3 Factors Determine Whether We Would Pay for a Service
In a reality of free services and more ads, which type of services can justify a premium price?
The launch of App Store back in 2008 has contributed greatly to the permeation of the freemium model.
In essence, freemium models rely on a small portion of heavy users that are responsible for most of the income, or on advertising as a major income.
Freemium models have their nuances across industries. In casual gaming, most apps are downloaded for free while charging for gems and tokens that are equivalent to time.
In online news, the model applies by using a metered pay-wall. A limited number of articles or a certain type of content is given to users for free. A full access requires a monthly payment.
In music and OTT (Over-the-top services i.e. Netflix), the presence of freemium model is scarce, as most users must pay to hear music or watch TV series.
In reality, the collective mindset for paying for services like apps and news is very low, while inclination to pay for TV and music related services has remained high.
The inclination to pay for services is a derivative of consensus and perceived value, which is influenced by 3 factors that are connected to the fundamentals of marketing: Diversity, expected enjoyment and price.
Diversity | Differentiation is harder when all services offer a similar value
The number of services that can answer a need define the likeliness a user would pay for it. In gaming, there are multiple sources that deliver a similar type of service, while some do so for free and others charge for the game. News publishers are on the same boat, as current affairs are served as commodity.
The justification to pay for services revolves around differentiation. For example, New York Times may hold such value due to the fact it has a certain list of elite writers, and it serves a certain agenda people are relating to.
For that reason, there are much differences between the providers of OTT. Disney has its own unique content, and so does HBO and Netflix. Having one instead of the other means giving up on a certain type of content.
For music, all services are alike as they connect the user to almost every possible music. In other words, it would not make sense for most people to pay for both Spotify and Apple Music.
Enjoyment | Recurring pleasure from a service
Enjoyment is a very important aspect, as it distinguishes between the must-have services and the ones people wish to maintain. In casual gaming, enjoyment is relatively high, and so is the case across music and OTT.
The caveat in casual gaming is that enjoyment does not stay constant and usually fades along the way.
For software-related services like Anti-virus, enjoyment is not a determining factor. Most people that pay premium do so to secure their computer, but would not base their judgement on how much they enjoy the service.
For News publishers, the service does not correlate with enjoyment, but more with the need to catch up.
Entertainment-related services like gaming, music and OTT are aligned with greater enjoyment, while news and must-have software enjoyment is usually low.
Price | Cheap and expensive are also defined by historic reference
One of the basic rules of economy is that raising up the price would cause less people to purchase, and vice versa. In that sense, price has a determining role.
For OTT and music, the ~$10 price point seems to be justified. Moreover, TV and music were considered to be more expensive in the past. Subscribing to a cable services or purchasing albums online have required the user to pay relatively more. Nowadays, people are churning cable services and instead assemble their own package by combining multiple streaming services at a lower cost.
For music and streaming services that offer a family bundle that allows to share cost with a group of people, the price point is lower per person.
Paying above $10 a month for a non-mandatory service require a higher engagement or appreciation to the service. That is the case for certain news publishers that charge over $20 a month after a trial period/year.
Satisfaction Score | How the 3 factors define whether we would pay for a service
The two main sources that justify paying for a service are diversity and enjoyment. The combined value of the two is then compared to the price requirement. When the price point for the service is lower than the overall score for diversity and enjoyment, users are inclined to pay for the service.
In the case of OTT, enjoyment and diversity score is high (people enjoy the content and the OTT provider provides exclusive content), and price point is relatively low.
Casual gaming normally receives a high enjoyment score and low diversity score. The price point reference is low, as many games are offered for free by their developer.
Definitions for enjoyment and diversity are subjective, and are connected to the level of involvement a user has with the relevant services. In total, surveys indicate the inclination to pay for OTT and music is much more significant than paying for online news and casual gaming.
Premium vs. Freemium | Advertising reduces enjoyment and overall inclination to pay for a service
Advertising has its effect mostly on enjoyment. For most users, advertising reduces the user experience but does not cause users pay for the service. However, advertising has a major influence on the revenue of providers across casual-gaming, online news, music and OTT.
Sustainability of freemium models depend greatly on the growth of digital advertising which shows signs of deceleration.
With that said, the current benefits of freemium for users pose many hardships on service providers: The insertion of ads reduces the inclination to pay for a service, but the revenue loss from the removal of ads may be greater than the revenue from paying users.
