How to win subscribers and advertisers

Websites earn revenue three basic ways: charge a subscription, charge advertising or do both. 

Higher subscription prices offer fewer viewers. However, those viewers may be the most attractive for advertisers because they have the income to pay for the high subscription. But they also may have the lowest tolerance for adverts. 

That's from a seminal 2003 paper [pdf] on the potential impacts of various advertising and subscription models for electronic media. 

The authors investigate the efficacy of four subscription and advertising strategies: 

  1. Limited access, which generally drive away low income (or minimally interested users) because they refuse to pay the subscription price. 
  2. Free access, which generally drive away high income users because advertisements are too common. 
  3. Pooling, where all customers accept the available advert price 
  4. Separating, where customers are segmented by self selecting their preferred subscription price.

The authors argue that a pure adverstiser-supported or pure pay-per-view models will only be successful under certain parameters: Mostly if the site only appeals to high- and low-income audience segments. 

Media sites will most likely pick up advertisers with higher end products -- those that produce a higher margin. But if these advertisers are fighting for the lower-income (or low interest) segment, there will be a lower probability of successful advertising. Advertising is a consumer annoyance, the authors write, but it can be used to market different products to different audience segments. "if different consumer segments are willing
to pay different prices for the opportunity to watch the program at different levels of advertising," they write. 
Thus, the authors lean heavily toward separating, allowing the site to segment the audience. For one, providing users with a choice to opt in or opt out of different amounts of advertising is easy to do on electronic sites. Secondly, advertisers will pay a higher price when they can better target different sets of users. 

They conclude by looking toward a future where content and advertising is married:  

It is not likely that the separating pricing strategies that we discuss here will become more pervasive with time since contemporary electronic media make it possible to implement it much more efficiently than was possible in the past. The implications are higher profits for media providers, more choices for customers, and more targeted advertising for advertisers. 

The paper: 

Advertising versus pay-per-view in electronic media
Intern. J. of Research in Marketing
20 (2003) 13 – 30
Ashutosh Prasada, Vijay Mahajanb and Bart Bronnenberg