Can membership programs apply Internet business models?

“Give away one thing to create demand for another.”  That’s the online business strategy discussed in Free: The Future of a Radical Price by Chris Anderson, Editor-in-Chief of Wired Magazine.

I had to stop my car so as not to miss all of Terry Gross’s interview with Anderson on NPR’s Fresh Air Wednesday, July 8th.

Now bear with me as I share a bit of my un-edited thinking as I was listening to the interview. (Why is it that I can’t resist exploring complex analogies on Friday afternoons?)

Anderson described how businesses are making money on the Internet by giving things away for free. I was particularly enthralled because the strategy he was describing — give the basic level away for free and then charge for the premium model — seemed to align with the radical museum membership program envisioned by Beverly Sheppard and John Falk in their 2006 book Thriving in the Knowledge Age: New business models for museums and cultural organizations from Alta Mira Press.

In their book, Falk and Sheppard ask why museums (and zoos, et al) discount prices for repeat users and thus receive the least proportional revenue from their best customers. In the commonly used nonprofit membership model, you contribute the membership fee and receive unlimited visits, visitors, discounts on merchandise, first serve on tickets to special exhibits, and more.

What if instead, they posit, the more of the museum that you use, and the more people in your group who use your membership, the more you pay for? Instead of continuing to increase revenues by increasing first time visitors, they suggested that the idea was to convince a “core group of the best customers to come repeatedly … and to pay full price each time they came.” The member pays more, but gets much better value for their higher price by their ability to access enhanced, highly personalized programming and services.

Reading this just three short years ago, the idea seemed both incredibly bold and incredibly fantastic.

Surprisingly, this is precisely the business model Anderson attributes to many successful Internet companies. As a customer, you get to sample the basic version for free online, but you only get the larger, better, bigger premium model for a price. The more you use, the more bells and whistles you grow into, the more you pay.

Anderson says this model works for two reasons:

1. It recruits such large (very large) numbers of free users that a sufficient and profitable number of them convert to paid use.
2. The free users have to love the product so much that they are willing to pay for it. That is, the product has to really deliver great value.

What do you think? Does this model have an application to our nonprofits?

Are you already making it work out there?

In some ways, the “Free” model does bear a resemblance to giving societies which are widely used methods of upgrading nonprofit donors. Give at higher levels and get rewarded with special events, preview parties, and more attention.

Downsides to these clubs can be costly benefits that are hard to maintain, or hard to deliver or do little to deepen the philanthropic intent of and connectedness of our donors to our institutions. Great models deepen donor understanding of mission and cost little more than time and personalized attention. Another danger is devoting your love to the high payer and marginalizing the smaller donor.

Ideas? What lessons have you taken from Internet business models and applied to your nonprofit?