How to compete with free? - AppStairs

How to compete with free?

PRICING ONLINE CONTENT TO REACH YOUNGSTERS.

Executive Summary

Lately, the pricing of digital content has become a source of debate. How much is it too much when we are paying for an e-book? And for unlimited music streaming? What content are youngsters willing to pay for? Companies are continuously struggling to design new pricing models that will help them reach their youngest target audience. When it comes to the adult cluster, the challenge is slightly easier to accomplish, as the established prices are somewhat generally accepted. However, new generations are arriving with a complete new set of rules in mind. They are willing to pay for certain content, but expect other for free. They are approaching the market with a new mentality that has been fueled by their awareness of the change in paradigm: they now have the knowledge to demand.

Stoop&Simon’s latest brainstorming session had the set goal of offering a detailed approach on how to price online content in order to reach the most demanding target – what to do, what to avoid, and most importantly: how to do it.

Key Findings (recommendations)

  1. Do not under-prize your product.
  2. Do not enhance the cannibalization of online over offline.
  3. Become a broadcaster by creating a trustworthy brand name.
  4. Go Freemium!
  5. Bundle and enhance the packaging. Start with an appealing interface.
  6. Offer a quick, smooth and safe service.
  7. Networking is important to youngsters – consider it.
  8. Piracy is a fact – acknowledge it.
  9. Advertising is necessary to support free accounts – but be creative, smart and don’t annoy!
  10. Offer an extra service that can’t be copied.

Index

  1. Ill go crazy when I can’t access the Internet!
  2. Basic rules and pricing strategies.
  3. Issues to consider when pricing digital content.
  4. What content are youngsters willing to pay for?
  5. The role of advertising when pricing digital content.
  6. How to compete with Free?

1. “I’ll go crazy when I can’t access the Internet!”

We wouldn’t hear this statement regarding television, newspapers or radio. It’s no breaking news; upcoming generations are revolutionizing media consumption as we knew it. In fact, some of the youngsters interviewed by Stoop&Simon are international students that haven’t sat in front of a television for months (or even years in some cases!) As surprising as it may sound, they simply don’t miss it. Not as much as they would miss the internet. Their preference for online is surely higher than for any other media platform. In addition, the way in which the young consume offline content leaves a lot to the marketers desires. Taking all this into account, at Stoop&Simon our duty was to make an initial approximation by questioning ourselves; what factors are triggering the new choice of platform consumption? How are youngsters informing and entertaining themselves? What communication channels are they using? Our analysis has enabled us to reach some main conclusions.

To start with, we asked the students about their television intake. The contrasting patterns of consumption amongst the interviewed made it a challenge to set a generalized descriptive template. Some claimed to watch at least two hours of television a day, while others recalled they haven’t watched a television program in months. Eventually, the Internet won’t cannibalize television, the same way television didn’t slaughter radio and radio didn’t kill newspapers. History speaks for itself. But there are a few trends that need to be taken into consideration for their possible future effects.

Firstly, Stoop&Simon found that amongst the interviewed group the average time of television consumption is of approximately one hour per day. Most will watch the evening news while having dinner, or will fall asleep while viewing a program. Those that reported of consuming television for more than two hours per day, also multitask while the device is on. Thus, the media platform becomes considerably more comparable to a source of accompaniment than to an informant or entertaining instrument. The implications this has on the advertising brands are obvious. The young television consumer is distracted and extremely difficult to amuse. In addition, it appears that when youngsters really want to watch a specific movie, show or documentary, they will automatically reach for their laptop. They simply won’t wait until their favorite program is broadcasted to watch it. This change is being motivated by to two main factors. The first is the lack of control over the content that is being displayed. The new generations come with a freedom-of-choice concept deeply printed in their DNA. They demand availability to decide what to watch and when to watch it. Few times they will settle for whatever is on TV. The second factor has its roots on the advertising saturation that TV channels are suffering. While an online episode will have no more than an advert per interruption (on average), a 60 minute TV program can be slaughtered to cover up to 15 minutes of advertisements. On top of this, online advertising can be extremely targeted, while television is still used to shout a brand’s name in every possible direction.

So why do we say the internet isn’t cannibalizing television? One of the main reasons is the wise breakdown of television channels and the appearance of numerous “targeted” channels. This new trend is some sort helping to raise again the interest of youngsters towards television. For example, some of the students interviewed by Stoop&Simon claimed they do watch MTV occasionally. Nevertheless, it is undeniable to state the consumption is at its lowest.

