Understand "a penny barrier"

Absrtact: Seven years ago, the founder of first round, Josh Kopelman, wrote an article highlighting the importance of providing free services for consumer products. In his view, most entrepreneurs are wrong about subscription fees, think that the price is down, user demand will be

Seven years ago, the founder of first round, Josh Kopelman, wrote an article highlighting the importance of providing free services for consumer products. In his view, the majority of entrepreneurs in the understanding of subscription fees is wrong, that prices fall, user demand will rise. This is not the case, kopelman that prices will affect demand to a certain extent, but the relationship is not linear, there is a barrier between free and charge, known as the Penny Gap.

Over the years, WhatsApp has used a new approach to "a penny barrier" to create the world's fastest-growing social network. WhatsApp this incredible product solves people's real needs, their understanding of "a penny barrier" is their most outstanding work. In this article, we will explain why this strategy can help your company and how to make your company and product successful.

Understand "a penny barrier"

Kopelman points out that lower prices tend to imply greater demand, but there is a significant difference between free ($ 0.00) and paid ($ 0.01). Many entrepreneurs believe that the cheaper they offer, the more people are willing to pay, but that understanding does not explain why there is so much difference between free and paid.

So what is the "penny barrier", Kopelman thinks:

In fact, a company's income from 5 dollars to 50 million dollars is not the most difficult, the hardest thing is to let users pay you.

To support this view, Kopelman cited two examples of popular products at the time, Napster and Kazaa are free music download platforms, which have a number of orders of magnitude larger than legitimate, fee-based competitors, Explain the relationship between product pricing and user requirements is very complex.

He believes that sometimes offering free products or services can save more money on business promotion. Access to paid users is low and expensive, and it is relatively easy to cash out free services through advertising. This lesson is more important than ever in the mobile internet age.

The "One penny barrier" of mobile internet

Over the years after Kopelman's theory of "one penny barrier", the theory has been further developed and strengthened by the distribution mechanism of the App Store and the huge number of users on the iOS and Android platforms.

Let's take a look at the list of popular iOS games, in the top 50 of the game, only Minecraft is paid to download. All other free downloads are available at the same time. Of the top 100, only 5 games are in a paid-for-download mode. The Android platform is similar, and only 2 of the hottest 120 games in Google play are paid to download.

Stuart K Hall had an app Store experiment, and he developed a "7-minute workout" app that paid for the first few weeks (he posted the message in the media, offered a discount code, and made the ipad fit, and the effect was still bad). Then Hall decided to free the app to see what would happen. Within 3 days, the download amount is 72,000 times per day, 2,500 times times as much as when it is paid to download. The app ranked 1th on ipad fitness applications in 68 countries and ranked 1th in 49-nation iphone fitness applications.

The shift from fee to free has also affected the app's revenue. After free, Hall increased the purchase of items, users can pay to upgrade to Professional version (PRO), after the upgrade users can record fitness, and make personalized settings. Although 97% of the users did not pay for the software, they brought the application free of charge by 300% of the revenue growth. The experiment fully demonstrated the power of a penny barrier.

Stay free in the winner-all market

Kopelman's example in the blog post is still not outdated, Napster and Kazaa are driven by the network effect. When the business model is combined with the social network, the value of the product is proportional to the number of users in the network, and LinkedIn, Twitter, and Yelp are typical examples. Any enterprise that wants to implement the Metcalfe Law (the value of a network equals the number of nodes in the network, and the value of the network proportional to the square of the number of users connected to it) must create value by rapidly establishing a network.

It is clear that free product eliminates a lot of resistance in the process of network construction. All kinds of network products are striving to achieve "winner take All", that is, to occupy the leading position, creating value for users, so that users because other platforms can not provide the same value and do not want to leave.

Getting the most users ' platforms as early as possible is the most valuable, and they lock in users and exclude their competitors. Migration costs are higher in large social networks.

So in a "winner-take-all" market, the product should be more invested in the early adopters than in the latter. Early adopters have established the dominant role of social networking in the marketplace and have been able to retain more users. Investing in an early user is definitely worth it, even if it means free software.

One-year free trial with "a penny barrier"

Many web products have been added to the ads to keep them free and to drive revenue growth. WhatsApp, of course, understands how social networking users are growing, and how many users ultimately achieve the "winner takes all" principle. But they know they don't want an ad-backed product.

Whatsapp's "First year free" model solves two needs: one is to cross the "one penny barrier", the user into the platform, the rapid accumulation of users, and ultimately the user locked on the platform; On the other hand, Whatsapp not to the advertising, its founder still very disgusted with advertising. A year of trial enough to make users accustomed to the product, but also initially told the user, WhatsApp is not permanently free.

Invest Early users

Because of the network effect, startups should invest in the early adopters and establish a dominant position. These early users bring new users and create value for the platform.

There are two ways you can invest in an early user: one is to spend more on the promotion of a paid installation, the other is to provide a free product. WhatsApp chose the latter.

The two look very different (after all, how to spend money is spent), but in fact, the promotion of paid installation than the free download effect is much worse. For WhatsApp, getting paid users is slower, social networking doesn't work well, the user experience gets worse, and the end result is bad Word-of-mouth and low product usage.

If WhatsApp is not downloaded for free, we may not be talking about it today.

Extended free trial in developing countries

WhatsApp solved the "one penny barrier", in some fast-growing countries, WhatsApp in order to establish a dominant position, the annual fee of 0.99 dollars aside, continue to invest for early users, hope to become the dominant winner.

But in emerging markets, WhatsApp is not the only company willing to invest in consumers. In India, Malaysia and Brazil, the number of potential users is huge, and many consumers are unable to pay enough traffic packages when they use their mobile phones to surf the web. To lock in their own advantages, many social networks have started working with mobile operators to pay for some consumers ' data traffic and try to eliminate the barriers to social networking expansion.

This approach is undoubtedly costly for those companies, and the cost of the flow data paid to the user is likely to exceed earlier revenue. But it is also necessary for companies seeking growth to win in the competition. Developers know the value of the Metcalfe law.

Conclusion

WhatsApp's success is largely due to its solution to an important demand for a large number of users-high SMS costs and the limitations of local operators. Their right pricing is also a concern, not only to help them overcome a "penny barrier", but also to avoid adding ads to the platform and retaining users on the platform.

It was this strategy that made WhatsApp an early success, dominating the mobile-information market and eventually being bought by Facebook at $19 billion. The value of this pricing strategy is obvious to any company that wants to expand its business in emerging markets.

The challenge for WhatsApp now is that the mobile-end market has grown so much that there is no real winner. Products such as line develop faster, gaining a foothold in areas where WhatsApp cannot make progress. As this trend continues, it remains to be seen whether WhatsApp will continue to maintain this advantage or gradually decline to become the friendster of the Mobile information version.