In Praise of Premium Services

In this Web 2.0 world free services have been all the rage – from social networking to photo sharing to social bookmarking, all the sites seem to be free and ad funded.

I don’t doubt the relevance and current and even continuing successes of these sites. Contextually relevant text ads have proven extremely successful and even less lucrative ads types can be very profitable if you can aggregate enough traffic (e.g.; MySpace).

The point I am making is that there is a market for premium services. In certain markets, charging improves quality. Listing fees decrease the amount of “junk” items on eBay. By charging, Match eliminates all the people who think finding the right date is not worth $24.95 per month. More importantly, there are many markets where charging allows the sites to provide a much improved quality of service.

The market that provides the best example of this might be the photo and video hosting and backup space. The free market is divided into two types of players:

  • Photo Printing sites such as Snapfish, Kodak Gallery and Shutterfly
  • Photo Community Sites such as Flickr, Fotolog, Pbase and Fotki

In both categories the various sites work relatively well at their primary purpose. However, both have their flaws. In the photo printing sites, they downgrade the quality of your pictures, it’s difficult to upload thousands of pictures, they don’t support video, and worst of all they delete your pictures if you don’t print. The photo community sites offer limited storage, poor customer service, limited support for video, downgrade the quality of your pictures and pictures are shared with the community as opposed to being only for you, your friends and family.

In this market a number of premium services have emerged. The one that impressed me the most is Phanfare. They charge $6.95 per month or $54.95 per year or $299.95 for a lifetime membership and you get:

  • Unlimited storage
  • Video support
  • Customer service that gets back to you within a day
  • The ability to easily upload thousands of pictures
  • Easy to use
  • Multi-lingual support
  • Dedicated site with a simple URL (yourname.phanfare.com)
  • Great photo hosting for eBay and blogs
  • No ads

It strikes me that at those prices – a little more than your daily price for a latte for a month of service – there should be a premium market for the service even when the competition is free. The hundred million dollar question is how big is the premium market? While we try to answer the question.

P.S. For full disclosure and because I put my money where my mouth is, I am a small investor in Phanfare.

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  • Fabrice,
    I think you’re right on the money. We will be releasing a web service in a few months and I am of the same opinion.
    Again, the market for a premium service is the million dollar question, but I’m willing to take the bet. A free version with limited functionality is a great replacement for ad supported services and at the end of the day, people prefer no ads to even text ads. The trick is to provide a free service with enough room to allow for growing pains and the desire to move to a premium service for, as you say, “a little more than your daily price for a latte for a month of service.”. Not only that, but it allows a bootstrap startup to position itself against large companies that defined the ad supported business models to begin with. What do you think?

  • Actually with all this Web 2.0 hype, everyone is doing the same thing with a little add-ons.

    I believe this will end the 2.0 hype soon.

    If you just check techcrunch and see Michael Arrington’s Web 2.0 companies they are all doing the same thing one with Ruby the other on Java.

    They will soon start charging for their services and soon the only difference will be price. And when the price starts controlling the market, the backers will dissappear. And the 2.0 will soon be forgotten…

    P.S: Start working Fabrice 🙂

    greetings from Turkey

  • Interesting you are talking about this Fabrice but I wanted to gauge your opinion in a reverse manner. Web 2.0 free going to premium, I see what you are thinking…….but what about mobile which has always been premium going to free. Mobile when it started was always about carriers controlling it and they wanted to make as much money as possible where as we now have a disparity in that you can buy a ringtone which is a bunch of beeps and bops (polymorphic I mean) and it is seling for 1.99 whereas an entire song is only 99 cents on itunes. Think along these lines for things like pacman or tetris which is a 5.00 game on cingular and which is essentially free on the web. So basically, what I am asking is that carriers have been taking as much money as they can from consumers for the conveniance of putting apps on their mobile and consumers have reluctently accepted as they have had no choice in the matter. But now with off deck happening, what is your view on this if we go to a more of free model where the opportunity is to build a much larger community ??? Granted if you want to play the latest EA madden football on your phone, you will still pay the cost of your latte. But the free model works wonders for consumers which are somewhat price sensitive and are not so knowledgeable about mobile data services. Hmmm, what do you think here…….

  • Mike,

    In mobile it’s all about convenience and being on the cell phone deck of the carriers is extremely powerful. Also, somehow clicking on something that says it’s $1.99 does not feel like you are paying for it – you are not entering your credit card number, etc. – especially if the people doing the buying (teens) are not the ones ultimately paying the cell phone bill.

    At Zingy we did a lot of price testing and found that customers were really price insensitive. We could sell the same number of ringtones at $1.99 than at $1.49 and $0.99. Also, ringtones are part of your self expression and fashion) which is a lot less price sensitive than entertainment (music downloads).

    In general though I agree that the mobile world is heading in the direction of the Internet world with similar browsers and specifications. However it’s going to take a long time to get there as there is still a proliferation of devices, screen sizes, etc. and so premium services and the strength of the carrier deck is not going to diminish rapidly. The first people likely to benefit from the carrier’s deck opening are off-deck sellers of premium services like Zingy or Jamster.

    In the long run though, I expect unlimited voice and data packages to be on offer for flat rates and for people to surf the web on their cell phones. As such many Internet web sites will have logical free mobile extensions and we can see the beginnings of that with Yahoo and Google offering their portals for free online. One of my next big projects (non-mobile) is also going to have a free mobile site.

  • Hello All,
    Being french (savvy) and living in the US (now: big spender) since a few years, I see where you’re coming from. But you gotta keep in mind that spending money without counting is a US thing (at least compared to France, Germany,..). It’s really a thought process difference.

    So even if I tend to agree with your basic idea …:
    1) we are at the beginning of a “premium services” era while people easily spend on the net. Soon, people will see 10 premium services a day for only $1,99 a month, and will do the math,
    2) it is so easy to copy or appropriate a technology that you can easily be surpassed by the identical free service (few examples i think about below. No entry barriers, as you say it in your “9 criteria” article.

    However, I do still believe in some examples, when people really need what you’re selling (http://www.sequoiacap.com/process/stepone_need.asp), that paying PER ITEM (vs registration) is a very good biz model. I.e. I would rather pay $8 for the strategic introduction on LinkedIn than a 99c monthly fee for a year.

    My 2 cents …
    Cheers !
    Laurent

    PS – Premium services now copied
    msn encarta => wikipedia
    hotmail premium => gmail
    ebay => craigslist (eBay = “premium” because not free)