Freemium

Takes Pandora Public (Book Page # 97)

Answer the following Case Study Questions

1. Compare Pandora’s original business model with its current business model. What’s the difference
between the “free” and “freemium” revenue model?

Firstly, Pandora came up with a business plan of a "free revenue model". The users who just
joined Pandora were given free music for 10 hours then after that the free time was up. Then users were
made to pay $36 a month for the service, off course no one was willing to pay so much for that service
which day could get for free by switching on an FM radio so that model failed severely. After that, they
tried several other options until the final and the current one "Freemium" model.

They had to subscribe to the service so that they could continue listening to music.

After subscription of service they were given 40 more hours free time then they had a choice to
subscribe to the service but they could also wait till the next month to sign up again. Further the third
time they had affiliates and ads to help with the cost that was not able to get from the lack of
subscribers. All the time they had premium service that received better response for Pandora such as
higher quality streaming, fewer usage limits and on top of all, No Advertising.

In the Freemium model, customers are given superior service in return for paid subscription fees
while free revenue models are typically based on advertising support. In the premium revenue model
you allow them to have the basic service for free over the premium service for a monthly fee.

In the Freemium model they provided strict limitations of bandwidth and showed advertisements
between songs which resulted in a lower quality listening experience. The premium services are priced
at just 36$ per year which is 1/12 of their previous asking price.$3 a month really justifies the price and
satisfaction of customers, in this model the premium services are offered with higher bandwidths songs
and no advertisements.

2. What is the customer value proposition that Pandora offers?

Pandora users can create multiple radio stations that can play not only the music of the selected artists
but also closely related music by different artists. Pandora selects genres of music based on our favorite
musician and a computer algorithm puts together a personal radio system. When the customer decides
if one should pay for the service that Pandora offers, desi that when they upgrade to premium service
and subscribe to it they receive lesser usage limits with no advertisements and higher quality of
streaming music as well as a desktop application.

Pandora provides access to its customers to music through the "Music Genome Project. This
project was started by Pandora founders and it offers a way to classify music so that similar music of
related artists will group each other into what they call a personalized radio station. The music is
evaluated by professional musicians on the basis of genre, and then within each genre 200 to 500
different data points are set for it song by the musician professional. Also similar songs are included in a
customer's playlist by a function. Additionally, the users dislike promoting or demoting certain brands
and their music so that they will play less or more often on their radio station.
That technology "Music Genome Project" is considered to be the most impossible to replace by any
other company in the music industry.

3. Why did MailChimp ultimately succeed with a freemium model but Baremetrics did not?

Mailchimp started giving away its basic services for free in 2009, and charging subscription fees
for special features expecting that users would be more willing to pay for analytics and other services as
their email lists grew. That is the reason their users increased from 85,000 to 450,000 within a single
year. On the other hand the email volume went from 200 million a month to around 700 million. Among
all, the number of paying customers increased more than 150 % while profit increased more than 650%.

For Mailchimp, Freemium has worked a lot. They are supporting more than 8 million
subscribers worldwide and sending 200 billion emails per year.

Contrarily, Baremetrics came to a different conclusion. Though it had historically charged even for the
lowest tier of its product offerings Baremetrics introduced a free option in 2015. Users needed to
upgrade if they wanted to enjoy the full version of each of the features in the free plan. If I judge solely
by buying conversion rate, the free plan could have been deemed a success, as our 11 % of free plan
subscribers eventually became paying customers as compared to the 3% to 5% that is typical in the
industry. However, Baremetrics wasn't able to keep up with the sudden increase in data processing
requirements and the staff it head available for customer support requests were struggling to meet the
higher demand.

As a result of this the total customers of Baremetrics began to decrease even less than at the
time of introduction of the free plan because the frustrated customers cancelled their subscriptions.

Conclusion: Baremetrics discovered that its resources were too tight to use the freemium model as
compared to Mailchimp. Also, Baremetrics' marginal cost was higher and it was supposed to be a similar
company with different goals and scope. After that they changed their strategy to a 14 day free trial
strategy in which customers were forced to pick up a paid subscription plan.

4. What’s the most important consideration when considering a freemium revenue model?

What makes a business Suitable to follow freemium revenue model is explained below:

Low Marginal Cost:

When you are considering a freemium revenue model, the company must have its marginal cost low.
The profit maximizing businesses recognize that they have to offer more to paint customers versus
those using the free product, like Skype or LinkedIn.

Large Potential Customers:

Freemium business model allows a business to grow in order to attract more people, millions of
people to your service. Letter on, those full of people will become your asset that you will convert them
to paying customers.

Easy to use:

As you are going to deal with millions of people at your site and you are gonna deal with different
types of customers, the business scenario and front-end Model must be easy and comprehensive to use.
When dealing with such a large number of customers, a company cannot afford to have calls or
complaints in the customer support center from users in order to get used to your service.

High Customer Retention:

It will not let you achieve your goals if you try a million of people to use your free service for
once and then never come back to your site. Our company must make the site "sticky" and "attractive"
so that people visit the site and fill convenience to use it and keep coming back, keep using the service
and spread & share with other colleagues and fellows. Value you're giving to them as in service should
be greater than the price you are charging.

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