Moving on, when it comes to newspapers and magazines, Stoop&Simon identified a gap between female and male consumption. On the one hand, females admitted to purchasing magazines at least twice a month. Amongst the mentioned titles we would highlight Vogue, MarieClaire or Elle. The reason behind their spending is they cherish the physical ownership of the product. Some will hold on to the magazines for several months, and some will even collect them for years. They do love magazines, but they will not purchase them more than occasionally, because they consider them to be a spoiled self-present (due to the perceived high price). On the other hand, male respondents content intake varies much more; from sports newspapers to a National Geographic monthly subscription. Although the content is different, the reasoning behind the purchase of magazines and newspapers is primarily the same for both sexes – they favor the touch and feel emotion behind their acquirement.

Concerning cinema and radio, both devices are characterized for occupying a minimal time of youngsters overall media consumption. The intake is extremely fragmented and only takes place in very specific occasions. Firstly, students declared they will go to the movies once or twice a month, despite the rise in price that cinema tickets have experienced over the past years. They lust the experience and will attend those sounded big movie premiers, just to make the experience and investment that much more worthwhile. When the situation entails radio consumption, Stoop&Simon spotted that youngsters listen to the device mostly while driving. One of the reasons they don’t turn the radio on more often relies in the annoyance of the advertisements. When at home, if anything, they are more likely to stream the program they want to listen to.

Now let’s get into matter; what about the Internet? The answer was completely unanimous; youngsters are connected all the time. They assure they are connected even when they aren’t actively browsing just by having their Smartphone in their pockets. If they lose this connection they will feel empty, anxious and lacking. This feeling will drive them to seek for a thread of WIFI wherever they go to quickly get back in tune. This attachment to the media platform is unique. Regarding online content consumption, once again there are variations from respondent to respondent, but still, a few website names gave us an idea of where the wind is blowing. All of the interviewed access search engines on a daily basis, whether it´s Google or YouTube. Youngsters will also access the internet in search of information. Accordingly, the essential used website is Wikipedia, but they are happy to look for information in blogs or newspaper and magazine’s official sites. The internet is also viewed as a perfect source of entertainment, where games, video and music are leading the time spent. Humor sites have started to gather an important roll too.9Gag.com is a perfect example. It is ranked 251 globally, and experienced an astonishing growth in the last two months. Finally, online shopping sites (whether it´s Nike or Zara, and whether the intention is to purchase or just to peep) are actively visited by youngsters. An aggregate of all this content is found in social networks, that are accessed on a daily basis from laptops and mobile phones. And speaking of Smartphones – youngsters will access the same kind of content but by downloading specific apps.

2. Issues when pricing digital content.

Prior to a further analysis, Stoop&Simon was eager to clarify what are the main issues to consider when pricing digital content. They may vary depending on the product or service, but still – we managed to isolate two ever present problems that every online company will have to deal with sometime or another.

The first issue is digital piracy; the eternal threat of any content generating company. All of the youngsters interviewed revealed it is common for them to illegally download music and films. By claiming artists and producers already have enough, youngsters have given themselves the role oftaking from the rich music and film industries to give it to themselves. In their opinion, free access to music and films should be treated almost like a human right. This Robin Hoodism mentality has helped them overcome any guilty feeling that they may experience to the point were some even feel proud of their actions. This is why there wasn’t any mention of the unethical nature of the activity. Additionally, the networking nature of the internet (now present in youngsters day-to-day mentality) also contributes to incite the illegal actions, as the young are found to be passionately sharing their acquisitions with friends and family members. Even while the brainstorming session was being carried out, the interviewed took the chance to recommend each other a bunch of website names from which they could download free content. Besides, students have remained undisturbed towards the imminent close-down of Megaupload and similar websites because, in their own words; “it’s the internet – something else will come up”. So what solution is there to this uncontrollable situation? For now, there isn’t. It might occur that in the future an efficient control method will be developed, but for now, the only policy is to take the trend into careful consideration.

The second issue is related to the virtual nature of the content. Online products and services lack many of the factors that help trigger a purchase. Instead, the content is nakedly presented to the prospective customers. A book is a book without a cover, but surely – the cover helps sell it. Besides, the lack of ownership over a physical product is also manifesting itself as an issue when targeting adults. When Stoop&Simon submitted these concerns to the youngsters, the outcome was surprising. While an adult will notice a great distinction between a virtual and a physical music album, for youngsters the difference is minimal. Unlike adults, they don’t perceive a virtual product as a diminished product. In fact – they appreciate it, as they consider it to be a much more efficient way of storing content. This generated another question regarding streaming and downloading. Which one do youngsters have preference for? It appears there isn’t a clear preference, as both have their advantages and disadvantages, and the lack of ownership isn’t considered to be a negative aspect of streaming. On the one hand, downloading is used to access quality content that youngsters desire to go over again sometime in the future. They will download a whole bunch of albums and films at the same time, and then erase progressively as the content is being consumed, making space for further downloads. Unlike films, music tends to be kept, as youngsters enjoy having instant access to their favorite songs by creating a 9,000 song library and several playlists. On the other hand, streaming is nothing but quicker. “It’s not about the ownership – it’s about the speed.” Overall, both are perceived as perfectly valid ways of accessing online content.

