Anything Could Be Free: Monetization in Emerging Markets

by Richard Zhu (blog: http://richardzhu.org/)

Think about the shopping list when you buy a new laptop:

A new laptop: $500 (OS pre-installed)

Anti-Virus: $40 (e.g. McAfee Total Protection 2011)

Microsoft Office: $120

That is what happens in US, where average per capital income is about $40,000. What happens if this is in a developing country? Let’s pick up a hot one, China, where per capita income is 6.23% of US (Only $2,500 per year? Yes! That’s why your iPhone is made there!).

Let’s see the impact such costs can have on these people’s income. (We know that the prices are the same):

% of Annual Income	US	China
Computer	1.3%	20.0%
Anti-Virus	0.1%	1.6%
Office	0.3%	4.8%
Total	1.7%	26.4%

Here we see that a new laptop is a big thing in China, like in many emerging markets. The relatively high price is giving incentive for them to seek alternative options. Here are things consumers could do to make the overall price less hefty:

Item	Option 1	Option 2
Hardware	N/A	N/A
Anti-Virus	Don’t Install	Get a counterfeit copy
Office	Don’t Install	Get a counterfeit copy

To the surprise of some people, installing counterfeit software is not their first choice to many people: the counterfeit versions are often defected, a lot of them containing Trojan or virus. So many consumers choose not to install everything. Survey indicates that 17 million internet users don’t have any security software on their computers, no mention having both anti-virus and firewall.

On the other hand, safety is a serious issue in China. According to a China’s official news agency, over 30 percent of internet users in China had their account or password stolen. Even on the non-crime side, hyper competitive market is driving websites to install varieties of add-ons or change your browser settings.

A company called Qihoo came in. In Aug 2006, the firm launched Qihoo 360 safety guard, a permanently free (and guaranteed life-long free-update) safety software. Over the past 5 years, the firm got 160 million users, covering over 60% of total Chinese internet users. (Compare with McAfee around 60 million copies sold in 2009 globally.) More strikingly, they made $50 million revenue in year 2010, and now in the preparation for IPO in Nasdaq this year. You may wonder: how are they monetizing?

Here are the products they offer: (absolutely free, and also free from advertising)

Product	Memo
360 safeguard & 360 software manager	50%+ market share
360 anti-viruses	50%+ market share
360 Safety Internet Explorer	market share 23.6%, vs. IE 67.8%, Chrome 1.2%
360 Safe Storage Space	Target top 1% of existing 160 million user

The 360 software manager bundled to 360 Safeguard, is a very active portal to software downloads. Even though 360 only allow trustworthy software downloads displayed there, the software providers need to pay Qihoo for being accessible in that portal. The 360 Safety Internet Explorer, which leveraged the huge brand value of 360 safeguard and anti-virus, provided a list of ‘safe’ websites and game providers. Aka! Money comes here! The Safe Storage Space, said to serve 1% of 360 product series user, is skimming the small portion of its large user base in subscription.

Seems this ‘free to consumer’ model is really working well, then what else could be done? The fact is: a lot! And many of them are already there!

WPS office: the Chinese local office software, completely compatible with MS office, began to offer fee versions to individual consumers in 2005. (Still charge for institutional users, or advanced functions)

Taobao.com: a Chinese online retail platform provider like ebay, made their platform ‘free’ to all merchants in 2003. At that time, ebay (where vendors need to pay a fee to be there) was holding 90% of online retail market share. Taobao’s free model created a significantly larger pie: anyone can open a store at their platform. 1 year later in 2004, the online retail market size increased from 1 billion RMB ($144 million) to 3.4 billion RMB ($493 million). Now Taobao is by far the No. 1 player in this field, with 98 million registered users. How they make money? Well, think about what happens if there are 100 vendors selling the same product: you need to pay the platform provider to get yourself displayed at a better place.

QQ (Tencent): the most popular IM in China, with 500 million registered user and over 100 million online at the same time, also provide free IM services. Their make money from Q coins, which you need to pay real money to get, and use the coins to decorate your IM image or use premium functions of online games. (Now, Tencent is the world’s 3^rd largest internet company, only after google and amazon, in terms of market cap.)

Guess all I am saying is: when the purchasing power of a market is lower, you need a different monetization approach from typical Silicon Valley approaches. Lower income doesn’t mean lower chance to make money, but maybe an opportunity for smart people to make more.

With my HBS debt further reducing my purchasing power, I feel more things could be free, or anything could be free. 

What’s next?

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Is Subscription Revenue the Holy Grail for All Startups?

by Amit Jain

In the startup world, subscription revenue is sexy.  Entrepreneurs and investors love subscription revenue (also referred to as recurring revenue) because of its predictable nature.  Startups with such revenue models essentially are striving to be annuity businesses: each customer signed up is an incremental lifetime monthly cash flow (with the caveat that churn rates are zero and renewal rates are 100% in this perfect world).

