Harvard Business Review turns system incompatibility into a customer delight

Graphic showing HBR Letter to Subscribers

HBR letter to subscribers regarding iPad subscriptions

Ever have the experience of receiving multiple bills from a company for different products, or having to have a different login for multiple parts of the same website? These types of annoyances are common these days, and they can be pinpointed on what companies will call “back end problems.” This means that they’ve kludged together several IT systems, either due to acquisitions or different parts of the company developing their own, and the systems don’t talk to each other.

With all the good will in the world, the company can still only choke out a clunky user experience until they truly integrate these systems. A lot of times, companies don’t always want to, because their bean counters have decided the expense outweighs any potential benefit, and everyone envisions a shiny future in which a new IT system solves all previous woes.

Which is why, when I read a recent statement from Harvard Business Review (HBR), I was pleasantly surprised. (See image at right).

HBR produces a well-regarded monthly magazine about business and management, for which it charges a hefty price (from $79 a year for a print subscription). They’ve recently launched an iPad app, but they’re unable to recognize customers already paying for full subscriptions either in print or online. Presumably this is due to incompatible IT systems. However, instead of requiring their loyal subscribers to purchase another full subscription, they’ve made the iPad app free, for everyone, until they can resolve the (presumed) IT problems.

HBR has taken what could have really pissed subscribers off and turned it into a new reason to love the magazine. They’ll no doubt gain subscribers instead of losing them this way. It is a great lesson for many companies who get so protective of their content that they refuse to allow any unpaid access to it.

From my perspective, I’ve only seen one pain point: they didn’t automatically refund people who got caught in the middle (who paid before they made this offer). That said, I’m one of them and I’m not really upset because the larger gesture is so damn cool.

It is also a great way for the company to align its needs with the customers’ needs – they’ve essentially laid down the gauntlet that they will fix their back end issues ASAP, and in the meantime it is HBR who suffers, not the customer. Oh, how I wish other companies would think this way (my telco provider who doesn’t realize I am both a mobile + broadband customer, I’m looking at you… )

For companies in similar situations, it is worth considering…

How might you turn pain points into moments of delight?
How might you better align internal incentives with customer needs?
How might you turn a customer pain into an internal priority?

Is Freemium really win-win?

Spotify’s latest announcement that it is limiting free streaming of its music begs the question, can successful businesses be built off of the freemium model? And, if so, is Spotify getting it right?

As a refresher, the freemium model is where a company offers at least two levels of service. The basic version is free of charge, though users may have to deal with advertisements, while more fully featured versions come with a monthly or yearly price.

We all know the major players: besides Spotify, Skype, LinkedIn and Dropbox are classic examples of freemium models. Even newspapers are jumping into the mix (see previous post about the New York Times paywall).

What do conversion rates look like for these companies? Let’s look at the classics.

LinkedIn, in its recent IPO filing, reported a revenue for the first 9 months of 2010 of $161m, double that of the previous year. Interestingly, less than a third of that came from premium subscriptions, at $44m. The rest of the revenue is from hiring solutions (essentially job postings) and marketing (advertising). Being conservative, if all of the premium subscriptions are at the cheapest rate ($19.95/month), then that’s about 180k premium subscribers, or less than 0.2% of its total user base of 100m.

Dropbox’s actual revenues are a deeply guarded secret, but the $30m quoted by an anonymous Quora user is probably within the realm of realistic. So, if we assume, again being conservative, that all premium users are on the basic rate of $99 per year, then there are about 300k premium users. That’s just over 1% of the total 25m users they recently announced. Compared to LinkedIn, they’re doing a lot better at conversions.

The veteran, Skype, surpasses both with nearly 1.5% of all users paying, and almost 7% of active users paying, according to reports put out around the time of its August 2010 IPO filing. That’s on numbers of 124m active users and 560m total subscribers.

Finally, let’s look at Spotify. It is the smallest of the lot, with 10 million users, yet 1m, or a whopping 10% of them, are paying customers.

Conversion rates alone don’t tell us whether companies can make enough off of the freemium model to earn healthy profits, but these numbers can be viewed two ways. We could say that conversion rates hovering around 1% do not bode well for a healthy business. Alternatively, a look at the number of users each of these companies has gotten to register suggests the model is brilliant for generating demand.

So, for companies considering the freemium model, what’s the best way to make a go of it?

1. Think of freemium as a way to get users interested in your offer

In a way, the freemium model isn’t really about pricing, but rather an option for building a healthy user base and giving potential serious users a good taste of the product. If everyone does it, however, then all of those million-plus user numbers are shallow. Consider the fact that Spotify’s competitors Pandora and Last.fm have 80m and 40m users respectively; the liklihood is that there is a lot of overlap among the three.

2. Make upgrading desirable, even essential for users

Of the four companies mentioned, Dropbox does this the best, by helping users build up a set of personal data, which it would then be a pain to move. When they want to share more files, they either have to clean out their folders or take the path of least resistance and pay to get more space. Spotify also does a lovely job of this, by offering free streaming on the computer and requiring users to pay to play on mobile phones or iPads. Smart.

3. Roadmap the service and consider the reaction from taking away anything “free”

While Spotify clearly has a well thought out roadmap, it is in a bit of a sticky situation now due to recent changes in its model. Besides the reduction in free songs, it also recently changed its streaming functionality. While previously users could simply search for an artist or genre (e.g., Lily Allen) and click the first song to stream them all, now they have to create a playlist. Neither change is likely to be devastating, but it is always preferable to have positive news reports rather than negative ones. Thinking long-term about how your model might change over time could help mitigate the perception of reduced functionality.

