Freemium

It’s funny that this business model comes up because I was just on the Skype web site today thinking about how it makes its money. I remember looking around on the site for advertised links of which I saw none. This intriguing business model now known as "Freemium" is really quite simple. You provide a service that the customer was already looking for. You provide that service for free and keep it free forever. How do you make money? You offer bonus packages and services that require payment. In essence, you get people so hooked on your quality product, that they become convinced they need this other thing… a better, stronger version of the product or an add-on, and then they have to pay for it.

I found an interesting blog that talks more specifically about how this business model is beneficial for both involved parties. David Beisel writes:

Risk is mitigated by the user because s/he isn’t paying up front. It isn’t until the consumer is comfortable with the relationship where s/he is ready to overtly pay to upgrade it. And by this point, the initial value delivery is in the rearview mirror because the connection between customer and service-provider has strengthened in the meantime. Again, the separation of initial value-delivery from eventual payment helps both parties – by alleviating risk for the consumer and building loyalty/allegiance for the business.

I think this is a pretty good assessment. It seems that most customers will use the web site for the free stuff for a while first before they become convinced they need all the other bells and whistles. One thing is sure, though. The base product has to be strong enough to lasso the customer in for the premium goods. Reza found a good article about this and how to let the customer lead the way. The bottom line: be ahead of the game and have a quality product.

Dictionary.com offers this service. I often use this web site to look up words (obviously) but also to translate text and find synonyms. It turns out, for a fee, you can subscribe and get everything you get for free only without the "distracting advertisements" as well as word games and further information about grammar and language.

Codestyle.org also uses the Freemium business model. It provides a wide variety of information to web developers thereby getting them hooked on the site and all it has to offer, then says "you probably also NEED these thing..." In this web site's case, those things are: all premium content, a year of updates, email notification of new items, and post follow up questions on all answers.

Swicki:
What is a Swicki? A swicki is a "new kind of search engine that allows anyone to create deep, focused searches on topics you care about. Your swicki presents search results that you're interested in, pulls in new relevant information as it is indexed, and organizes everything for you in a neat little customizable widget you can put on your web site or blog."

Chinese Officials Suppress Public Opinion

...And we’re at it again. It’s never enough to stick to what we know and stay happily under the rule and reign of our own government. It seems the Chinese government is taking greater measures for more censorship within the country, all crimes in the eyes of many human rights groups and American companies. We, as Americans, recognize (and often take for granted ourselves) that freedom of speech is a God-given right, a basic human right. But as we’re discovering with each minute of enormous growth of the Internet, some people are terribly frightened and even threatened by the power of that basic right. Sure, everyone’s entitled to his or her opinion… until it becomes the opinion of such a large and powerful group as the government of the fastest growing economy in the world. With the Chinese government feeling threatened by the democratic ideal that is this freedom of expression, the whole world is affected.

Many American companies have banded together to stop this injustice of free thought and opinion being silenced by the Chinese government. Now a United States Congressman wants to put sanctions on American companies that do business with companies in “Internet-restricting countries.” I too think it’s a terrible injustice not only to censor, but essentially to mandate what links show when something is searched. However, I believe it is too dangerous a step for the American government to take to forbid American companies from doing business with companies in these other countries.

What I find most interesting about this article is that the logic goes against that of the last article I chose to write about. We know that the United States and China are dependent on each other for certain things, not the least of which is the strength of each other’s economy. Based on the Meyer article from last time, it seems that any discouragement from doing business with China is not the best idea for the sake of the U.S.’s well-being. Indeed while it is unquestionably wrong and unjust to keep truth and public opinion out of the reach of the Chinese people, it is by the same logic unjust for forcing the Chinese government to conduct itself the way the Americans see fit.

With that said however, one must still consider that the Chinese people need to have a voice, and one that is not silenced by a more powerful entity. As this video shows, a web site with a public forum about an upcoming election was taken down simply because the government saw it as a threat to its power. But they cannot silence the citizens entirely. Public opinion will still be heard and shared only on a less open forum. But that sharing of information, whether online or via word of mouth, is what defines the Internet and the future of global business. Without letting the Internet serve as that open forum, China will undoubtedly lose significant ground as the next world power.

Group work - vente-privee

Vente-privee was created at the end of 2000 after Xavier Court passed by a Weston shoe store and saw an enormous line where people were gathered to take advantage of a private sale. He immediately realized that this concept had great potential, especially on an online level. He created the online site to give consumers a way to feel part of an exclusive club while getting products at a discounted price. As the internet has continued to grow, the company has entered into agreements with more and more important brand names.