David Skok’s series of blogs on SaaS economics (Software-as-a-Service companies are inherently subscription businesses) contain several analyses on the high profit potential of startups with recurring monthly revenues.  Apple/Google recently announced subscription-pricing capabilities for app developers as an alternative to ads-based or one-time transaction-based pricing models.  In our LTV class, we saw Rentjuice as an example of a startup that pivoted away from per-transaction pricing to subscription pricing.  It seems that recurring revenue models are popping up everywhere in the digital world.

So is subscription revenue really the Holy Grail for profitability? Why don’t more startups from join the party? Why aren’t all subscription startups wildly successful? A few thoughts...

Subscriptions require patience (and a leap of faith)

Imagine an iPhone app developer having the option of charging $5 for an app, or charging 50 cents per month to subscribe to the app.  The subscription approach could lead to a larger customer base which can pay off well in the long-run if customers continue to subscribe, but the developer will have to weigh that possibility against potentially reaching breakeven faster through the transaction-based model, albeit with a lower long-term revenue potential due to a smaller customer base.  This relative time delay in reaching breakeven on development costs is often the barrier for startups to jump on the subscription bandwagon.

Subscription pricing is tricky

Recurring revenue looks great in the Excel model, but the trick is determining the price for which customers are willing to subscribe for your product.  Ning, a web-based platform for building social websites, began as a traditional freemium model that let users access basic services for free and then have the option to upgrade services for $20 a month.  The freemium model was not working so Ning got rid of the free product and introduced several pricing options ranging from $3 a month to $50 per month - resulting in doubling conversation rate and tripling the base of it paying users.  Ning’s first attempt at a subscription business was not successful, but it had raised sufficient capital to survive this mistake and buy time to test different subscription price points that worked better.

Subscriptions are relationships 


When people subscribe to a product and agree to send money to a business on a recurring basis - a relationship is established (rather than just a transaction).  There is a customer service element that requires higher touch of support for paid subscription relationships.  Netflix is exemplary with its proactive approach: if there is an interruption in the Netflix feed when you stream content - customers automatically (and quickly) receive an apology email that informs them they will get a 2% credit on their next bill for the inconvenience.  However, startups often have to skimp on post-sales support, considering higher priority is usually given to the product and sales teams.

I expect an increasing percentage of startups to adopt subscription revenue models though I suspect startups with ample funding will be more successful in executing these models given the resources needed to wait out the payback period, figure out pricing, and maintain good customer support.

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What’s the Deal with Deals?

by Colt Stander

A number of LTV classmates had a recent twitter conversation concerning how Foursquare could finally monetize while providing additional value to its members.  The strongest response was for advertisers to push deals to the users, leading consumers to these businesses.  With that, we all assumed this provided value and left it at that.

Upon checking my email this morning I was greeted by 30 emails from deal websites with their daily offerings.  Between Gilt Groupe, Living Social, Groupon, Jack Threads, RueLaLa, Restaurant.com and the number of other fashion, local, restaurant, and tech websites, can you guess how many I actually opened, let alone purchased anything?  Zero.  I came to a realization this morning that I am so bombarded with deals every morning that I don’t even bother to look at them.  I now beg the question, am I so cheap that I am no longer interested in products, even when they are on sale, or are we becoming so flooded with these offers that each is quickly losing its relevance.

If we are in fact being overexposed to deals, we need to consider if we can keep creating more sources of these discounts for consumers in able to commercialize our sites and more importantly, what will happen to the markets we are serving as we continue to offer their products at a fraction of the normal price.  While we can imagine that discounts will always be popular, relevance will be the key to winning this game.  Knowing this, websites like Groupon will need to reconsider their shotgun approach, which is tough to do when they are the Walmart of discount sites.

While the fear of being relevant and competitive is real, more important is how long these actions can persist.  At a recent lunch concerning fashion with HBS Professor Mukti Khaire, she expressed extreme concerns of the effects on the fashion industry by sites such as Gilt Groupe.  As Gilt suddenly makes inaccessible brands accessible at lower price points, it is destroying brand equity, exclusivity, and profitability of these brands.  Other deal sites like Groupon have similar destruction patterns with the claim that they bring new follow-up business to these businesses.  At a certain point, these consumers will be able to shop exclusively with deals, eliminating any follow-up business.  At some point, businesses will figure this out and either refuse to buy into the deal game, or their businesses will no longer be viable.  Either way, the long term perspective doesn’t look to be a good deal for anyone.

If giving a deal to the masses isn’t going to be a viable option eventually, how will they stay relevant? And what does it mean for groups like Foursquare which may only find monetization in this way?  As for Foursquare, I propose they look for another way to be relevant by using their information to lead you to places you LIKE, not just one that will give you a cheap meal.  But that is just one of a hundred things to do with the mountains of data they have on each of its users.  I’m looking forward to seeing the direction they take the service and hearing other ideas from readers.

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