The shifting dynamic of OTT, Telcos and traditional broadcasters makes the landscape of delivering video content an unpredictable beast. Consumers have moved away from the bloated Pay TV model involving heavy monthly fees and minimum stay contracts in favor of flexible and personalized OTT services, capable of bending and maintaining a malleable stance within the market as customer needs adapt and transform with new content delivery platforms.
This offered both an opportunity and a dilemma for traditional services and as some of the largest names in the business likes Disney and Sony announce new OTT services, the newest challenge facing new entrants is, what shall my business model be, SVOD (Subscription Video On Demand) or AVOD (Ad-funded Video On Demand)?
This is an ongoing decision which video companies must mold to follow consumer trends and make sure their pricing model and sales strategy are maleable, as shown with Netflix’s new strategy which involves rolling out tailored ads to subscribed users as a form of personalization.
While an SVOD, the more popular option, is a more secure way of measuring your user base and having better control over gross income, many companies show great ways to make a profit simply on ad impressions – YouTube is a great example of this. We’ll go into the pros and cons of each option later in this article to further articulate why different businesses will suit one better than the other. However, something that many video companies are beginning to employ is a hybrid service in which multi-tiered payment models accommodate various customer needs. This strategy has long been employed by mobile gaming companies as an alternative funding method to purchasing the product, where consumers have the option to either pay for the product or download a free version and subject themselves to regular advertising – this is where the true value in a hybrid pricing strategy surfaces.
An SVOD (Subscription Video On Demand) business model is a more secure and popular option. With a higher average ROI than alternative business models, the SVOD model has been adopted by industry leaders like Hulu, Amazon, Netflix and Youtube. This is less risky than the most popular alternative AVOD model, which requires more risky investments to acquire users and retain them.
A key benefit of running an SVOD video service is the proven track record of success. Annual revenue for SVODs in 2017 hit $64 million, up from just over $10 million in 2016. This is largely thanks to the highly competitive landscape between the few big players, resulting in many households subscribing to multiple SVOD services in order to access their favorite content. The boost in revenue has opened up space for companies like Netflix to have a budget of $8 billion for commissioning original content in 2018. This has made the SVOD model very accommodating for premium and high visual quality content.
A downfall of SVODs is the high cost of user acquisition, costing companies like Netflix $100 to acquire one single user, meaning user retention must be around 1 year for the company to make a profit (assuming a rate of $9.99/month). High costs and high turnovers make this a very volatile pricing plan, however, coordinated correctly and with the right analytics tool to track user behavior, this is almost the perfect option.
The AVOD (Ad-funded Video On Demand) model is an example of a very diverse but unpredictable business strategy. While SVODs benefit from passive and predictable income, AVODs must rely on gripping content, maximizing contact time and ad impressions, constantly updated content and a focussed marketing team. This balancing act can prove to be fruitful, as exemplified by YouTube, the most successful AVOD in history. Creating ad partnerships and publishing regular content to satiate consumers is a taxing feat, although, there are ways to accomplish this. YouTube capitalizes on citizen content and offers a cash incentive to anyone who can create content that brings in a large volume of viewers to maximize ad impressions by monetizing the video timeline.
A strong grasp of A/B testing is crucial when pursuing this path, as figuring out ad placement, length, frequency and type is what is going to aid businesses in finding the perfect balance between ad income and impressions to reduce churn and capitalize on content consumption.
Richard Foster, a mobile app developer, claimed that an ad-funded business was far superior to a subscription-based option. His reasoning? User outreach. Foster is able to monetize his various mobile apps, allowing the total number of downloads to rise before claiming them as users without taking a single dime from their pockets. This is free advertising for Foster who is able to claim a large number of users for his apps and save money on marketing. This is where more flexible business models and pricing options can play a pivotal role in accelerating growth and capitalizing on user acquisition.
This creates two streams of revenue: advertisers paying for ad space, and committed and loyal customers who are happy to pay more for an ad-free experience and access to exclusive and engaging content. Most recently, CuriosityStreamer, the VOD service from Discovery has moved over to a hybrid business model. they’re offering a subscription for only $2.99/month which comes with pre-roll ads. they’ve also added a free version, giving customers access to 18 titles.
A hybrid ad-and-subscription model offers room for upselling, cross-selling and variable income dependant on ad impressions. the flexibility that this model offers has proved to be very popular in the short yet exciting timeline of OTT services, with big players like YouTube moving from their infamous ad-funded model towards YouTube RED, their subscription-based platform which has now seen the addition of YouTube Music as another way to wet the appetites of it’s almost two billion users.
A “Try Before You Buy” sales method is part and parcel of the online marketplace. 82% of consumers consult online reviews before purchasing a product or service, with positive reviews pushing average purchase amount up by 31%. Customers don’t like investing without proof that they’re getting a good return – everyone wants a good deal. By offering a ‘free’ version of your service while still pulling in revenue from ad impressions you’re giving consumers than sneak peak into the full product and unbiased user experience that drives sales and garners loyal customers.
The key to decision-making when it comes to choosing a business model is A/B testing and an analytics tool to measure how your platform performs. The video team at NPAW have created YOUBORA, the industry-leading BI solution to gain full visibility of platform performance and user behavior to help with decision-making and improve QOE to create a top-of-the-line video service.
Research & Editorial Team on August 19th 2018
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