ITM 350 Lecture Notes - Lecture 5: Affiliate Marketing, Foodie, Linkedin
28 May 2018
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ITM 350 – Concepts of e-business
Case 2 Analysis
Freemium Takes Pandora Public (pages 97-101 of the text book)
Key issues & Assumptions
Freemium is a pricing strategy for a product or service that is typically a digital
application such as games, social media, or web services. These applications are
provided free of charge but later money is charged for the features and functionality of
the application. Many companies have used this pricing strategy and have been
successful, some good examples are Zapier, Filament Fare, MailChimp, Google Penalty
Checker, FreshBooks, Dropbox, and HootSuite. In this case, one of the issues is that
“the crux of the issue is that while freemium can be an efficient way to gather a large
group of potential customers, companies have found that it’s a challenge to convert
eyeballs into those willing to pay. Absent subscriber revenue, firms are forced to rely on
advertising revenues” (Laudon, C., & Traver, 2017). This is an issue for Pandora
because it takes lots of time to gain a massive number of loyal customers. And when
you do gather your potential customers, there’s a lot of risk changing your price strategy
with your product/service because it could lead to gaining or losing customers. “The ad-
supported business model was a risky move because Pandora had no ad server or
accounting system, but it attracted so many users that in a few weeks it had a sufficient
number of advertisers (including Apple) to pay for its infrastructure” (Laudon, C., &
Traver, 2017). If customers are not willing to pay, the company is forced to rely on
advertising revenue. So, for Pandora or any other company, this would be a challenge
to convert your customers and convince them to pay for your product/service.
Another issue in this case is that a lot of companies find it hard to determine what to
provide for free to their consumers, and what they should charge the customers for.
“Companies also face challenges in terms of determining what products and/or services
to offer for free versus what to charge for (this may change over time), the cost of
supporting free customers, and how to price premium services (Laudon, C., & Traver,
2017). The company here needs to plan the outcome of each option and see what
option would make the most profit. “Further, it is difficult to predict attrition rates, which
are highly variable at companies using freemium. So, while freemium can be a great
way to get early users and to provide a company with a built-in pool for upgrades, it’s
tough to determine how many users will be willing to pay and willing to stay” (Laudon,
C., & Traver, 2017). To determine how users will be paying and willing to stay with your
company, you will need to have a plan. You can use business models (social networks),
they are portal, market creator, and service providers which can help figure the issue
out and would recommend using the swot analysis to help you as well.
Relevance to course concepts
In this case, venture capitalist Marc Andreessen, founder of Netscape and co-creator of
the first web browser, launched Ning in 2004.Venture capitalist are investors who invest
in other people’s money, who provides capital to Startup ventures or supports small
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companies that wish to expand. The web is the most popular internet service and the
mobile platform is the most recent development in internet infrastructure. It enables
access to the internet via wireless networks or cell-phone service. “Mobiles services
include tablets, smartphones, and ultra-lightweight laptops” (Shah, 2017). Pandora
added an iPhone application to allow users to sign up from their smartphones and listen
all day. This is related to the technology and business today, Pandora is all virtual which
is the development and mastery of digital computing and communications technology.
Pandora also introduced a “buy” button to each song being played and could listen to
music or the radio all day. “Advertising can target users by interests, life stage, or
persona such as Millennial, prospective parent, or foodie, and rather than being limited
to paying for ads on just a pay-per-view or pay-per-model” (Laudon, C., & Traver, 2017).
Using the CPE model, advertisers only pay when a user engages with the features of
the app, such as through upgrading, or when a user clicks through to a website and
makes a purchase or downloads an app. This is their market strategy, they promote
their products/services to attract the targeted audience by intend to enter the market
and attracting customers. “Target audience is based on demographics (age, gender
income, location), behaviour patterns (lifestyle), consumption patterns (purchasing
habits), digital usage patterns, content creation patterns (blogs, Facebook), and buyer
personas” (Shah, 2017). Every company has a different targeted audience, and
customer demand because each company offers different products/services so the
company needs to look for people that would be interested in their product or service.
Since Ning shifting to a three-tier paid subscription model, they experienced explosive
growth, increasing the number of paying customers from 17,000 to more than 100,000
and growing revenue by more than 500%. Which relates to the B2C model: community
provider, they provide online environment (social network) where people with similar
interest can transact, share content, and communicate. Some examples are Facebook,
LinkedIn, Twitter, and Pinterest. “The revenue models for these are advertising, referral
fees, sales, transaction fees, subscriptions for premium services, and affiliate revenue”
(Shah, 2017). E-commerce is the fastest growing form of commerce in the United
States, it has the potential to generate significant revenue based on advertising.
Answer to case questions
1. Compare Pandora’s original business model with its current business model. What’s
the difference between “free” and “freemium” revenue models
Pandora’s original business model was to give away 10 hours of free music access, and
when the 10 hours are used up, they would ask the subscribers to pay $36 a month for
a year. Obviously, no one was going to pay that much when they could easily switch to
something else cheaper. 100,000 people liked this strategy at first and listened to their
10 hours of free access but then refused to pay the $36 annual feel monthly. Later in
2005, “Pandora introduced an ad-supported option where subscribers could listen to a
maximum of 40 hours of music in a calendar month for free. After the 40 hours of free
find more resources at oneclass.com
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Document Summary
Freemium takes pandora public (pages 97-101 of the text book) Freemium is a pricing strategy for a product or service that is typically a digital application such as games, social media, or web services. These applications are provided free of charge but later money is charged for the features and functionality of the application. Many companies have used this pricing strategy and have been successful, some good examples are zapier, filament fare, mailchimp, google penalty. In this case, one of the issues is that. The crux of the issue is that while freemium can be an efficient way to gather a large group of potential customers, companies have found that it"s a challenge to convert eyeballs into those willing to pay. Absent subscriber revenue, firms are forced to rely on advertising revenues (laudon, c. , & traver, 2017). This is an issue for pandora because it takes lots of time to gain a massive number of loyal customers.
