Moving from Free to Fee: How Online Firms Market to Change Their Business Model Successfully

Abstract

Moving from free to “free and fee” for any product or service represents a challenge to managers, especially when consumers have plenty of free alternatives. For one online content provider, this article examines (1) the sources of long-term revenue loss (through attracting fewer free subscribers) and (2) how the firm's marketing actions affect its revenue gains (through attracting paid subscribers). The authors quantify revenue loss from several sources, including the direct effects of charging for part of the online content and the reduced effectiveness of search-engine referrals and e-mails. The analysis suggests several managerial implications. Managers should focus their price promotions on stimulating new monthly subscriptions, rather than the current promotional focus on stimulating new yearly contracts. In contrast, e-mail and search-engine referrals appear to be effective at generating yearly subscriptions. Meanwhile, free-to-fee conversion e-mail blasts are a double-edged sword; they increase subscription revenue at the expense of advertising revenue. Finally, further analysis shows that the move was preceded by the buildup of momentum in new free subscriptions, which appears to be beneficial for the move's success. The decomposition and comparison of the sources of revenue loss versus gains reveals several trade-offs facing companies moving from free to free and fee.