Web site dared to ask users to pay
Thursday, June 21, 2001
By Monica Soto
KNIGHT RIDDER NEWS SERVICE
In 1995, Classmates.com charged a modest $5 for a lifetime membership. Even then, Randy Conrads believed that, if his customers would not pay for his service, he didn't belong in business.
If Conrads' approach sounds logical now, it wasn't the conventional wisdom most Internet businesses followed two to three years ago.
The majority of content sites – even early Internet darlings such as TheStreet.com and Salon.com - operated under the assumption that, in order to survive in a competitive marketplace, they should sell banner ads and give their product away.
As the same Internet sites struggle to build subscription-based businesses or go under, Classmates has amassed 20 million names in its high school and military directories.
Of those registered, about 1.2 million have paid a subscription fee as high as $29.95 annually to have access to e-mail addresses of fellow alumni and use other services such as message boards and tools to plan class reunions.
That places Classmates, which is based in Renton, Wash., in rare company, with a sliver of other successful, subscription-based online businesses, including Consumer Reports, the Wall Street Journal, and America Online.
"Given the right value proposition, [consumers] will spend," said Dan O'Brien, a media analyst for Forrester Research, of Cambridge, Mass. "It's just [that] they won't spend to browse through content."
Forrester predicts that consumers will spend $423 million for online content this year and $2.1 billion by 2005.
The challenge for content businesses is to change the behavior of users conditioned to getting something for nothing. "The mind-set seems to be: 'I paid my $20 to access the Web, and everything should be free,' " O'Brien said.
With the switch such a delicate matter, Internet sites have tried to find creative ways to introduce paid services to customers. Homestead.com, of Menlo Park, Calif., which offers a Web-site-building service, notified its 11 million users last week that it would start charging for services. The letter asks the customers what they would be willing to pay.
"I think AOL is someone that has proven that [business model], and Yahoo is someone that hasn't," Homestead chief executive officer Justin Kitch said. "You want to be an AOL in this market."
Conrads, a retired Boeing Co. engineer, started Classmates.com after failing to find former high school classmates through directories listed on AOL and Prodigy.
After amassing its first 1 million customers, the company received an angel investment, then venture-capital financing. To date, it has raised $15 million.
Michael Schutzler, Classmates' president and chief executive officer, said the company is adding users at the rate of 80,000 to 100,000 per day. From January to May, with the help of heavy advertising, it registered 10.7 million new basic members (who pay no fee) and 548,000 new "gold" members, who pay $29.95 annually.
Schutzler, who joined the company last September, said that volume has helped the company develop a positive cash flow, with plans to turn a net profit by October. It expects to post $40 million in revenue and $30 million in deferred revenue this year.
Paul Goodrich, a managing director at Madrona Venture Group, a Classmates' investor, said one of the company's most critical assets is its user base of 20 million - something it amassed with smart advertising.
"They were doing the heavy lifting that is required to actually know how much it costs to get a customer and how to get a customer at the lowest cost," he said.
Classmates raised its subscription price to $29.95 a year ago. The question now is whether those subscribers will continue to pay for the service.
Goodrich said the challenge was "to augment the content they're offering so the reason you go back to Classmates is only, in part, because it allows you to stay in touch with your classmates." |