4. Limit the initial subscriber base and use them to learn

Spotify started out in Europe partly because of its origins (it is Swedish) and partly because of digital rights management challenges in the US. But it has done a great job of building up interest and a healthy paying user base, which is no doubt making raising additional funding a lot easier. Not to mention helping them hone their business model before taking it big.

Despite its recent struggles, Spotify might be the company to be getting freemium right, with the healthiest conversion rates and speculated value of $1bn. It will be interesting to see where they take it next, and whether all they’ve learned in Europe will make them a smash hit in the US.


LinkedIn Files For IPO; Revenue $161 Million For The First Nine Months Of 2010
Dropbox Hits 25 Millions Users, 200 Million Files Per Day
Skype Files For IPO, Only 6 Percent Of Users Pay

6 Free Alternatives To Spotify You Should Check Out


How the internet helps independent stores scale while retaining their character

Despite my years of training in business school and the strategy consulting world, where I learned that profits come from scalability, I’ve always had a fondness for mom and pop stores. I’m a big advocate of independent bookstores and make sure I support them through purchases when I can. And I’m always sad when I go to a new city, looking to buy unique items, only to find yet another Zara or Gap with the same things I can buy at home.

It is no secret that independent stores are dying out. For instance, ten percent of independent bookstores in the UK closed in 2009, according to the Booksellers Association.

And, often communities vote for larger stores, such as Wal-Mart, because they offer affordable prices. Despite concerns from some members of the community about the effects Wal-Mart would have in Brooklyn, nearly 80,000 people still signed a petition in support of it.

So, in this age of conglomerates seeking ever larger profits, is there still a market for small stores? The internet, with access to the global marketplace, is helping to ensure there is.

1. Expanding markets

The internet can help create worldwide markets for unique items. Etsy.com does a lovely job of creating a vast marketplace for craftspeople, and companies like Garmz.com help democratize fashion design.

2. Banding together

Another way the internet is helping is by allowing providers to band together to create viable alternatives to big stores. Consider London-based Hubbub, which allows East London residents to place orders from several local shops and have them delivered all at once. It has the same principle but completely different experience to Amazon.co.uk’s grocery service, which at launch was delivering items at several different times, making it infeasible for the typical working consumer. Where Amazon fell down and Hubbub is succeeding is by ensuring co-located shops work together.

Though Hubbub only operates in some parts of London now, its model is ripe for scalability.

3. Celebrating diversity

Though they haven’t tapped the internet yet, stores are encouraging customers to go to other independents. Local London coffee shop Prufrock established a ‘disloyalty’ tour, offering free cups of coffee to those who have visited several of their competitors. A group of coffeeshops in Toronto have replicated the idea.

So, small stores are recognizing that they have to think big to survive, but are being refreshingly creative about how to retain their fundamental character while doing so. Could this potentially mean that more of our main streets reverse direction and host increasing numbers of independent shops?


The New York Times missed a chance to connect with its customers

So, I get why the New York Times is playing with a paywall. It has worked for the Financial Times, and the New York Times is one of the most well-read online news sites, according to Google. Good for them for experimenting. No doubt lots of on and offline newspapers are watching closely. But, from a consumer – and potentially a revenue – perspective, they haven’t nailed it yet. Here’s how they might do it differently in the next rev…

Step 1: Get in touch

What strikes me foremost is the Times’ lack of contact with registered users. All online readers who read a certain number of articles a month have been required for years to register. I’m one of them. So, they have my contact details, and if they’re smart, all kinds of stats on what I read and when.

Despite having this information, the Times didn’t contact me about the new paywall until after it launched.

I’m not alone. There are about 30 million unique visitors to the site each month. The Times estimates that about 15% of them are heavy users, so they must have registered. That’s about 4.5million email addresses they could have used. And that’s just within the US.

Why not use that information to give us a heads-up about the coming changes at the very least? What a stark contrast to the email message from LinkedIn’s CEO and Founder Reid Hoffman, who wrote to the first one million customers last week just to say thanks. The New York Times could have done something similar to generate positive buzz. Instead the top Google News hits on March 28 (the day of the paywall launch) were all about mastering the complexity of the payment options and finding ways to hack around the limits.

Step 2: Exploit data for good

And, given the Times has all kinds of data on our usage patterns, why not play it back to us? Consider what Dopplr does with its yearly review or what Placebook just did for Facebook users by showing them stats on their friends’ locations.

I’d love it if the Times told me how much of what I’ve been reading, when and on what device. That in and of itself would generate positive chatter.

Step 3: Really master personal pricing

On top of that, there’s no reason that the Times couldn’t then offer me a customized subscription based on my usage. Then no one could compare prices to each other or to other sources (e.g., the broadsheet), because pricing would be unique to each user for a personal newspaper delivered online daily. For inspiration, the Times could look to Flipboard’s winning custom magazine for the iPad.

[Update on 21 April]
Step 4: Make ambassadors of loyal readers

Unsurprisingly, the Times contacted its print subscribers to alert them of the change. However, they’re not a big new revenue market, given they’re already paying. But the Times could use them as ambassadors by offering incentives, for instance a Dopplr-style report on their usage patterns, for referrals to friends.


I’m a big fan of the New York Times, and I love that they’re experimenting with new revenue models. I think few would argue that they have taken some missteps with this paywall launch, but the beauty of the internet is it is adaptable. And think of all the kudos publisher Arthur Sulzberger Jr and his team would win for admitting they didn’t get it perfect and making it right.