3. Basic rules and Pricing Strategies.

The following paragraphs will help the reader understand basic ideas that need to be taken into consideration when establishing the price of online content. It’s essential to bear in mind the charge can vary widely from product to product and, as everything else when it comes to matters of the online, it all comes down to research and trial.

First of all, virtual content is priced depending on the delivered value to the customer. In other words – a book isn’t made by its cover, but rather by what is found inside. This simple idea tends to be ignored at times, and we can still find online books that are half the price of the physical issue. Why? It seems many companies awareness of the difficulty of pricing digital content results in establishing lower prices than those accepted in the physical market. One of the results (apart from the obvious lost in revenue) is an instant devaluation of the brand’s image. “The cheaper, the worse”. That is our simple, straight-forward trail of thoughts. A perfect example to illustrate this is found in the recent price-war held by Amazon and iTunes. With the intention of getting hold of some new customers, Amazon carried out an action that lead to a whole lot of buzz. For one day, customers could buy Lady Gaga’s ‘Born to Die’ album for only 99cent. The same day, iTunes was selling the album for $11.99. It turned out that not only iTune’s sales seemed unaffected, but Amazon’s image was slightly tarnished. Download delays on Amazon’s website ruined the experience, convincing customers that the company’s services are more similar to those of a low cost brand. Therefore, the price as a strategic positioning method is also fit for internet content, but should carefully be evaluated. Cheaper is not always the best policy.

Although e-books are still suffering unfair online pricing strategies, magazines and newspaper subscriptions have managed to stay coherent in their pricing. As stated before in this report, youngsters enjoy possessing the physical magazine issues. This has provoked a different approach to online magazine and newspaper content. They are complimentary offers—not competitive. Digital copies will not trigger a cannibalization of the physical issues, but rather enhance the physical subscription model while also growing a completely new digital subscription business. However, this favorable situation isn’t found when analyzing the pricing of other digital content.

When the situation entails music, a successful and profitable model is yet to be accomplished, but Spotify and Pandora have already helped us shed some light on the issue. Both companies have decanted themselves for a Freemium model where ad supported users are self-sufficient but are far less profitable than the premium/paying users. This wouldn’t be a problem if it wasn’t for the fact that over 90% of both companies subscribers are ad-supported users. The companies aren’t profitable, but they are definitely helping to establish the basis of the future industry. And why don’t we bet on iTunes or Amazon’s model? Simply because youngsters consider music should be free. Stoop&Simon asked the interviewed students how much they would pay for the new album of their favorite group given the option of paying nothing. None of the respondents would pay more than 5€, and many claimed they would obviously download it for free. So far this dangerous mentality has only been embraced by Spotify and Pandora. This is why from our interviewees, none have ever paid for a song on iTunes, but many have a Spotify free-user account and some are considering purchasing the premium account in the near future.

Finally, a successful pricing of films has been approximated by Netflix, once again, with the freemium model. Recently, the firm unbundled its product offers with the goal of focusing only on the streaming business, as (understandably) they consider this to be a step towards the future. Nevertheless, unbundling a product offer is not a recommendation we would make. As stated before, youngsters are actively downloading illegally films into their computers for free. Once again the irritating question pops-up; how can we make them pay? It seems the only reason to pay would be if the service offers a little extra-something. So far, Netflix does offer a coherent organized platform from which to access movies, but that is about it, and it’s definitely not enough for this demanding generation.

To summarize, our recommendations of basic rules and pricing strategies to reach youngsters are as follows. Firstly, do not under price your product, to avoid enhancing the cannibalization of online over offline. Secondly, go freemium – it’s the only way. Finally, bundle your offers into a nice appealing package of goods.

4. What digital content are youngsters willing to pay for?

The million-dollar question. Youngsters don’t generally buy DVD’s or music albums; they don’t purchase songs on iTunes, don’t own a Netflix account and won’t pay more than 50 cents for an app. None of Stoop&Simon’s contestants have spent more than 10€ in building their music library, but they still own 300 songs playlists. They know every trick in the book to achieve free content access. This sticky situation unravels in one question; what are they willing to pay for?

