Sunday, 7 March 2010

4 strategies for charging for things that used to be free

I recently asked (on Twitter) for examples of things that used to be free but for which people now charge.

The reasons for my interest are probably fairly obvious. Firstly, if you can find a way to charge for something that used to be free, you can effectively make money for nothing (in a manner of speaking). But secondly, and more relevantly to my inquiry, there has been a lot of talk about reversing the trend towards "free" that seems to have taken hold on the Internet, with the newspapers leading the charge, and I am curious to understand how this might work and whether it might succeed. Suffice to say, on a personal level I hope it fails as I am a voracious consumer of news and information on the Internet, but on a professional level I hope it succeeds because it could open up a lot of business opportunities.

The answers I received seem to fall into four categories:

1. Product / service enhancement

The first category represents things that used to be free but are now charged for because they have been altered or enhanced in some way.

For example, @TonySanchez1 suggested water.   I presume, of course, that he meant bottled water.  Do we pay for the water, do we pay to have it supplied in convenient bottles, or do we pay to have it purified or enriched with minerals and other trace elements?   I suspect that for most of us it is one of the latter two reasons.   After all, tap water itself remains as free, or nearly free, as it ever was.

2. Price disaggregation

The second category represents things that used to be included in the price for a primary service, but are now charged for separately.

For example, Tom Smith and @hiblen (both via Google Buzz) suggested that there were various things on air travel, including going to the toilet on Ryanair flights! which were once free but are now charged for.   The airlines suggest that these things are now charged for in order to keep the price of primary service, the flight itself, as low as possible.   So it is really a transfer of price from one part of the service to another, rather than a new charge altogether.

@wallsandfutures also suggested bad advice as an example.   I never got quite to he bottom of exactly what they had in mind and why they restricted their example to bad advice only, but this did call to mind the debate around the Financial Service Authority's Retail Distribution Review.   This proposes, amongst other things, that customers should pay an explicit fee for financial advice.   Currently, many advisers purport to offer customers free advice as they are paid by commission from the product providers.   However, of course, the cost of these commissions is simply built into the product fees that the customers pay to the product providers.   As I have pointed out in numerous forums, such fees are not a new charge against the customer, but rather a repackaging of the existing charges in such a way as to make them more explicit and controllable.

3. Pricing for communication

The third category is where a price is added in order to communicate a message rather than as a source of revenue.

For example, @JoeWi and @foxbeefly gave the example of plastic bags at supermarkets.   I suspect that plastic bags at supermarkets do not present much of a profitable business model.  After all, no one goes to the supermarket to buy bags, and once you're there you either need them or you don't.   But charging for plastic bags sends a very clear environmental message - "we care about the environment and we're doing something about it".   Even customers who are not impressed by the environmental sentiment are unlikely to complain.   So, charging for plastic bags is more about PR than it is a business model.

Tom Smith's example (again via Google Buzz rather than Twitter) of towels at the gym probably falls into the same category.

4. When loss leaders cease to lead

The fourth and final category represents cheap things that businesses used to deliberately give away in order to attract customers from which they make money from a completely different product or service.

@AndrewAppleyard suggested air at garages.  This is clearly something that used to be free (and still is in many places) as a value added service for customers coming into refuel their vehicles.   However, it is now often charged for without any changes to the product or the way it is delivered, with no discernible communicational value, and without any impact on the price of the primary service.   It's just something that some gas stations have decided to start charging for.   And it demonstrates one of the related problems - that of micro-payments.   As @AndrewAppleyard quickly pointed out, the 20p cost is often an irritant, or even a deterrent.

I suspect that garages don't make much money selling air.    But then again, if my understanding is correct, they don't make much money selling petrol either, and make most of their profit from selling conveniences in their forecourt stores.   I would guess that garages just realised that free air no longer made any contribution to attracting customer to the forecourt but also that charging customers would not drive them away (or cause them to drive themselves to the next petrol station).

However, the very first example I received in response to my initial inquiry was from @Hilary_MRM, who jumped straight in with content on News International sites.   That, of course, struck right at the heart of my enquiry.   Yes, we know that news providers, particularly Rupert Murdoch and the New York Times have made a lot of noise recently about charging for access to news online, but how much progress have they made in implementing this?   How many people actually sign up to pay compared to how many simply carry on reading the limited number of free articles you're allowed each month?   And if forced, will people pay, or will they simply switch to a competing news provider who has yet to implement charging?

The problem, as I see it, is that news publishers used to consider online news to be cheap, like air at petrol stations.   They were, after all, already producing it for their print publications, and could provide it online at relatively low cost.   They could also use it to draw customers into their sites, where, like forecourts made money out of them in their convenience stores, newspapers made money from them from online advertising.   However, with the collapse of both print news and online advertising, online news is not longer a cheap product, nor can it be justified in terms of the benefit of online advertising.   And customers don't need to drive somewhere to find a competing free offering as the next news sight is only a mouse-click away.

Finally, whilst petrol stations can rely on the fact that most of us can come up with a 20p to drop in the slot to get our tires pumped, the news publishers face the challenge that even if we were prepared to pay for online news content, there is no readily accessible and suitable system for micro-payments online.   The subscription model that Rupert Murdoch proposes seems unlikely to work as mos of use get our online information from a myriad of sources, and therefore could not satisfy all of our needs with a single subscription payment.   Rupert Murdoch could do worse, therefore, than to support innovative micro-payment models such as Flattr proposed by one of the founders of the Pirate Bay.

@Hilary_MRM's suggestion did give me pause to consider the problem from the other end.   How has the increasing availability of free information on the Internet impacted on those types of information that have never been free?   I am thinking here of specialist research publishers such as Gartner and Datamonitor.   Have their business models suffered as the quality of freely available information has increased, or have their markets proved resilient?

Beginning to charge for something your customers have become used to receiving for free can be done, but not easily.   I suspect that Rupert Murdoch will need a better strategy than simply mouthing off about the unfairness of a model in which was, until recently, happy to participate.   Like the music industry, I suspect that the news industry will have to reconsider both how it adds value (see, for example, The News Pyramid in the Social Media Age), and how it charges its customers.

This is an intensely interesting subject and a debate that is far from over.   I'd be very interested in hearing your opinions and examples in the comments below.