Opportunities for Vente-privee:
- develop concept in other countries
- improve delivery time
- stay aware of up-and-coming brands
- stay aware of competitors
- keep discounts
- keep company exclusive while still getting new customers
- develop ways to sell more products (cars, boats, airplanes -- the sky's the limit!!)
- help brands develop their brands further and give easy avenue through which to sell

Competitor include: ventedudiable.com, fruitrouge.com, linvitesdesmarques.com, club-prive.fr.

See also these comments:
Fadwa
Natacha

Vente-privee

Vente-privee is a very interesting business model, much like bluefly in the United States, only selling a broader range of products. It has two types of customers, the average individual who shops online and the brands that it sells. The beauty of it is that the brands have the option to get rid of their inventory through this company that is willing to take on selling it and the individuals who belong get to feel as though they belong to an exclusive club. These consumers love a bargain and the fact that you must have a membership to have access to these deals.

Vente-privee sells its products at a reduced price and tells customers about sales through email and "bande-annonces".

This way, the company remains in close contact with the customer and even gears those emails toward what the customer has bought in the past. This model is good because it benefits all involved parties very well. The company takes the leftover inventory off the hands of the luxury brands who are done trying to sell it and moving on to other endeavors, while the customer gets the opportunity to buy the product at a discounted price. Vente-privee then gets its share for successfully selling what the original brand could not (more details).

This concept could be effective on a greater level as well. As we’ve learned from eBay, one’s trash is another’s treasure. Therefore, I would think a company could be formed from the loads and loads of inventory left over from any company. In a way, this has already been implemented with sales and clearance sales on web sites, but in those cases it is still the original company who remains responsible for selling them.

Suzie's and Irina's responses about vente-privee discuss how the business model enables the companies (i.e. Diesel, Saint Honore, etc.) to give their respective companies a certain amount of time to sell their latest line, while still allowing those companies to maintain their images in boutiques. And as we learned with the Long Tail, the beauty of this, too, is that it’s ONLINE, so the brick and mortar location, beyond a warehouse, is not necessary.

Notes:

• exclusivity/openness
• preserving reatil price
• preserving image
• competitors

What American CEOs need to know

This is quite a heavy article. It was written by Herb Meyer who served during the Reagan administration as Special Assistant to the Director of Central Intelligence and Vice Chairman of the CIA's National Intelligence Council. [“In these positions, he managed production of the U.S. National Intelligence Estimates and other top-secret projections for the President and his national security advisers. Meyer is widely credited with being the first senior U.S. Government official to forecast the Soviet Union's collapse, for which he later was awarded the U.S. National Intelligence Distinguished Service Medal, the intelligence community's highest honor. Formerly an associate editor of FORTUNE, he is also the author of several books.”] If you took the time to read it you’ll understand why I say that but also why I chose it. My dad emailed me this article a couple of days ago with no commentary, just “read this; it’s interesting.”

The implications in the article are great, startling, interesting. While I don’t agree with the author whole-heartedly on a couple of topics, I think this article and its talking points are worth further discussion.

First, Meyer’s comments about China moving millions of people from rural areas to urban areas intrigues me. As the reader, I was frustrated that he didn’t explain more why the government is doing this. Sure, bring people to where the work is… but 250 million people? That needs an explanation! The codependency between China and the United States he discusses is dead on. Living here in Paris and traveling around Europe, I feel like I’m being robbed. Some things are so much more expensive than at home, and I’ve never really understood why. I never heard enough about China’s importance or influence to understand that it carries so much clout in the world market. I was trained to believe they were more at the mercy of the U.S. than we at theirs. This factor is indeed extremely important for American CEOs to consider. But the Chinese are not yet home-free when it comes to supplying Americans with all it hungers for. The government and people of China need to consider how to handle the ever-growing population and the concentration of that population before the country itself experiences total and damaging chaos.

The problem of changing demographics in Europe and Japan especially is an imminent problem for which not just governments have to prepare; people all over the world, thanks to globalization, will also feel the effects of younger citizens bearing the financial burden of the ageing population. This of course includes the American CEOs Meyer is targeting in his article. Not having young people to pay the pensions and social security of the enormous ageing population could be disastrous for those young people. And if Meyer is correct that the European economy is in such shambles, there may eventually be a mass exodus to find better circumstances elsewhere.

*Side note*: Besides France, I am most familiar with the goings-on in the Netherlands, where, I’m told, Muslims immigrate in droves. One interesting point I have heard on more than one occasion about these immigrants is that the number of children in a family is staggering, often as many as eight. I suspect this is where the comment about half of all births there by 2020 being non-European comes from. But Meyer fails to mention this fact that will most certainly have an impact on the number of working young supporting that ageing population.

