Promising new business models

The world of business (online business, in particular) has been (And continues to be) revolutionized by a plethora of new business models that have evolved in the recent past. Quite a few have shown tremendous promise in their short life span. I was particularly intrigued by two such models (Which are by no means new – Just that I came across these only recently): ‘Trial Pay’ and ‘Groupon’. While Trial Pay is a well-established name, with a client list that includes a number of blue-chip advertisers such as Sony, Starbucks and Apple, ‘Groupon’ is an idea with immense potential, but has had limited exposure, so far.

Three websites that I happened to visit in the last two days – Webroot, Lavasoft and one other “EndPoint Protection Program” as Gartner prefers to call them – offered products for free using the trial pay model. Traditional businesses (Non-online) have, since time immemorial enticed customers through “Free” offerings (Using “free” both for acquisition and retention). Before the emergence of the “Freemium” model on the web, mostly brick and mortar retailers (And other businesses in the B2C space), promoted products through BOGO offers, free samples of newly launched products and in some cases even free samples with no strings attached (to get word of mouth publicity), like the recent ‘Starbucks free ice cream’ facebook campaign (I m hoping to pen my thoughts about this campaign, contrasting it with the “free pastry with beverage” campaign, in a subsequent blog post in the near future – As to why the former was a good idea, and  the latter, not). ‘Trial Pay’ while not fundamentally different from the traditional “Free” offers, is unique in a few ways:

  1. First, the roles of paid-for product and freebie are reversed. i.e. in traditional offers of this kind, a customer decides to purchase something out of necessity and is offered a freebie with the purchase. Whereas with trial pay, what the customer wants is offered for free, and he/she has to pay for the bundled product (For eg. An ad from webroot says “Download and install webroot spysweeper for free, if you complete an offer from one of our trial partners – Netflix, Sony, Apple, etc).
  2. Unlike most traditional offers where the paid for product and freebie are from the same company, trial pay bundles a variety of unrelated products & services from different companies, together.
  3. While most traditional promotions offer limited flexibility in terms of what is given away, Trial Pay lets you choose among a number of products and services that you can choose to pay for.

Let us take a look at the economics of this model. As long as customers can find trial partner products that they have a genuine need/use for, this model can benefit most if not all parties in this N-sided market. Consider the Webroot Spysweeper example. An Anti-spyware is indispensable in today’s high risk web environment, where new threats emerge at an alarming frequency. According to the “State of the Net” report (consumerreports.org), expected total loss from virus and spyware this year is likely to $7.5Bn (Split between $5.8 Bn from virus attacks and $1.7 Bn from spyware attacks). Among those surveyed, 1 out of 7 had experienced serious virus problems and the incidence of spyware problems was 1 in 12. Assuming the average internet penetration in the US over the last year at 200 million users, and assuming the above incidence rates, approximately 28 million users would lose $207 on average due to virus attacks and 17 million spyware attack victims would be poorer by $100 each. So the expected value of loss from attacks is $207*(1/7) + $100*(1/12) = $38 (Expected loss, or the willingness to pay). Some users (If not all) would be willing to pay this amount for a decent anti-spyware product. But then for every user who is willing to pay for software, there are many who wouldn’t pay for software to please a dying grand m (Especially in countries where anti-piracy laws are lax – India for e.g. where you can get every piece of software worth installing  ever written, in the grey market for between $5 and $10). Trial Pay is a great way to coax at least some users of pirated/cracked software into helping the authors of the software in some way (In most cases – by signing up for a partner offer). While most partner offers require payment of some kind, there are some that require only a trial signup –

  1. Businesses that are not well established enough (or those that are in such dire need of publicity) that they feel that it is worth paying webroot for any free signups that can be thrown their way. With freemium success stories such as facebook, businesses have realized the importance of building a solid user base (And are willing to pay to do so).
  2. Companies that are confident in their products’/services’ ability to make trial users lives difficult without their product/service (subsequently resulting in a paid subscription). Eg. Netflix. I cannot recount from my experience how difficult it was to stop subscribing after the the trial period expired – because I did not try to!  But I am sure lots of trial subscribers would have been faced with this dilemma and would have made the right choice – to continue the subscription.

In essence, a small portion of the marketing budget of the big brands like Apple, Sony and Netflix ends up subsidizing buyers of legal software (Consider it a reward for, at least thinking about paying for software).

As for the software vendor, they stand to gain on two counts:

  1. With most costs (R&D, development & testing) sunk, what do they have to lose? Even if the partner company pays them a fraction of the standalone price of the software for every completed offer, it would only add to their bottom line (With near zero marginal cost of software deployment on the web).
  2. At least some users, who would otherwise have used cracked/pirated version of the software, end up contributing in some way to the company’s profits. I don’t expect piracy to reduce drastically because of this (The inherent unwillingness to pay for software is an innate tendency that cannot be expected to disappear overnight!), but, this is definitely a step in the right direction.

We need more such models, especially in times such as these, when software has to compete with other more basic needs, for the share of consumers’ wallet – In my case (As in the case of most students – international, in particular) , the annual subscription fee for a decent anti-spyware software can buy 2 weeks or more of groceries!

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~ by jyothiprakash on July 30, 2009.

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