Charging for a Free Lunch

No one likes to pay for something that used to be free. And no company likes to tell its customers they have to start paying for a service they got for nothing. Nevertheless, it happens all the time and, in many cases, it causes hard feeling and ill-will between customer and company.


The folks at Pandora, the online streaming music service that allows you to create your own radio “channels,” faced the same problem. Due to royalty issues with its providers, Pandora had to begin charging for some of their content. As a devotee of the service, I was leery about what was coming. After all, Jott used to be free, and after they hooked me, they cut off the free service.


Here’s an excerpt from the email I got from Tim Westergren, the founder of Pandora.

First, I want to let you know that we’ve reached a resolution to the calamitous Internet radio royalty ruling of 2007. After more than two precarious years, we are finally on safe ground with a long-term agreement for survivable royalty rates – thanks to the extraordinary efforts of our listeners who voiced an absolute avalanche of support for us on Capitol Hill. We are deeply thankful.

While we did the best we could to lower the rates, we are going to have to make an adjustment that will affect about 10% of our users who are our heaviest listeners. Specifically, we are going to begin limiting listening to 40 hours per month on the web. Because we have to pay royalty fees per song and per listener, it makes very heavy listeners hard to support on advertising alone. Most listeners will never hit this cap, but it seems that you might.

Ok, so far so good, although I was expecting the big “but” that was going to nail me with big fees. This is what came next:

We hate the idea of capping anyone's usage, so we've
been working to devise an alternative for listeners like you. We've come up with two solutions and we hope that one of them will work for you:

Your first option is to continue listening just as you have been and, if and when you reach the 40 hour limit in a given month, to pay just $0.99 for unlimited listening for the rest of that month. This isn't a subscription. You can pay by credit card and your card will be charged for just that one month. You'll be able to keep listening as much as you'd like for the remainder of the month. We hope this is
relatively painless and affordable - the same price as a single song download.

Your second option is to upgrade to our premium version called Pandora One. Pandora One costs $36 per year. In addition to unlimited monthly listening and no advertising, Pandora One offers very high quality 192 Kbps streams, an
elegant desktop application that eliminates the need for a browser, personalized skins for the Pandora player, and a number of other features: http://www.pandora.com/pandora_one.

Tim goes on to add that a third option is to stop listening once you get to the 40 hour cap for that month. He closed the email by saying they’ve created a counter that will let you see where you are to date toward your 40 hour cap and by thanking me once again for using the Pandora service.


What’s the catch? There is none. Pandora has had to change their business model and did so in a way that almost makes you feel good about paying a small fee to continue being a customer. What did they do right and what can marketers learn from this? I see three things:

1. Lay out the issue clearly – Tim spoke of the royalty settlement and its impact on his business. No fluff, just straightforward talk.


2. Give the customer options – I now have three choices (four if you count stopping listening altogether). One of these three will surely work for me.


3. Give the customer time to react – I got Tim’s email in early July. His changes won’t be effective until August, giving me plenty of time to consider my options (not that this is a life-changing decision, but I do like my Bob Seeger and James Brown channels).

Product management’s role is to set pricing strategy. Part of that strategy includes how / when you change price. Pandora’s decision on how they increased their price says a lot about their brand and the type of company they want to be.


P.S. I responded to Tim’s email and got a prompt (less than 24 hour) response from Jasmyn, a “listener advocate” thanking me for my comments and my support of Pandora. Well done!

Honor Thy Channel

Unless you’re a serious cyclist, you’ve probably never heard of Orbea bikes (http://www.orbea.com/). Orbea is a Spanish designer and manufacturer of high end racing bicycles. Their bikes retail for $1,500 to $10,000 and are made of lightweight carbon fiber and aluminum. The bikes are sold exclusively through retailers.

I recently had the chance to tour the Orbea USA assembly facility with their Chief Operating Officer. I asked him about Orbea’s distribution strategy of using only retailers. After all, competitive cyclists tend to be pretty “wired” and know what they want, so why not sell directly through the Orbea website? He said they sell through retailers since there is some customization done at the dealer and to protect their premium product positioning.

I also visited an Orbea retailer. I asked the sales guy (who obviously was a cyclist) about Orbea bikes, and he launched into a passionate rant about why they’re the best and how he wouldn’t be caught dead riding anything less.

The Orbea strategy is a great example of why manufacturers must stay true to their distribution channels, especially in recessionary times:

• Brand loyalty is not just for the end user. It extends to your channel. Protecting them builds goodwill that carries you through tough times
• Short term margin gains (e.g., selling through the Internet) comes with a long term cost of diminishing your brand in the eyes of the end user and losing your channel’s loyalty

Orbea is taking the long view of meeting the needs of a very specific segment of the riding population. Their customers, and their channels, are in turn rewarding this strategy with fierce loyalty.