The Death of Freemium (Sponsored by Advertising)

By Maor Sadra, Founder and CEO of INCRMNTAL

The 1960s are often considered the glory days of advertising. During the Mad Men era, working in an ad agency was seen as one of the most glamorous jobs going. Back then, consumers loved advertising, yet fast-forward to the unrecognisable advertising industry of today, and it’s a totally different story. The barrage of ads consumers are subjected to on a daily basis has fuelled the privacy-apocalypse and people are happy to pay to avoid watching ads altogether.

Across the board we’re seeing SaaS platforms offering premium subscriptions to access content without ads. Spotify and YouTube Premium are popular examples, and many new services like ChatGPT offer paid subscriptions for their premium platforms, enabling them to generate revenues without introducing ads at all.

YouGov research into what makes consumers pay for content, found that one third (33%) of consumers in the US and over a quarter (28%) in the UK, would pay for an ad-free browsing experience. The report noted that too many ads is a major deterrent for users, with over half of the population in both markets saying an ad-heavy experience will make them less likely to pay for a website subscription (52% US / 54% UK).

So, could this be the beginning of the end for the freemium model and digital advertising as we know it?

Freemium by a thread

There’s no avoiding the fact that the industry went too far with advertising, resulting in consumers pushing back, and landing us in the spot we find ourselves today. Consumers have lost trust in advertising and concerns around data privacy remain rife.

On the business side, the popular freemium business model of SaaS platforms offering at least part of their product for free is dying out, as the need to drive revenue in a competitive environment becomes ever-more imperative. We’re therefore seeing an increase in ad-free paid subscription services for platforms like Slack and Otter, which began their lives as freemium platforms and seem unlikely to ever feature advertising.

Over the next few years, there’s likely to be many more start-up solutions that do away with freemium models, as well as some VOD and social platforms. Meta and Twitter, for instance, both offer subscriptions to use their platforms without seeing ads. So far pick-up has been low but this is likely a sign of the challenging economic environment and, with regards to Meta, its younger user-base. Advertisers shouldn’t breathe a sigh of relief though. If consumers continue to be bombarded with ads in the way they are today, it might not be long before free social media becomes a thing of the past.

Advertising needs to evolve or die

Consumers are done with traditional advertising. Pop-ups, banners, commercials, and any advert that screams ‘I’m an ad’ is not what people want to see right now, particularly Gen Z audiences. Brands are already pushing more budget towards native advertising – think Instagram – and other tactics such as using content creators and influencer marketing, as well as sponsorship of big events. There’s a sense that advertising is only ok if the sales pitch is subtle and sits beneath educational or entertaining content. This is causing headaches in creative departments who need to go back to the drawing board and come up with new, innovative ways to appeal to consumers.

The other issue is that although consumers don’t want their privacy encroached upon, they do want to receive personalised advertising. A McKinsey study found over three quarters (76%) of consumers are more likely to purchase from brands that personalise communications. While personalisation has been a key focus for marketers for a while, the speed at which generative AI is integrating into advertising, means hyper-personalisation to every individual consumer will soon not only be possible, but essential.

The more personal advertising becomes, the more likely it is to become favourable to consumers and if there’s a shift in perceptions towards ads, freemium ad models could be firmly back on the table. Even if this isn’t the case, many SaaS platforms still rely on advertising as a necessary revenue stream, so in order to keep consumers happy and their bottom line intact, we might see these platforms hosting advertising in different ways with fresh types of inventory.

What is the future for ad-based freemium?

All that said, if we don’t see a drastic transformation in the way brands advertise to consumers over the next decade, we could lose ad-based freemium models altogether. It’s been quoted in the press that consumers currently see around 5,000 ads a day, although an original source for this seems hard to come by and in all likelihood, the number is probably a lot lower. But even if consumers are exposed to 500 ads a day, if advertising continues to annoy them and ad-free subscriptions consequently rise, this number could reduce as much as 80%. The impact on brands would be catastrophic and it’s unnerving to think about the economic impact it would have around the world.

Like it or not, advertising in a capitalist economy is essential, it drives trends and serves to both increase and reduce prices. Without advertising, the cost of consumption for consumers would rise dramatically, and that’s not what consumers, brands or publishers including SaaS platforms want.

While the death of advertising altogether seems a far-fetched idea, change needs to happen fast to avoid ads disappearing from SaaS platforms, which currently command a significant proportion of brands’ marketing budgets.

It’s not the first time the ad industry has been under pressure though and disruption is often necessary to drive evolution. It remains to be seen what the next few years for ad-based freemium hold but one thing’s for certain, it won’t look the same as it does today.

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