Archive for day September 4th, 2011

Wraps come off Flagship Hong Kong Apple Store at IFC center (update: opens Sept. 24!)

We’re hearing it is perhaps weeks from being open but this evening you are seeing the enormity of this store in Hong Kong’s IFC shopping complex.  That is a four story tall red Apple which spans three lanes of traffic for those measuring at home.

Update: Reader Joe send in this shot from inside:

Update 2: Engadget has nabbed some higher-resolution pictures. They also say the store opens September 24th!

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Seth Weintraub

September 4th


The Complete Guide To Freemium Business Models


Editor’s note: This guest post was written by Uzi Shmilovici, CEO and founder of Future Simple, which creates online software for small businesses. The post is based on a study done with Professor Eric Budish, an economics professor at the University of Chicago Booth School of Business. It also includes ideas and comments from Peter Levine, a Venture Partner at Andreessen-Horowitz and a professor at Stanford GSB

The idea of offering your product or a version of it for free has been a source of much debate.

Pricing is always tricky. Unfortunately, many entrepreneurs don’t give it enough thought. They will often copy the pricing strategy of similar products, base their decisions on pompous statements made by “experts” or rely on broken rationale (we worked hard so we should charge $X).

Free is even trickier and with so many opinions about it, we thought it would be refreshing to take a critical approach and dive deep into why some companies are very successful at employing the model while other companies fail. We’ve looked into economics academic papers, behavioral psychology books and strategies that worked for companies to come up with the key concepts below.

The Law of Marginal Cost

Pricing plays a huge part in competing for customers. Here’s an economic law that holds almost as much truth as the law of gravity: in a perfectly competitive market, the long-term product price (aka “market clearing price”) will be the marginal cost of production.

Guess what? Because of declining hosting and bandwidth costs, for most Internet products the marginal cost today is practically … zero.

In other words, if the cost to serve a customer (support aside) is zero, the long-term price of the product in the market will be zero (because of competitive pressure).

An Experience Good

At the core of the “Free” models are the products or services being offered to the customer. Most Internet products or services fall into the definition of an Experience Good: a product that needs a period of use before the customer can determine the value they can derive from it.

A good example is Dropbox. Consider Drew Houston’s words: “The fact was that Dropbox was offering a product that people didn’t know they needed until they tried.”

There are plenty of academics who looked into the pricing of Experience Goods. In 1983, the Economist Carl Shapiro wrote a fascinating paper about this subject. His conclusion was that since customers tend to underestimate the value of a product, the optimal pricing for an experience good is a low introductory price which is then increased when the customer realizes the value of the product.

In some cases, a customer might overestimate the value of the product. In that case, the optimal pricing strategy is to charge as much in the beginning or to lock in customers with long-term contracts.

This is why customers are reluctant to buy when someone asks them to prepay for a service or product or sign a long-term contract.

Hence, the introductory price is a signaling mechanism. The conclusion?  A low entrance price signals that you are confident that your product will create value for the customer.

The Psychology of Free

Much has been written about the Psychology of Free. Two books that looked specifically into the subject are “Free” by Chris Anderson and “Predictably Irrational” by Dan Ariely. Putting it simply, Free is an emotional hot button that immediately reduces the mental barriers for the customer. Free makes people think that they have “nothing to lose” since many ignore time as an investment.

From this perspective, free is a huge accelerator of adoption. The flip side of this is that after using the product for free, it is very hard to get the customer to start paying for it. This phenomenon was broad enough to get its own name: “The penny gap”—the hardest part is to get your customer to pay you the first penny. This is why it is so critical to choose your premium features wisely.

Decision Factors

If all that is true, it seems like Free (or Freemium) is the answer. Well…. not so fast. The decision is definitely not easy. Here’s a basic framework to help you make a more informed decision. A word of caution though: for every complex problem there’s a simple solution … and it’s wrong. The framework is helpful as a thinking tool but there’s no magic formula.