It is important to clarify the obvious: the only reason youngsters aren’t willing to pay at all for digital content is they can find it somewhere else for free. The interviewed did state that, if this wasn’t the case, they would pay. However, the suggested amounts didn’t overpass 5€ a month, which presumably is the reason why Spotify still hasn’t properly taken off. As stated before, free content sharing is the default mentality of this generation and (at least for now) piracy is one of its consequences. And the only way to battle it is to take it into consideration.

When approaching the issue, Stoop&Simon discovered that the male respondents are spending astonishing amounts of money on PC games, reaching up to 200€ a year. This immediately caught our attention and flipped our main question. We rephrased it by asking; why would youngsters pay for something if they can find it for free? It turns out the reason behind their purchases is that, unless they buy the product, they can’t access the online multi-player version of the game. Sounds familiar? It’s the Freemium model all over again. Youngsters have the chance to save up to 60€ per game if they decide to download it illegally. Nevertheless, the premium service of the multi-gamer experience is driving youngsters to the stores, and the gaming industry is now expected to top $110 billion by 2015.

Our intention is not to suggest that this is the only reason why the gaming industry is so successful, nothing further from the truth. Nonetheless, it has unlocked one determinant conclusion. Youngsters are only willing to pay for content that can’t be copied. It’s an annoying idea but extremely reassuring at the same time. If anything, it gives a bit of hope for the future business models. To put it simply – any digital content aimed at youngsters should carry a service that is impossible to duplicate and valuable for the target. Once that is done, the price can be set. That is what youngsters are willing to pay for.

5. The role of advertising in the pricing of digital content.

The Freemium model implies advertising. It is necessary to support the free accounts, and youngsters are conscious about it. They will happily accept it in return for the free access, especially because most of the times they won’t even realize it’s there. It’s unbelievable how impermeable youngsters have become to push advertising. So some companies have opted for literally screaming their story in the users face by becoming extremely annoying. This not only devaluates the advertiser’s image, but also the content providers [image]. Not to mention the depreciation of the users experience.

Many companies have embarked themselves in the hunt for the perfect model that satisfies equally advertisers, consumers and content providers. A hint of how to do it is found in the mobile gaming industry with an innovating idea developed by the company KIIP, based in United Kingdom. In essence, their approach is based on offering gamers real-life prizes when they overpass a new level. The spectrum of possible gifts can vary from a free latte to a BMW test-drive. This means that the brand not only isn’t annoying, but actually interacts with the user in a moment of happiness by giving a positive reward. Depending on the user, different awards can be given to assure a successful prick on the target audience of the brand. To put it simply; there is no way a male will receive a make-up tester. This new kind of advertising isn’t yet common to find, but when the youngsters interviewed by Stoop&Simon were informed about it, they all seemed tremendously excited about the idea.

Once again we clarify that we are not implying the only valid advertising is the one that gives away free products. Still, the nature of the idea is interesting, as it gives some general guidelines towards the creation of a prosperous adverting standard. Firstly, to avoid being ignored, advertising should be extremely targeted. Secondly, it should offer something in exchange for the user’s attention. Anything (not necessarily a physical product) as long as its valuable for the user. On the whole, there is no need to be “annoying” when ideas are developed creatively.

Conclusions

Amongst our findings, we highlight the next ideas. To start with, do not under-prize your product. There is simply no need to do so. Digital and physical content should be both equally worthy. If the price is lowered, the customer will perceive the online version as a devalued adaptation of the physical product. Neither intensify the cannibalization of online over offline, as both contents should be complimentary, and not competitors.

In order to build a trustworthy brand name, the first step is to become a broadcaster. It might take some endeavor, but the reality of the internet cloud implies having some sort of information filters. Make your brand one of them. Moreover, to appeal to customers, bundle and enhance the packaging. To do so, the first step is to create an appealing interface through which content is served quickly, smoothly, and safely. Networking is important to youngsters, so enhance this service by offering some sort of connection to social networks. Let them share. What is more, acknowledge piracy is a fact. Youngsters want free content and this involves advertising. The solution has been made clear by the industry: go Freemium. But – be extremely wary with your advertising model. As much as its tempting to bombard the user with simple pushy messages, adverts should be creative, smart and never annoying. Finally, offer an extra service that can’t be copied and will make users want to pay. This last one is key.

Overall, pricing digital content is still a source of debate, as companies are continuously struggling to develop a strategy that satisfies all players in the industry. Hopefully, Stoop&Simon’s report has uncovered many doubts. However, an efficient prototype is yet to be found and will only be obtained through intensive research and by developing a coherent approach towards the target audience.

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