to reading for free.

Know Your Audience
Part of marketing a premium app involves striking the right balance between different groups of customers. It may be straightforward, for example, to get committed sports fans to pay for access to a live video stream of their favorite teams in action, while less obsessive fans don’t mind watching what they can on TV. “If you're out and about, you want to know what's happening with your particular team,” Gartner’s Eckholm notes.

In February, Turner Sports and CBS Sports announced it would charge $3.99 for this year’s version of its March Madness app, called March Madness Live. The app streams all 67 NCAA Men’s Basketball Tournament games on iOS and Android mobile devices.  Last year’s version of the app was free.

If you’re an NCAA Tournament fan, then it would have been hard to miss the news. After the announcement, an ad on the NCAA home page linked to a page where visitors could sign up to be notified when the app became available. Another link offers a March Madness Live FAQ.

In interviews about the app, Matthew Hong, Turner Sports senior vice president and general manager of operations, said the broadcaster's goal for the app isn’t really to raise revenue but to expand access to the games to viewers who don’t subscribe to Turner Sports channels. Cable subscribers who authenticate themselves online can still watch the games for free, while anyone can watch games that are broadcast on CBS.

“Here in media we have a mixture of how we pay for it,” ABI’s Beccue notes. “Live events, I believe, would command a premium. I would think there is a considerable percentage of people that are going to buy into this because they don't have traditional access.”

At Storefront Backtalk, Schuman walks a finer line. He has to do more than simply differentiate content among subscribers. He has to offer enough stories for free that free subscribers find the site worthwhile, without turning off current or future premium subscribers.

Figuring out where the line is has been a process of trial and error. When Schuman and his team started labeling stories on the site, premium subscriptions slowed. The reason: There was too much free content. When editors put more stories behind the paywall, revenues from premium subscriptions rose again sharply.

As with other product decisions, analytics can help marketers target customers. Eckholm says crunching app store data, for example, can provide insight not only into who is buying apps, but also which platforms are most popular and even the day of the week or time of day when sales occur. Then, she adds, companies can plan releases for when they know their customers are most active.

Keeping an eye on when, and how, customers use paid apps and content might even lead to new ways to market them. Schuman recalls offering premium subscribers an option to buy a site license so a company could allow multiple readers to access Storefront Backtalk. He assumed these licenses would be purchased by retailers--the site’s core readers. But he noticed vendors starting to purchase them to offer complimentary access to their retailer customers as a way to form closer relationships.

“That’s kind of cool,” he says. “We never thought of it. Customers thought of that for us.”

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