Pandora is the most successful subscription-based radio service. Its considerable user base depicts its huge success. By mid-2013, the brand had over two-hundred million registered members, with its active listeners reaching a number of more than seventy million users. More than seventy percent of all the internet -based radio-listening hours were attributed to Pandora, and as a result, the company had a market share of seven percent of the aggregate US radio-listening market.
The original business of Pandora was established in 2005 and was based on issuing ten hours of free access to users. After using the 10-hour free access, the customers were required to pay thirty-six dollars monthly for one year to continue receiving the free service. The business model led to the acquisition of 100,000 users who listened to various tracks on the platform for ten hours for free. However, the users declined to pay for the annual offering by the use of their credit cards. After its launch in 2005, Pandora’s business model was flawed since the users who used the ten-hour free service were unwilling to pay thirty-six dollars monthly for continued service. The free ad-supported option allowed users to listen to a maximum of forty hours of music in a month for free. After the forty hours were depleted, the subscribers could pay ninety-nine cents monthly or register for a premium service that had unlimited usage or wait for the music to be stopped by Pandora.
The current model, which is the freemium model, was established in 2009. It provided no advertisements and a desktop application. Compared to the original model, the new model provided streaming of higher quality music and fewer usage limits. The price of the service was thirty-six dollars per year. The model allowed Pandora to offer some offerings for free to ninety-nine percent of the consumers, and depending on the one percent of users to pay for premium versions of the same offering.
Pandora offers personalization as its primary customer value proposition. The user chooses a genre of music based on his or her favorite musician, and the platform uses a computer algorithm to form a personal radio station that plays the tracks of the chosen artists and other tracks that are of a similar genre to the opening track. In such a scenario, the recommendations allow the user to feel that his or her personal needs are met. The personalized experience makes the consumer feel appreciated and valued.
Eventually, MailChimp succeeded since it was able to convert its eyeballs into paying users. MailChimp’s services included the ability of customers to send email newsletters to other customers, to manage lists of subscribers, and to monitor the performance of an email marketing initiative. The basic tools of the brand were provided for free. The special features enhanced the marketing efforts of entities advertising their products. For instance, marketers could utilize sophisticated analytics to assist them in targeting their email-marketing campaigns more effectively and efficiently. In such a scenario, the eyeballs, who were email marketers, could be encouraged to purchase the special features to enjoy considerable benefits. On the other hand, Ning could not convert its free users into paying customers. The entity allowed customers to establish their social networks. The brand did not have a unique value proposition for its premium service, and, as a result, many of the customers preferred using only the free service. The low number of premium users contributed to the failure of the freemium strategy.
The most vital consideration is whether the business enjoys a low marginal cost. In the Freemium model, the company provides free service to ninety percent of the customers, with the remaining one percent permitted to pay for the premium version of the same offering. The free offerings are likely to attract many customers. In such a scenario, the entity utilizing the freemium model is likely to have a high daily or monthly increase in the number of users of its services. Given the addition of a customer, the firm is likely to spend additional costs for setting up the infrastructure. The costs of adding a new customer should be low to guarantee the long-term survival of the firm. In such a scenario, companies using the freemium model should have low marginal costs to allow them to increase their chances of converting free users into premium users. An entity with a high marginal cost cannot implement the freemium model effectively since the costs of acquiring free would significantly diminish the firm’s operating income.
Pandora has successfully implemented the freemium model in which the majority of the customers are free users, with the remaining minority being the premium users. The low marginal costs allow the entity to implement the business model effectively. For enterprises keen on utilizing the freemium business model, they should ensure the cost of acquiring a new customer is very low.