How Customers are Like Lab Rats !!!

I hope people won’t get offended by the heading of this article. I laughed loud my self when I received this information. It seems we are more like animals than we may think!!!

In 1930, research revealed animals tended to work harder as they got closer and closer to a reward. According to the information I have received, research at Columbia and Fordham universities found that consumers in a café loyalty program bought coffee more frequently the closer they got toward earning a free cup of joe.

Another study found that internet users, who received reward certificates for rating songs, rated more songs and visited the web site more often as they neared their goal.

The main idea here is how customers perceive the offers might improve their uptake.

The reason why I started this article by breaking this news is because I found it very much similar to our up-coming discussion subject “freemium” as in both cases the bottom line is customer’s behavior and their reaction to business offers whether through the loyalty program, in case of established customers base, or stimulating them for the first time through various technique like:

• Free downloads of music, software and photos
• Limited period free downloads of software as a trial
• Free upload of files, photos and music up to limited storage capacity

As per Chris Anderson, today’s disrupter’s motto is “Be the first to give away what other charge for”.

The dominant business model on the internet today is making money by giving things away. This business model is called “freemium” and it works by offering basic services for free, while charging a premium for advance features.

But the critical question is can we make money by doing so?

Yes we can, if and only if a premium level of services has been tied up with the free services offered, otherwise the business will be bearing costs no matter how cheap the bandwidth and storage costs could be today.

Many companies like Skype, Box.net and last.fm have demonstrated the success of the “freemium” phenomenon.

Skype for example is offering the basic in network voice for free, while charging premium for out of network calling. Also, the company makes its users productive by letting them communicate with each other for free. www.skype.com

Box.net is an on-line based business that enables users to share, store and access files of any type from anywhere. Box.net gives its customers individual Box A/C with certain storage capacity for free. www.box.net

Such companies their core strategy is to build a massive customers base first, where they eliminate all the possible factors that could lead to lose them. They would offer the customers for instance free downloads only a click away, so simple and could be obtained with the minimal effort. On the other hand, in order to push the customers to buy their products and services, those companies need to either meet or exceed the customers’ expectations.

From my point of view “freemium” is a very smart business model. It solves many customers’ problems especially those who are normally hesitant to buy directly from the web. “freemium” gives them the chance to experiment and explore the offered services/products before taking the buying decision.

As to the business owners, “freemium” is their marketing tool. Their free services/products are the lures that would hopefully entice customers to buy their others supplementary products/services.

Customers who would us “freemium” could be described as either skeptical type who does not consider buying products/services unless they are sure of the value they would get in return, or they could be experimental type who likes to explore new services and products. I guess young people would be the one who like to try and explore “freemium” with a percentage much higher than the older ones.

Revenue sources for “freemium” business model could be as following:
• Revenue from selling premium services/products
• Advertisements
• Revenue from selling support and maintenance products
• Consultancy could be a source of revenue

“freemium” business model can be applied offline for sure, in fact, it has been exiting offline way back before being applied on the web. Giving away customer free samples of products, is considered very classical way of promotion used by companies offline. Similarly, companies on the service sector use the same tactic. Orange (France) for example, has offered recently bunch of new channels bouquets one of those was the Arabic bouquet that contain Rotana’s channels. They broadcasted the channels for free for one month only then they asked for premium subscription. I don’t need to tell you, I was among I guess the first people who subscribed for the service.

The advantages of the “freemium” business model are:

For customers
• Minimize the risk involve of buying new products.
• Expanding their knowledge horizons.
• Adapt to more practical (e.g. software download) and economical (e.g. cheap internet phone calls) methods of doing tasks.
• Share and communicate with larger number of people around the world instantly. ( e.g. photos exchanges, video conferencing, and internet phone calls)

For business
• Promoting their products and services through the free trial period of download or generating revenue through the sell of enhanced software or support programs.
• In case of successful business, they build up a huge customer base (e.g. Skype) and their business could be bought out by other investors with millions of dollars.

The disadvantages of “freemium” business model are:

• Businesses send their files over the web and there is a chance that hackers might get access to those files.
• There is a chance that customer would lose their photos and files stored on line.
• Premium services offered could not meet customer’s expectation of value.