Recently, social media platforms have been heavily criticized for perpetuating false and misleading information. We wanted to dig deeper and understand why. Currently, the business model of these platforms is based on advertising revenue, which is all about engagement. The algorithms used by these platforms understand the best way to get the greatest number of clicks is through outrage, even if its perpetuated through falsehood. Oftentimes the most damaging and outrageous narratives get the most clicks. This means the more of these messages it feeds you, the more clicks it will get, the more advertising revenue. At the end of the day, isn’t it the business model that’s causing the problem? Then can’t the business model also be the solution?.
Scott Galloway, professor of marketing at NYU Stern School of Business suggests one of the most effective ways to disincentive this behavior is to shift from advertising towards a subscription model. He suggests that people with large followings pay a subscription fee, while most users with few followers can continue to use the service for free..
This so-called Freemium business model means Twitter can still offer its basic platform free of charge, while offering its premium services and advanced product features to a relatively small group of paid users with over a certain number of followers. This business model pattern along with many others is part of our Business Model Pattern Library. Featured in our latest book, The Invincible Company.
This is what Twitters Freemium Provider business model could look like.
Twitter’s free platform usage still gives users access to the platform. The free service has basic functionality with users still receiving messages from advertisers, partially subsidizing the free service.
Once free users obtain a certain number of followers, say 20,000, Twitter can then convert them to paid users by charging a monthly fee. The premium service could have many more features to help influencers amplify their message.
A user’s lifetime value (LTV)—how much Twitter can earn from a user over time— increases the longer the company can retain users. This is called managing customer churn. Thus with this business model, Twitter is incentivized to continuously deliver value to its customers.
Scott Galloway has indicated Twitter’s shift away from the advertising model could see advertising revenue declined by 20-40%. Yet, because of the stability of the recurring revenue model, their share prices will likely go up over time. This will be good news for shareholders since Twitter's share price has dropped 60% since its peak in 2014.
The particularity of the freemium model is that you need to be able to cover the costs of free and paying users. It will take time to adjust to the new model. Twitter will still be able to generate ad revenue from free users. Instead of having 90% of its revenue dependent on advertising it will over time, receive most of its revenue through subscription. Making it far less reliant on its algorithms.
In the last few years, Twitter has experienced a steady decline in the popularity of its service. It is down more than 100 million daily users and slowly losing ad revenue to other platforms. At one twentieth of Facebook’s market capitalization, it has an opportunity to be bold, and make the shift. Knowing its current advertising model will eventually become obsolete. This is an opportunity for Twitter to reinvent itself in order to stay relevant.
Building Invincible Companies
6, 7 & 8th October 2020