Here’s a set of questions that you’ll need to ask yourself:

  1. How big do I want my company to be? If you are looking to build a lifestyle business that’ll make you $8,000 a month and you have a good product, you can probably do without Freemium. If you want to build a dominant company that has a substantial market share, Freemium can help you accelerate adoption.
  2. What is the value of the free users? Across all successful Freemium companies, there is a way of making money or saving money from the free users. Either by saving on marketing costs (Dropbox) or by making money from ads or data (Pandora, Evernote, Mint) or both. If you cannot turn your free users into savings in marketing costs or revenues from third parties—figure out how!
  3. What is the cost to serve free users?  This is a critical aspect of the model. If you spend a lot of money and/or time servicing free users, you are going to lose a lot of money. The cost of servicing free users must be lower than the dollar value they provide.
  4. How big is my market? “The easiest way to get 1 million people paying is to get 1 billion people using,” says Phil Libin, the CEO of Evernote. Free adds another conversion step on your way to revenues. You need a big market to have enough people who will be paying you at the end of the day.
  5. Is there value to one customer from other customers using the product? This will determine how many new users the free users will refer. There are three levels of value:
  1. Inherent value – You can use Skype only if the person you talk with also uses Skype. You can share a Dropbox folder only with other Dropbox users. In this case, Freemium can be a powerful strategy.
  2. Added value – You wouldn’t want to be the only user of LinkedIn. You derive value from other people using it. In this case, Freemium can help you gain traction if you use an effective invitation mechanism.
  3. No value – You don’t care if someone is using Evernote or not. The only reason for one person to tell another about the product or service is if they think it is awesome.

The Types of “Free”

One of the key factors in making Freemium work is the structure of the offering. What is it that you offer for free vs. charge? There are different types of free strategies. Let’s take a look at the popular ones:

  1. True Freemium – Give a version of the product for free and charge a fee for the other versions. There are two ways to go about this:
  1. Value based – The most successful type of Freemium strategy. The more a customer uses the product, the more value she derives, the higher the switching costs are, and at some point she’ll hit a usage limit and convert to a paying customer. Evernote and Dropbox are beautiful examples of this.
  2. Characteristic based – For example offering the product for free for one user (so it is based on company size for instance). Let’s think about a B2B application. If I’m a freelancer, I will use the application forever and I will never have to upgrade. If I’m a 3-person company, I can’t add more users and try the application for real and hence might not get to the point where I see the value in using it.
  3. Free Product for a Cross Subsidy  - Give one product for free and charge for complementary products.
  4. Time Based Free Trial – Give a free trial for X days and start charging once the trial ends. The issue here is figuring out what X is. On one hand you want to create a sense of urgency, on the other hand you need the customer to see the value in the system.

Open Source as a Free model

Lately I’ve seen many entrepreneurs confuse Open Source with Free so I thought it would be helpful to make the distinction. An open source model can definitely accelerate the distribution of your product and is a viable free model. It has two main advantages. You might get developers to contribute to your product (see WordPress). By doing that you can accelerate the development of your product. The other advantage is that you give customers peace of mind as they have control over the source code. You can then make money from selling pro features or value added services. There’s a critical distinction here and that is that your code is out there and anyone can start a company to commercialize this code. Bear in mind that it is very hard (often impossible) to reverse a decision to open-source.
The Last Bit And The Secret To Success

There are many factors to consider when you are evaluating whether to use the Freemium model or not. However, there’s one last secret that I didn’t share with you. During the study, while looking at the successful Freemium companies, a pattern emerged. They all had phenomenal products. All of these decision factors are useless if the product or service you are offering is nothing short of amazing. If your product is not creating great value for its users, no tactic in the world will make Freemium work for you.

Image credit: Shutterstock/JelenaA

Future Simple

Uzi Shmilovici is an internet entrepreneur. He co-founded Netcraft - an Israeli web agency in 2003. Over the years, Netcraft set the tone and became an industry leader in...

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September 4th


10-Foot-Tall Lego Trump Tower Is the First Trump Building I Actually Want to Visit [Lego]

Using a transparent Lego brick technique I can only describe as amazing, builder Sean Kenney has recreated a reflected skyline in the "glass" on this 10-foot, 65,000-brick Trump International Hotel and Tower monstrosity. More »

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Jack Loftus

September 4th


One Man’s Dumpster Is Another Man’s Tiny Mobile Park [Environment]

Can't find a parking space in San Francisco these days? Don't plan overpopulation, blame these mobile dumpster parks that have started sprouting up around the city. More »

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Jack Loftus

September 4th


The Besom Holder: Sweeping Desktop Simplicity [Design]

