Posted by: Matt Shanahan
Increasing ARPU with a paywall is a strategy being pursued by an increasing number of publishers, however different paywalls have different revenue dynamics. What and how to charge have big implications. Specifically, a mandatory vs. an opt-in paywall have very different revenue dynamics and risks.
Let’s look at the math. Assume a publisher has identified a monetizable value proposition (see methdology) and a fan base of 10,000 with an average daily consumption of 10 page views. Further, let’s assume the publisher averages $10 RPM. Under these assumptions, the ARPU of a fan is $36.40 (i.e., 10 page views/day X 7 days/week X 52 weeks/year X $10 RPM ÷ 1000). The revenue of the fan base is $364,000.
Now there are two types of paywalls, a mandatory paywall and an opt-in paywall. A mandatory paywall is the more traditional one that only allows paying fans to access content. An opt-in paywall allows both paying and non-paying fans access to content. The advantage to paying fans are value-added services such as exclusive offers or ad-free content which becomes the motivation to pay.
Any mandatory paywall that would go up need to generate greater $364,000 to improve ARPU. Since paying fans will generate ad and paywall revenue, the inequality looks like this to figure out the minimum mandatory paywall price:
paying fans * [mandatory paywall price + $36.40] > $36.40 * all fans
Solving for the minimum mandatory paywall price:
mandatory paywall price > [$36.4 ÷ conversion rate] - $36.40
where the conversion rate is the percentage of fans that convert to paying fans. The lower the conversion rate the great the price to cover the lost advertising revenue. With a 30% conversion rate, the price of the mandatory paywall needs to be $84.93/year (i.e., [$36.40 ÷ 0.30] - $36.40) in order to match the advertising revenue from all fans. The lower the conversion rate is, the higher the paywall price must be in order to breakeven.
In the opt-in paywall, the dynamics are a bit different. Using the fan base, a publisher decides to go with an opt-in paywall by offering an ad-free environment. In this case, the inequality looks like this:
[opt-in paywall price * paying fans] + [$36.40 * non-paying fans] = $36.40 * all fans
This simplifies down to the following minimum opt-in paywall price:
opt-in paywall = $36.40
Interestingly, if a publisher sets the opt-in paywall price at $84.93 (i.e., the mandatory paywall price) and gets 0% conversion, there is no loss in revenue. However, if any fans convert to paying, the opt-in paywall outperforms the mandatory paywall and ad-only models up until the conversion rate of 50%. The mandatory vs. opt-in paywalls have very different revenue dynamics. Additionally, the opt-in paywall has far lower risk to the current revenue stream because non-paying fans will continue to generate the revenue they always had.
I am working on a diagram to post later this week as well as a side by side comparison of the two paywalls.
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