Friday, May 4, 2018

How Much Would You Pay for Ad-Free Facebook?

With word that Facebook is indeed looking at the possibility of offering subscription access, the question obviously arises: what price would a revenue neutral, assuming Facebook only needs to replace current revenue?

Facebook average revenue per user overall (globally) was a bit more than $6 a quarter in the fourth quarter of 2017. But U.S. revenue was in the $26.76 per user, per quarter range. So it will matter where the paid subscribers come from.

There  is, for that reason, no simple answer. Replacing a U.S. free user might involve replacing $9 a month in lost ad revenue, but just $3 in Europe, 83 cents in Asia or 67 cents per month in Africa.

source: Data N Charts

Source: Facebook

The “simple” answer is to charge different amounts in each market. And that is where matters get very tricky. How much additional cost is required to create a new marketing and fulfillment mechanism for paid subscriptions in any market? Does that cost scale linearly with living costs in each market, or is there some universal cost of computing infrastructure and marketing that applies globally?

That cost will hinge on volume, but assume a reasonable assumption is made that the incremental cost of selling a subscription amounts to 25 percent higher costs. Then the retail price of a U.S. Facebook subscription would be perhaps $11.25 a month.

Compare that rate with consumer willingness to pay for other apps. Even the most-desired mobile apps seem to be priced at just $3, total, all in, with no recurring costs. Netflix might cost $11 a month in the U.S. market, if fulfillment and marketing costs were just $2 per sub, per month.

Facebook arguably could sell for a price point closer to Netflix than a mobile app (low one time cost). If marketing costs are higher than $2 per month, retail prices could reach far higher levels.

It will be a tricky exercise. Prices much above $10 to $11 a month might face significant user resistance. Ask yourself whether you would pay $30 a month for an ad-free version of Facebook, for example. Most of us likely would refuse to do so.

So is “more privacy”  worth $11 a month to perhaps $15 a month on Facebook?

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