JetLib News

After its disappointing IPO last month cast doubts on the company’s ability to monetize its vast user base, Facebook today announced a subsciption pricing model – potentially adding a recurring source of revenue for itself – and for developers of Facebook apps.

The new service, announced on Facebook’s Developer Blog this afternoon, will launch in July.

Subscriptions will bring Facebook app producers a recurring revenue stream that will ideally normalize an app’s overall revenue stream, instead of depending on the spiky ups and downs of one-time payments for virtual items. The new system will be launched on both the Web and mobile versions of Facebook.

Altimeter Group analyst Chris Silva sees subscription-based pricing as a real value for app developers to offer to users. “A subscription that buys me access to specialized content rather than a virtual item with maybe a more fungible value is a more successful way for developers to bring in revenue,” Silva said today. Specialized content is more of a value-add to users, he believes.

Subscriptions have already been tested by popular game producer Zynga for its FarmVille and Pioneer Trail games. Kixeye, a smaller game developer, will sell exclusive items in its Backyard Monsters game for a $9.95 monthly fee – with Facebook picking up 30% of every subscription.

Local Currency Pricing

At the same time, Facebook is also moving away from its Credits payment system to pricing that supports local currencies.

Prashant Fuloria “By supporting pricing in local currency, we hope to simplify the purchase experience, give you more flexibility, and make it easier to reach a global audience of Facebook users who want a way to pay for your apps and games in their local currency. With local pricing, you will be able to set more granular and consistent prices for non-US users and price the same item differently on a market-by-market basis,” Facebook Product Management Director Prashant Fuloria told developers in today’s blog.

That last point contains the real gem in the move: setting market-to-market pricing will let app developers maximize their revenue by lowering prices in markets where their items might be too expensive, or charge more if the market can bear it.

The new subscription program will support local currencies, and apps that use the Credits system will be flipped over to local currencies automatically.

“We hope new features like subscriptions and local currency pricing help you monetize more effectively and reach more users globally,” Fuloria added.

Generating alternate and optimized revenue streams is pretty much Job #1 for Facebook after the lukewarm reception investors gave its IPO this month. And for Fuloria, it’s personal – this is why he was hired away from Google in 2009.

The Mobile Conundrum

On the mobile version of Facebook, there are no ads and Facebook is seeing phenomenal growth. A recent report revealed that nearly a third of Facebook’s users in India access Facebook exclusively through mobile devices. The local currency and subscription changes will make it much easier for developers obtain revenue from mobile customers in developing countries.

That’s critical for Facebook’s future: Facebook’s mobile platform “must be front and center with the massive growth in mobile users in the US – and more so, abroad,” wrote Silva earlier this year. “Facebook should expect the device, be it feature phone, smartphone or tablet, to be the central interaction point for users. It’s going to have to adjust its monetization model to match if it wants happy investors because mobile matters.”

Today’s announcement is a fulfillment of Silva’s prediction: an adjustment of Facebook’s monetization model to start getting stronger and more predictable revenue streams from mobile users, and those in developing countries. And it won’t hurt the revenue channels from the rest of Facebook’s users, either.

Back when we first started using PCs, we all wished that they would become as easy to use as a telephone. Well, we got our wish, not because computers got easier to use but because phones are now so darn complicated. If we examine the process and story by which phones became so complex, we can uncover a variety of lessons that startups can learn – and hopefully avoid.

The Phone’s Transformation

First, the landline is becoming extinct. As we moved to cell phones, it became easier and more convenient for everyone to have their own number. This is true for both home and office lines: I gave up both a long time ago.

Minutes became ultra cheap, thanks to voice over IP telephony. Remember when you had to think about calling someone “long distance?” Now toll calls are pretty much a thing of the past. And the whole notion of area codes also got more complex. Forget traveling; cell phone users often keep their original area codes when they move to another city, so you can’t tell where you are calling anymore. For example, I still have a Los Angeles “310″ area code even though I have lived in the Midwest for several years now. In some countries, cell phones have their own area code, so all you can tell is that you are calling a mobile phone.

Then cell phones became more than just phones: About half of us now use them for surfing the Web or running apps, and navigating the typical cell plan now requires a degree in accounting. When we get a new plan, we have to figure out prices for our data and texting plans, and how many actual voice minutes we’ll need – that is, if we still use phones to make actual phone calls.

And then, of course, there’s the task of finding the right phone to purchase. Computers now seem a lot easier by comparison.

Lessons for Startups

So what, you say? Modern life is complex; deal with it.

But startups can take away some important lessons from this thought experiment:

1. Don’t assume that technology is understandable by everyone. Consider the context in which an item is going to be used, and its intended audience. This is Marketing 101, but still. Just because brilliant engineers from Stanford or MIT design your product doesn’t mean that everyone who will actually use it has that kind of training.
2. Simplify your pricing and eliminate degrees of freedom. I once had a client in the network storage business. Its pricing sheet comprised not one but a series of Excel spreadsheets. Since pricing had six different metrics, it could take the better part of an hour to come up with a final price for customers. It shouldn’t be that hard. Take Thoreau’s maxim (“Simplify, simplify, simplify!”) to heart, and make your pricing easier to understand.
3. Align your product with your domain name. How often do companies start with one name and end up having to change it because their major brand got more popular than the name of their company?
4. Don’t penalize your best customers. When you run over your cellular airtime minutes allotment, you get hit with overage charges. It shouldn’t take an act of Congress to convince companies of the folly of this tactic. Stop trying to extract more money from your best customers, and instead, make it easier to do business with your company.
5. There is nothing wrong with having subscription-based pricing, but make it clear how a customer can end a contract without paying a hefty penalty.
6. Don’t make your product instantly obsolete. This issue is huge for cell phone makers right now, but every time you buy a laptop, the manufacturer instantly seems to introduce something lighter with a better screen.

As you can see, there is a lot that startups can learn from the saga of cellular phones’ growing complexity. It does make you long for those days when we could just pick up that black model and ask the operator to dial a number for us. As Lily Tomlin’s “Ernestine” would say, “I work for the phone company. It isn’t my job to think.”