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The perfect FREEMIUM model 11/24/2010 Petra Sanyova BCi08: 5th semester: e-Marketing The Freemium Model The term freemium is a coined term, derived from words ‘free’ and ‘premium’. This term stands for an expanding business model where companies are making profits from selling premium products to a small percentage of their total users. Although the majority of the users is not paying anything for the product, companies still has possibility to be highly profitable, and they usually are.
The business where only 5-10% of customers generate revenue could not run profitably under traditional conditions. The change was caused by numerous innovations in the field of digital production, as well as internet distribution. Due to these technological progresses, companies are able to copy and distribute free products to many customers at very low costs. Skype “Skype is software that enables the world’s conversations.
” Millions of people make video or voice calls, send instant messages and share files through this program. The majority of them do so with no charge at all.
The only prerequisite, to be able to use this software, is that both parties who would like to communicate need to have the program installed and running. Skype was established in 2003, with its headquarters being in Luxemburg. Its founders Niklas Zennstrom and Janus Friis are still partial owners together with investor group led by Silver Lake (that also owns eBay), the Canada Pension Plan Investment Board and Andreessen Horowitz.
Since the establishment – the first version of the program, Skype never stopped to grow and is still introducing new updates, features etc.
When it comes to its community, the Skype changed from a small unknown program into a program used daily by millions of people with many features. Lately everybody is impressed with the number of Facebook users; nevertheless in the end of year 2009, Skype had 160 million more registered users than Facebook, which in numbers is 560 million. According to the quarterly updates the company issues, it added 39 million registered users in the last quarter of 2009 only. This stands for 6% growth rate in the maturity phase of the product! 36. billion minutes of Skype-to-Skype calls were recorded in these last three months of 2009, adding to get 250 billion minutes of these calls recorded overall. Still in 2009 only, this number accounted for 12% of the world’s international calls. About 23 million users are logged into Skype at its peak times. (I am logged in just as a write this paper. ) Skype is international software, offered in 29 languages and used almost in every single country of the world. Skype offers a variety of features to all its users, with the main feature being Skype-to-Skype calls free of charge.
To improve the customers’ experience while calling, it introduced many additional features as: conference calling, video calling and group video calling. Moreover Skype is effectively used for instant messaging and sharing various files; screen sharing included. One of the latest introduced features is called ‘Facebook News Feed and Phonebook’ which enables users to call friends directly from a Facebook News Feed and Phonebook in Skype. Although this all is offered by Skype to its users for free, it does not indicate company’s irrationality.
Just because products are free, does not mean companies are not profitable. Google is a great example of this; and however slightly different, Skype is as well. The point is to broaden the classic view of a market from only two parties (buyer and seller) to more parties, from which only few exchange money. The most common model is the three-party system. The third party pays to participate in the system, the first two created by a free exchange between each other. The success of charging nothing for something lies in understanding of the psychological gap between ‘almost zero’ and ‘zero’.
As all the other members are needed to create the environment, for others to pay for, it is essential to attract as many people as possible. While the costs are insignificant and free is a word appealing to almost everybody, giving away the product to 90% of customers is reasonable. The rest 10% then consist of the customers who opted for a premium account and they generate revenues. Pareto principle applies This is the case of Skype too. The third party consists of the premium users, who are actually paying for additional features available in premium accounts.
This group of users accounts to 6% of its all active users generating over 777 million dollars a year. The additional features, they are then enabled to use are: Skype-to-landlines/mobiles, voicemail, call forwarding, call transfer and text messaging. The user also gets his/her own online number so the landlines/mobiles-to-Skype calls are then also possible. Skype specific success can be accredited not only to the great idea that is making people’s lives easier, but to the way its entire business model is set up: [ 1 ]. SKYPE business model
Partners:- Phone manufacturers- Online Platforms| Key activities:-Software development- Integration with new platforms- Marketing| Value proposition:- Free VoIP and video calling- Internet based communication| Relationships:- Appreciative user base- Thanks to free download- Automated with online profiles| Customers:-Not fragmented| | Key resources:- Software- Brand| | Distribution and acquisition channels: – Online| | Cost structure:- Very low maintenance cost- Software development| Revenue streams / pricing:- Sale of complimentary items- 7-8% conversion rate from free|
And no argument there, that it is set up brilliantly. Conclusion Skype, together with Flickr and LinkedIn, is one of the most successful companies, operating under the freemium model. As was already mentioned, Skype uses three-party model, in which the Pareto principle applies – small percentage of a customers pay to get a premium, covering the cost of the majority of users not charged and still generating the revenues. The reason for this is the almost zero maintenance cost, thanks to technological advancements.
For people to purchase the premium accounts is important that the system created is stable and large enough, and so Skype is doing great job in attracting these basic users. By giving the program for free and updating it regularly it does not create only large user base, but an appreciative one. As Skype is a program, which with its features, benefits the ordinary users and possibly save them money – this group is thankful.
Being thankful for Skype means being loyal and having overall positive attitudes towards the brand; which is another big asset of Skype. Nowadays it stands for a international brand, which is widely recognized. If company can keep up the conversion ratio, remain popular and hand off the possible threads from new competitors or telecommunication companies; its sustainability of the freemium model can be proved.