10 May 2016
Fee or free? Research reveals when to charge customers for content
Charging customers for online content during periods of low demand and providing more content for free during periods of high demand feels counter-intuitive but could actually be more profitable, according to new research co-authored by a London Business School expert.
Anja Lambrecht, Associate Professor of Marketing, London Business School, and Kanishka Misra, Assistant Professor of Marketing, University of Michigan’s Ross School of Business, argue that when a firm earn both subscription and advertising revenues it may be optimal to offer more free content during periods of high demand, when a site has a large audience, and to offer less free content during periods of low demand.
“Classic economic theory suggests that increasing prices during periods of high demand should be the most profitable approach to charging for online content,” says Lambrecht. “In reality, however, this may not be the case.
“Providing more free content when there is more demand may feel counter-intuitive, but it can actually help balance the trade-off between subscription and advertising revenues.”
Research co-authored by the pair explains that the demand for news varies substantially throughout the year – it is highly cyclical. In business, the cycles are quarterly as they relate to earnings reports; in politics the cycles are four-yearly to coincide with the US Presidential elections; in sport, demand is unequivocally higher when it is ‘in season.’
“It relies on the fact that when demand for content is high, for example when a sport is in season, there is a large audience willing to visit the site though still unwilling to pay for content. This presents a window of opportunity for businesses to generate more advertising revenue, rather than subscription revenue, thanks to high viewership.”
In fact, the number of unique visitors to relevant websites more than doubles when a sport is in season, that is the time period when games are played. By contrast, when a sport is not in season the number of unique visitors to a website drops by about 50 per cent.
Lambrecht continues: “This sort of revenue model is ‘counter-cyclical’. It allows a firm to gain subscription revenue by attracting high value consumers off season – for example sports buffs who want sports content all year round – while not alienating low type consumers – occasional fans who simply tune in for high-profile games.”
While a large proportion of online news outlets have tried to monetise their business models by introducing paywalls or charging monthly subscription fees, such policies can limit revenue in the long-run.
“The inflexibility to respond to demand shocks in the organic news cycle can be a setback for a firm’s bottom line,” Lambrecht concludes.
“Managers should broadly identify their own cyclical demand shocks so that they can adjust their share of free and paid content. Firms offering long-term contracts with their customers, such as annual subscription fees, can use technology to flexibly assign any new piece of content to be free or paid as they observe real-time changes in demand. Some providers are already doing this, recognising it as a profit-maximising approach.”