Projjol oversees the company’s online and offline presence, PR/communications, industry/media relationships and market research. Previously, he worked in London as VP Marketing for mobile payments company Surfpin. He earned an MBA from the Saïd Business School at the University of Oxford as well as degrees in computer science and informatics from DePauw University and Indiana University, respectively.
The piece was co-authored by Joseph Deluca, Marketing Manager at SponsorPay.
Joe has a wide range of international experience, both professional and academic, across the US, UK, Italy and Germany. He is a graduate of the MA in Integrated Marketing Communications programme at St. Bonaventure University.
As we continue to transition into the age of digitisation, we are seeing a tectonic shift in the way online publishers and content providers do business. One of the biggest changes is in the way they monetise digital goods and services. The previously prevalent subscription-based (fixed price) or display advertising-funded revenue models are increasingly being replaced with freemium strategies often powered by micro-transactions.
These emerging payment models have benefits for both the buyer and the seller. The consumer is presented with options and flexibility while service providers can easily introduce new customers to their product with minimal ‘barriers to entry’. Importantly, in the case of micro-transactions, there is no longer a cap on the amount of revenue that can be gained from a single customer. In theory, there is also no limit to the number of customers that can be acquired.
An area where new forms of revenue generation have been the harbinger of change is the online games industry. It is becoming increasingly uncommon to be charged with an initial fee for access to a game. Instead, users are granted free admittance and then monetized through sales of virtual goods and currencies via a series of micro-transactions.
Social games behemoth Zynga is one of the most prominent examples of the success of these strategies. The four-year-old company generated almost $600 million in micro-transaction-based sales last year from less than 10% of its 250 million players, a percentage consistent with other companies in the space. Interestingly, according to sources, 25-50% of the revenue came from only 1% of users – the big-spenders referred to as “whales” (a term borrowed from casino-speak).
This success has not gone unnoticed. After many years with a pure subscription-based model, Blizzard Entertainment’s hugely popular MMORPG, World of Warcraft, very recently adopted a ‘free-to-play (F2P)’ approach which allows users to play for free until they reach level 20. Blizzard president Michael Morhaime says the move has led to a significant increase in new account creations and he believes it is “an important direction to continue lowering the barrier to trial and reaching new players around the world”.
The relatively new but fast blossoming mobile apps industry has also seen a rapid transformation in how revenue is generated. According to a recent report by mobile search firm Chomp, 97% of Android apps downloaded from their service in April this year were free. Additionally, Chomp found that among the most widely searched terms on both Android and iOS were the word “free” and its variations. At the same time, analytics firm Distimo revealed a month ago that the average selling price of paid iPhone games declined by 28% over the last year.
What is interesting is that in spite of the overwhelming popularity of free games/apps, overall sales did not drop but in fact grew exponentially. Distimo’s research found that 52% of all the revenue of the top grossing games was generated by freemium offerings, up from only 8% a year ago. In addition, the revenue for the 200 highest grossing games on iOS saw a 79% increase YoY.
Among the newer payment methods, offer-based payments – where users get rewarded with virtual currency or premium access in exchange for interacting with ad offers such as watching videos, participating in surveys and registering for product trials – are of particular interest. These offers are presented in different places, both at the online point-of-sale as an alternative payment method as well as in the form of promotional banners and other notifications elsewhere on the website. They are especially attractive for publishers and content providers since research reveals they actually support regular payment options by serving as a stepping-stone for users to sample premium content without parting with real cash. Once convinced or ‘hooked’, the majority of these users are converted to paying customers.
Not every industry has been quick to adopt these new payment models and methods. The struggling print media sector has been notoriously floundering with their digital efforts, some still operating under the traditional pure subscription model and many others trying to survive on shrinking revenues from display advertising.
A notable exception is the Financial Times whose metered access system – readers are allowed 10 free articles a month – has been successful at driving the conversion of visitors to subscribers. Encouraged by their results, The New York Times also launched its own pay wall earlier this year. The Wall Street Journal too has implemented its own version of a freemium model whereby their most popular content is free, but their specialized, more niche content is only available to those that register for a premium subscription. Indeed, Chris Anderson, Wired Editor-in-chief and author of “Free: The Future of a Radical Price”, suggests newspapers should “give away the head and charge for the tail”. The head refers to the general interest high traffic content that attracts 95% of readers, while the tail is special interest content that attracts about 5% of readers.The catalyst of this entire situation is choice. Today’s consumer, spurred by developments in social media, expects to be heard and desires to be seen as an individual instead of being thrown into a larger flock. By simply giving people the personalized choices they want, as opposed to the “one size fits all” approach with standard subscriptions and fixed fees, organizations are seeing a substantial spike in revenues.
When it comes to payment models, users have voted with their feet and the choice is clear – freemium models and micro-transactions are their preference. As it turns out, they’re also a more effective and profitable way of conducting business.
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