Personally, as much a I love Europe, I don’t see that this is the place where I would consider settling down and having a family. There is a good chance I will marry a European, and despite the great things I feel about this continent and the Netherlands, a failing economy and increasing danger from global warming make it less and less appealing to try to start a life here. And, while I would not fall into the category of lost residents, I could be a particularly attractive immigrant with European (rather than Muslim) heritage, a good work ethic, and a desire to integrate myself into society. But if they can’t attract the kind of immigrants that will keep the Netherlands (for example) truly Dutch, how can they think they have a prayer to preserve their society as we know it when their people won’t reproduce and the country gets more Eastern Europeans and Muslims every day?

The Long Tail may have some legs to it

Chris Anderson's Long Tail analysis addresses some interesting points that I have been aware of but have never really thought about. Just like all those times (i.e. all day, every day) I've been subjected to someone else's marketing tactics, I had not noticed exactly what these innovators have come up with this time. But I have to admit, it's ingenius.

I can relate personally to the Amazon example of the company suggesting books and other items related to what you search for or add to your wish list. My own Wish List is probably about 50% made up of items Amazon itself suggested for me. I now realize that I, too, have been the victim of the Long Tail phenomenon. At least that's how I've always looked at it; people are the victims of these mass marketing ploys to get us all to spend more and more! I always hated it when people asked me my zip code before we could complete a transaction. I felt it was my duty to keep them from keeping tabs on what this girl from 66208 was buying. I couldn't see that any good could come from having that information.

Alas, the Long Tail seems to have a much more well-intentioned end in mind. For that reason, I now consider myself the beneficiary of these newest marketing tactics. As a consumer I crave products and services that fit my needs. Who knew that someone else was determining my needs for me? Now I understand that so much more than I thought was at my disposal.

The mention of iTunes in the piece reminded me of all those times I've searched for a song and been surprised by the many covers of the same song. While covers aren't generally as well received as, say, similar music by a different artist, they still fall into that Long Tail category, making them fair game for potential profitability.

Anderson suggests video "Game publishers could release every title as a 99-cent download three years after its release - no support, no guarantees, no packaging." Based on today's teenage interest in 80s pop culture iconic game of Pacman I saw recently, redistributing the game so that people could still play it with the almost obsolete (right?) joystick could revve enthusiasm back up.

But getting back to the topic at hand, if we take a look at Netflix, we see an enormously successful internet business with no brick and mortar retail locations. Its business model is successful because its niche IS the Long Tail, with thousands of documentary titles and other special films from which to choose. In addition to having hit movies available for rental, it also has thousands of other lesser-known titles that movie buffs, professors, and curious people alike can find based on their particular desires. Although Netflix's net income was less than in past years in 2006, it is still growing at a solid rate and keeping at least side by side with major competitor Blockbuster. The company, as all good companies do, continues to look for new and creative ways to stay ahead of its competitors and always considers its inventory.

If we look at the snippet below from Seeking Alpha's web site, we see how this niche creates the lucrative business it does for Netflix. The company has learned how to develop a successful product that is more focused on creating interest in the lesser-known films and documentaries.

THE LONG TAIL
We believe a key driver behind NFLX’s success rests on its ability to create demand for lesser-known and older movies (i.e. moving subscribers “down the tail"?).
These titles:
1) are cheaper to acquire,
2) improve wait times,
3) provide more depth to the service, and
4) help restrain demand for blockbuster new releases.

These benefits should improve overall profitability and attrition rates. Considering the high cost of acquiring new subscribers, the ability to reduce churn has meaningful impact on earnings.

WHAT IS THE LONG TAIL AND ITS EFFECT?
The Long Tail refers to the end of a one-sided bell curve that measures title depth on one axis and title demand on another axis. The “hill"? represents the few number of blockbuster titles that are in high demand while the long tail represent the large number of “catalog"? titles that are abundant but have limited demand. Typically, most entertainment providers have focused on the “Large Hill"? given this is where the bulk of demand is located. However, the power of the internet, the minimal costs of storing titles, improving distribution capabilities, lower acquisition costs, and analytical software allows for the depth of catalog content to compensate for the lack of demand. Furthermore, these improvements have also allowed the bell curve to flatten out (i.e., more title can not be cost effectively sold). We see NFLX as utilizing the long tail as a competitive advantage that should help generate additional operating leverage.

This theory of "The Long Tail" is not agreed upon across the board, however. Wall Street Journal's Lee Gomes disagrees with Anderson's claim that there is a rapid and certain change in people's power to broaden their horizons through the "long tail". Still, I'm sold. I think we've seen only the beginning...