ITS 380: Global e-Commerce Systems

John Bergstrom

CH 2

1.      Compare Pandora’s original business model with its current business model. What’s the difference between “free” and “freemium” revenue models?

Pandora’s first strategy way to give their customers 10 free hours of listening to music, and after those 10 hours had lapsed the customers were asked to pay $36 a month for a year to continue to be able to listen to customized radio. This resulted in 100,000 users listening to their 10 hours of free music and the refused to pay the fee to get access to the full Pandora experience. There was a large demand for Pandora’s services and people seemed to love their interface, but the revenue model simply didn’t work.

            In 2005, when Pandora faced a financial collapse they changed their strategy and revenue model to an ad-supported option where subscribers could listen to 40 free hours before they had to take any actions. They could choose between a) pay 99 cents for the rest of the month b) sign up for a premium service that offered unlimited usage c) do nothing and be unable to use Pandora. This ad-supported business model was risky for Pandora as they didn’t have an ad server or accounting system. But by, 2009 Pandora again focused on their premium service when they launched Pandora-One, which is a high-end version of their freemium service. The Pandora-One service offered at $36 a year was much more justifiable for customers as it was much less than their original model of paying $36 a month. The premium model offered music at a higher quality and no advertising.

2.      What is the customer value proposition that Pandora offers?

Pandora provides access to music through their “matching-song” algorithm that customizes their customer’s radio experience by playing similar songs after one another which is something unique. They also offer their customers a premium experience where their customers can get unlimited availability to music, no advertising interrupting the music, higher-quality streaming music, a desktop app, and overall fewer usage limitations.

3.      Why did MailChimp ultimately succeed with a freemium model but Baremetrics did not?

MailChimp automatically has a large user potential as the foundation of their service lies in sending emails. Thus, when MailChimp decided to get some of their features of their software out “there” for free, they maximized the exposure they got. One could argue that MailChimp simply needed more exposure to the right customers to gain more subscribers. The customer using the free version might just use it to send out a community newsletter, whereas the premium customer would be a large corporation sending out deals and special offers and wanting to keep track of how many of those that leads to a purchase.

            Baremetrics however, failed with their freemium model because they didn’t have as big of a user base as MailChimp did as they dealt with analytics compatible with Stripe payments processing platform, i.e. a niche market. Although their premium usage initially increased because of their freemium model, their ultimate demise was found in Baremetrics struggle to provide sufficient customer support to their users which lead to a drop in subscribers.

4.      What’s the most important consideration when considering a freemium revenue model?

The freemium business model works most effectively when there is a large user base for your service, where companies actively work to get their users to subscribe and pay for their use of the service. To be able to grow your business from a freemium model one must attract many people to be able to convert them to paying customers. Another important aspect of this is that the service you provide must be easy to use. If your service is accessible and easy to use, you will attract more potential paying customers.

            Secondly, providing service at a low cost for users is essential as the profit margins are slim in this industry. Companies can do this by automating customer service functions and spreading licenses over their whole platform. Additionally, you want to have a high customer retention which relates to the software or website being user friendly. When someone visits your website/app you want them to come back the next time. Lastly, the network effect could do wonders for a freemium service if the reputation starts spreading by the word of mouth. This correlates with good customer service, user friendly, and a good service for it to happen. The network effect will result in friends of paying customers to join as free users which makes them into potential paying customers which equals profit.

1.      Select an e-commerce  company. Visit its website or mobile app and describe its business model based on the information you find there. Identify its customer’s value proposition, its revenue model, the marketspace it operates in, who its main competitors are, any comparative advantages you believe the company possesses, and what its market strategy appears to be. Also try to locate information about the company’s management team and organizational structure.

I choose to visit Spotify, which is a Swedish company based out of Stockholm, Sweden. Spotify is a music streaming service that launched in 2008, they have recently also started getting into the streaming of podcasts and videos. Spotify has the digital rights to all the music that they stream from record labels and media companies. It is a freemium service which basic features include; free music with advertisements, limited skips, but not unlimited access to any track they want to listen to. Their premium package includes; shuffle play, ad free, unlimited skips, listen offline, play any track, and high quality streaming.

            The value proposition that Spotify offers their customer is that they have access to their whole database of songs, podcasts, and videos without having to pay extra for them. The customers only buy the rights to stream Spotify’s content for the subscription period, and if they don’t pay they have to listen to advertisement. The great advantage in Spotify’s value proposition is that their customers don’t have to make choices between their favorite songs, they can listen to all of them without restrictions if they are a premium user. Additionally, Spotify was the first music-streaming provider to offer their songs in offline mode as well, where their customers don’t have to have internet access to be able to listen to the music. This is where Spotify’s competitive advantage lies within compared to Apple Music, Pandora, Youtube Red, and Google Play.

            Their market strategy seems to be to provide unlimited access to music to as many people as possible. They do this by retaining all sorts of music, no matter how strange or local the music is. They have recently also decided to get into the podcast and video streaming industry where they offer access to podcasts and videos about bands and artists to their premium subscribers as well. This strategy has been articulated by their Swedish founder Daniel Ek who is a Swedish entrepreneur and technology “geek” and also a KTH alumni.

2.      Examine the experience of shopping online versus shopping in a traditional environment. Imagine that you have decided to purchase a digital camera (or nay other item of your choosing). First, shop for the camera in a traditional manner. Describe how you would do so (for example, how you would gather the necessary information you would need to choose a particular item, what stores you would visit, how long it would take, prices etc.) Next, shop for the item on the Web or via a mobile app. Compare and contrast your experiences. What were the advantages and disadvantages of each? Which did you prefer and why?

When shopping for a camera in a traditional manner I would have to start by looking at physical catalogues that I have in my home for special offers and different cameras. After that I would have to venture out to a physical store, e.g. Walmart, BestBuy, or Target. When I enter the first store, let’s say Walmart, I would walk to the technology department and start looking at cameras where I could physically look at them, touch them, look through them, take a test picture, and ask for advice from an expert that works at the store. However, when I have browsed through Walmart’s cameras and looked at their prices, I want to compare prices between Walmart and BestBuy. I then have to drive or walk to BestBuy which costs gas money to be able to compare the prices of cameras.

      When shopping for a camera online I would simply go to amazon and check their website/app for cameras. To gather information about the cameras I would look at the reviews of the camera in question, and perform some google searches on how the camera functions if it takes quality pictures etc. And when I want to compare prices between the cameras they have on Amazon with other places I simply google that to get the results. I could also check Pricerunner to see if there’s any other websites which offer the camera at a lower price.

      The advantages with shopping for a camera in a traditional manner is that you get to see, touch, and try the camera you are potentially buying, and also ask an expert in the store about recommendations, advantages and disadvantages between cameras. The downside is that you have to travel by car physically between the stores to be able to compare the prices of cameras. The advantage with shopping for a camera through e-commerce websites and apps is that you can attain the information about the cameras through your computer, phone, or tablet from your home in seconds and compare prices. The downside is that you can’t see, touch, or try the camera out through your computer, and you won’t be able to ask an expert from the site about the quality of the camera.

      The optimal choice for me if I bought a camera would be to physically go to stores and try out their cameras and ask the experts for advice. When I have done that I would go home and look on amazon to see if I can find the camera that I want, or any other website/app. If it is cheaper online (which it is most of the times), I would buy it online, and if it is cheaper in the store I would buy it from there. So the ultimate shopping experience when shopping for a camera would be a mix between traditional shopping and online shopping, especially when it comes to quality products that are required to hold a certain standard of quality.