Tag: Freemium

Stack Them High, Sell Them Low: Can Creators ‘Get Lucky’ By Selling Merchandise?

Business Models, Freemium

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Spotify has recently announced the ability for artists to offer merchandise to fans through their platform without taking any commission. Is this a valuable opportunity for creators or, as some have claimed, simply a cynical attempt by Spotify to improve its sometimes shaky relationship with artists? Is merchandising actually useful as a source of revenue?

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All sorts of goods have been offered for sale by creators over the years. The American band Kiss has sold coffins; Boy band One Direction have their own line of toothpaste and toothbrushes; and recent Grammy award-winning band Daft Punk last year released a range of condoms packaged with the distinctive art of their hit record “Get Lucky” (although, as one commentator noted, they missed the golden opportunity to brand after their song “Harder Better Faster” instead ). The opportunities are endless.

When done well these offerings can make huge sums for their original creators. Pixar, for example, produced a follow up to their animated film Cars on the back of an estimated US $10 billion in revenue generated from merchandise associated with the first instalment. Even smaller movies such as the Australian work Beached Whale have been able to raise over US $2 million through such channels despite being made on a budget of only fifteen Australian dollars and being freely distributed on YouTube. With the decline of traditional revenue streams, such as licensing, merchandising is only likely to continue to be an important part of monetising works such as animation. Indeed capitalising on the market for merchandise will arguably be critical to long term success: it can even make money from beyond the grave!

This is not a new concept. For generations musicians have sold t-shirts and other goods at gigs while many museums over the years have found that free access to their collection can be offset by revenues gained from selling merchandise in the gift shop. Merchandising has long played a part in the business models of creators from across the spectrum of pursuits.

Old Money

Available under CC BY-NC-ND 2.0 by Christopher S. Penn

It has however become an increasing topic of discussion in recent years as the traditionally dominant revenue streams in some industries have dwindled. The recorded music industry in particular has seen increased attention paid to merchandise as falling record sales have been met with an increase in record labels signing artists to so called ‘360 degree deals’: deals in which the label takes a share of a several of their artist’s revenue streams rather than solely record sales. Merchandising is often included.

These kinds of deals leave the signed musician in an uncomfortable position. While the record labels see ‘360 degree’ contracts as a partnership with artists for mutual benefit it can be argued that for many artists they are not a good idea. Merchandising is one way in which a band can compensate for the fact that record contracts rarely provide the band with much revenue. Giving the labels a slice of merchandising revenue on top of the traditional record sales can therefore erode musicians’ earnings.

This is only compounded by the fact that the sums raised from merchandise do not appear to be large to begin with for most artists. Some studies have found that as few as five percent of musicians are able to earn more than a tenth of their income from the sale of merchandise and it seems clear that merchandise, while a nice bonus, simply doesn’t earn enough to play the bills for the majority. To lose a portion of this already meagre income may be painful.

One Direction Merchandise

Not all merchandising is this successful … Available under CC BY-SA 2.0 by Eva Rinaldi

In other sectors creators may even need to think carefully about whether some types of merchandise can be useful at all. For traditional visual artists, for example, the sale of merchandise may harm more than it helps. If merchandise bearing an image of an artwork is sold in close proximity to the original work sales may be cannibalised: Replicas can be a substitute for the original for some. If not carefully thought through therefore some types of merchandise may actually lose a creator money.

Even where selling merchandise doesn’t make an artist rich however it can still be worth doing. Merchandise can play a significant role in the building of a brand around a creator and their works and thus can benefit their career overall even if it contributes little financial return in the short term. A creators’ brand can have a big impact on their chances of success and some industry players have even gone so far as to argue that it is an essential consideration.

Overall therefore it appears that merchandising has many upsides and few downsides. While for most it may not prove to be a huge earner it can help to grow a brand and, if carefully thought through, will likely contribute at least a small increase to net revenue. While it is possible to assign cynical motives to recent efforts by Spotify to allow the sale of merchandise it therefore nonetheless offers a valuable avenue for creators to exploit.

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Has ‘freemium’ had its day?

Business Models

The freemium business model has become increasingly prevalent as online markets grow. But recent troubles raise the question: has the bubble burst?

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Freemium is a popular model: with social games such as Farmville, file storage such as Dropbox, and even survey platforms such as Survey Monkey using it, most of us have encountered it at some point. But recent months have been marked by a number of blows that have led some to question whether the freemium model can survive in the future. The producers of Farmville, Zynga, have announced that nearly a fifth of their workforce is being laid off and Flickr, once thought of as the poster child for the model, has quietly shifted their focus to generating advertising revenue instead. Investigations by the UK Office of Fair Trading (OFT) amid concerns that games using the model could be unfairly pressuring children have done little to lighten the cloud of gloom.

Generally, the freemium model involves giving the core product away for free while charging for additional features or enhancements. Giving an offering for free reduces the psychological barriers to trying the product and converting some of the resulting users to ‘paid additions’ generates a continuing revenue stream.

But such an approach faces several limitations. The relatively low conversion rates, from free to paying users, experienced by most offerings – often as low as 1%  – means that for the model to work, a large market is needed: this is not an approach that can work as well in niche fields. However, even in larger markets, attracting the notice of potential customers can often require a big marketing spend. Smaller creators may struggle to break in on their more limited budgets. In addition, the scale of the offering necessary to reach a large market only works if the cost of giving away the free copies (the marginal costs of duplication) is extremely low. After all, for every paying user there will be tens who are not contributing anything to the costs of distribution. All of these additional costs have led some to argue that freemium is a ‘costly trap’.

However, these challenges do not mean that the freemium model must necessarily fade out in the future. It may not be a model that works for everyone. But for those who can cope with the limitations it imposes, it continues to offer a growing source of revenue. In particular, the freemium model continues to gain traction in the MMO videogames field, with even top tier titles such as EA’s ‘Star Wars: The Old Republic’ transitioning from its initial subscription model to freemium and almost doubling its revenue in the process. As recently as march this year, executives from EA continue to stress the importance of freemium to their future commercial strategy and freemium games continue to dominate mobile app stores.

For the gaming industry at least, freemium appears far from dead. The recent troubles faced by those using the model serve to illustrate its limitations but there is nothing fundamentally flawed in the underlying approach. For some creators, it remains a viable way of monetising their works and will continue to do so for the foreseeable future.

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