A few interesting posts drew my attention this morning. First there was Dave Winer who predicts that on-line advertisement will be dead. Not because it will completely disappear, or that it’s growth will slow down considerable. But because it will be replaced by something more valuable, commercial information. Interesting thought. I’ve always felt that on-line advertisement only makes sense when the advertisement itself has value to its user. Dave takes that thought one step further and explains why commercial information is more relevant.
Erik Schonfeld at Techcrucnh shows statistics that advertisement growth is grinding to a halt. He uses the results of the 4 major advertisers (Google, Yahoo, Microsoft, AOL) to show that growth is slowing down considerably. Together they still create a staggering $ 8,2 Bln revenues per quarter, but what would interest me is to know the total market value right now. It would most likely show that more than 90% of all advertisement revenues are generated by these four companies. Why there are so many startups still executing the free advertisement based business model is beyond me.
Chris Anderson explains about the metrics behind a business model I like a whole lot better, Freemium. In this business model you provide most of your service for free and generate revenues from a small part. The model works only in cases transaction costs are nearly zero. You can have a huge distribution at near-zero costs and at the same time convert some of your users to paying customers. As your user base grows and you become more effective converting some users to paying customers you can have a successful business model.
Chris provides some market statistcs on this:
But that was just a hypothetical percentage split, to make a point. In the real world, what’s the right balance? The answer varies from market to market, but some of the best data is in the games world.
In online free-to-play games, companies aim to structure their costs so they can break even if as little as 5-10% of the users pay. Anything above that is profit. Which is why these numbers from Nabeel Hyatt are so impressive:
- Club Penguin: 25% monthly uniques pay, $5/mo per paying user
- Habbo: 10% monthly players pay, $10.30/mo per paying user
- Runescape: 16.6% monthly uniques pay, $5/mo per paying user
- Puzzle Pirates: 22% monthly players pay, $7.95/mo per paying user
As the blog notes, that compares very well to the 2% of the casual downloadable game market that pays, or a 3-5% that a lot of “penny gap” free trial web startups get. Estimates for the number of free Flickr users that convert to paid Flickr Pro range from 5-10%. Ning says 3% of its 500,000 social network creators pay for the premium version. And shareware software programs often see less than 0.5% of users paying up.
If you can get 5% of your user converted to paying customers then your business case can become profitable. As your business keeps scaling (due to the FREE component), 5% quickly becomes an interesting number of paying customers and a healthy stream of revenues.