I don't know how old this Besom Holder organizer is or if you've seen it before. Don't care. There's something about the duality of this clean design that required posting today. I'll take two. [bookofjoe via Fancy It via Anthropologie] More »

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Jack Loftus

September 4th


WebOS Goes Under the Knife [WebOS]

Who wants a leg? Who wants the Palm? WebOS is about to be carved up by HP as part of an internal move that will see parts of it—and the Palm group—heading to different areas within the company. More »

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Jack Loftus

September 4th


Lost In Legoland: A Gazillion Bricks And A Mini Star Wars Geekfest


What happens when a geek winds up in Legoland? He has loads of unfiltered fun, that’s what.

“WTF? I should have kept this for my personal blog. This has got nothing to do with technology, and this blog is called TechCrunch for crying out loud. A report and pictures about a visit to a theme park have absolutely no place here on this blog. I wasted a couple of minutes of your life, and your time is valuable. You can, and perhaps should, unsubscribe from and never visit TechCrunch, ever again.”

Ok, now that we got that out of the way, on to the fun stuff!

I was in Denmark this week for the Next Aarhus ‘Beautiful Mistakes’ conference and exhibitions. I had a great time, as you can tell from my report about the trip. I did something awful, though.

At the third day of the event, there was a separate conference for school teachers about the next wave of technology for kids, at the Billund Center in – you guessed it – (tiny) Billund. As I wasn’t actually speaking at the event, I managed to sneak out of the conference room, and walked a mile down the street, passing the original Lego factory, which is conveniently located right next to Denmark’s second busiest airport, Billund Airport, as well the Legoland Hotel.

My destination: theme park Legoland Billund, a popular tourist attraction originally opened in 1968.

No disrespect to the Next Aarhus organizers who kindly invited me to the event, but it was by far the highlight of my trip. And not just because it made me feel like a kid again.

I even got on some rides, garnering wary looks from parents in waiting lines as I was pretty much the only adult in the park with no kids in tow – one carrying around a laptop bag, no less. Ah well, I thought, I’m used to making painful sacrifices for my work here at TechCrunch.

Here’s an elevated, 360-degree and slightly sped up video overview of the Legoland Billund park:

Quite a view, right? I can’t even imagine how many bricks are used for all this.

And here’s a small selection of the pictures I took:

You can quite literally spend hours gazing at the many fantastic creations, big or small, hop on fun rides, grab food, or visit some of the movies and exhibitions in the designated areas. I promised myself to come back here when my son, who is now only 5 months old, grows a few years older. If you have kids, or you would love to feel like a kid again too, I encourage you to see if there’s a Legoland park near you (spoiler: there are parks in Denmark, Germany, UK and California, US).

Here’s the video of a Lego submarine surrounded by (real) sharks, batoids and plenty of other fish:

Bonus points if you can name all the fish you see in the video.

On to the real highlight of my visit to Legoland, which was beyond any shred of doubt the 420 square-metre Star Wars display area in Miniland, which is at the heart of the park.

As a self-confessed Star Wars fan, the level of detail that went into the minitiature depiction of several of the movies’ most famous scenes genuinely astounded me. I took quite a few pictures, but they don’t really don’t do enough justice to the fantastic work that went into this.

Do you remember all the scenes from the films (and The Clone Wars animated series)?

Bonus: a slideshow featuring all the pictures embedded above:

Click to view slideshow.

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Robin Wauters

September 4th


Amazon Is Testing a Tablet-Focused Web Site Redesign [Amazon]

The Amazon tablet is real. TechCrunch played with it. We made a mockup. The Internet had a field day. The only thing left for Amazon to do now is prepare, and prepare they have. More »

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Jack Loftus

September 4th


AppleInsider Rumor Purports Apple iCloud Runs on Microsoft, Amazon Servers [Blip]

The enemy of my enemy is my data center server provider, or something. Anyway, rumor says Apple is using Microsoft and Amazon servers to power iCloud. How cozy! [AppleInsider] More »

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Jack Loftus

September 4th


Inflatable Bicycle Helmet or Unused Prop from an Alien Movie? [Design]

I really can't tell if this model's beautiful life is about to be saved or snuffed out by some kind of bulbous brain sucker. More »

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Jack Loftus

September 4th

September 2011
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