Focus on the Loyalest Customer

The battle between free and paid services continues to evolve in new and interesting directions.  Glenn Fleishman has an interesting article out that takes a look at some of the changing economics.

While there are some instances where the company/vendor have purely altruistic goals, the usual, underlying goal is that by offering something for free, some other monetizable action exists.  As a business offer free as a lead-generation tool, focus on filling this pipeline is critical to its success or failure.

Kodak Gallery, once know to us as OFoto, is carving out a new, rather interesting, pathway to revenue:

In the past, photos were stored by Kodak indefinitely at no charge. Now, Kodak has imposed the equivalent of a yearly service fee made through a purchase. Storage is free for 90 days after creation of an account. For accounts with less than 2 GB of stored photos, you must spend at least $4.99 over 12 months; more than 2 GB, $19.99.

Source: TidBITS, “Kodak Gallery Joins Parade of Free with Payment Services”

However, I disagree with Glenn that this is a step towards free.  This is really a wolf in sheep’s clothing.

If you think about the actual economics, what’s happening is we’re making a move towards paid services over free ones.  In this case, we saw a service that was free now having a cost - a declared cost. This differs from before where the photo hosting itself was the loss leader.

Every business that hopes to turn a profit has to recooperate the costs associated with providing its service.  This responsibility is three-fold, of course:

1. To Shareholders - every shareholder in the company has made an investment in the future of the company and cannot provide an infinitely supply of resources to that success
2. To Stakeholders - this includes the employees of the company and the universe of companies that supply services to the company
3. To Customers - most importantly, it's our inherent responsibility to make sure we persist to continue service to the customer in the method they're accustomed

Glenn continues on to point out an interesting fact about the economics:

As Web advertising dollars have shrunken from click fatigue and the declining economy, focusing more closely on the most loyal users may shed overhead while increasing ARPU (average revenue per user). A million ad impressions at $10 per thousand views ($10,000) doesn't add up as fast or come as easily as 1,000 subscribers at $10 per month.

Source: TidBITS, “Kodak Gallery Joins Parade of Free with Payment Services”

Despite the continuing downward pricing trends for storage, cpu capacity, etc. these costs are still not zero and without alternative means to subsidize these sub-systems, growing these features “to scale” quickly becomes non-trivial.

One caveat here, though.  I don’t necessarily mean to equate loyalty with value.  I think that there are a number of different prisms through which we can look our customer-base.  While revenue is definitely a hard metric to avoid, many others come to mind as well.  Will explore those at a later date, though. For a bit of history, I discussed this topic in September 2005, “The Fine Line Between Free and Profit”