(Freemium Summit) Lessons on Charging for Content from Pandora

WebNewser is reporting from the Freemium Summit in San Francisco today, which is looking at innovative business models that pair free offerings with paid ones.

Interesting lessons this morning for newspapers considering charging for content online, courtesy of Pandora CTO Tom Conrad, who spoke at the Freemium Summit. When everyone’s favorite Internet radio site launched in the fall of 2005, Conrad said, they offered listeners 10 hours free before requiring them to plunk down a $36 annual subscription fee. About 100,000 people started listening every week, but only about 1% went on to subscribe. When Pandora asked the other 99% what was wrong, they said: Nothing. They loved the service. They listened to every minute of their 10 hours. They thought $36 was an entirely reasonable price. But… they just weren’t willing to pony up.

It took Pandora less than two months to decide to scrap the subscription idea and switch to an ad-supported model. Looks like it was the right move: The service became profitable last year, with $50 million in revenue. Nevertheless, that wasn’t the end of the subscription story.

How Pandora brought subscriptions back, after the jump.

By early 2009, Pandora had 18 million unique users. Conrad started wondering, what if we could get just 1% of those to upgrade to a premium—subscription-based—service? How much money would that make? He did some quick math: One percent of 18 million (180,000) x $36 = “a lot of money.” ($6,480,000 to be exact). So Pandora crafted a paid offering, which didn’t just get rid of ads and the 40-hour-per-month limit that regular users were subjected to, but it also gave subscribers additional features, like better audio quality and a desktop application. The result? They’ve beat their 1% projection: About 1.6% of Pandora users are now subscribers.

The key to making the freemium model work, Conrad said, is to have a really great free product. “We want the free version of Pandora to be a really exceptional service. We don’t want the consumer’s conception to be: ‘It’s not very good, and if I just gave them $36, it’d be great.’ We want them to feel like they’ve got this great service, and that if they subscribe they get a specialized set of features that appeals to the particular kind of market niche that they’re in.”