Angie’s List IPO: So Maybe a Paid-Membership Business Model Can Work?

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The initial public offering of Angie’s List, the membership-only site offering consumer reviews of contractors, mechanics, and other local businesses in hundreds of communities around the country, is being viewed as an enormous success. The company’s stock shot up 33% soon after it began trading early on Thursday. What’s perhaps most interesting is that, given the reluctance of consumers to pay for content—user-generated content especially—Angie’s List is thriving even as subscribers must pay for the right to rate local companies and check out the reviews of other members.

For years, giving away free content and services has been the standard e-business model. See Wikipedia, YouTube, Yelp, LinkedIn, Hulu, Mint.com, TripAdvisor, Google, Facebook, and others as prime examples of how “free” can help a venture be successful.

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Angie’s List has always operated differently, perhaps because it predates the rise of the typical ad-based Internet business. The company began as a phone-in service, and expanded to the web in 1999. Today, it boasts paid membership in 175 U.S. markets, and members pay an average of $6 a month.

Again: People pay for access to Angie’s List’s user reviews. That’s pretty amazing when you think about it. User reviews are a dime a dozen, and they’re almost always free and openly available via sites like Insider Pages, RateMDs, Yelp, and epinions. Getting a recommendation for a contractor, dentist, or landscaper from someone you know—or someone who knows someone you know—is also super easy thanks to Facebook.

When Angie’s List enters a new community, it too is free. But after a couple years of gathering members and compiling loads of reviews of local businesses, it switches to a paid-membership model. And apparently, members feel it’s worthwhile to pay for the service.

The Wall Street Journal reports that 70% of first-year subscribers re-up their memberships, and people who have been members for five years or more stick with the company 87% of the time.

It’s pretty much unimaginable that a company could launch today and successfully convince consumers it’s necessary to pay for user reviews. So how does Angie’s List do it? For one thing, the company has a long track record. It began 16 years ago as a mostly grass-roots effort. Because memberships are more valuable when more and more people write reviews, it’s in the individual member’s best interest to submit as many ratings as possible—creating a pool of information that becomes more useful with each review added.

Angie’s List members have an obvious interest in making it a comprehensive, trustworthy resource. Speaking of trust, as the WSJ notes:

The website differentiates itself from other review sites by emphasizing quality control. It refuses anonymous reviews, won’t allow companies to pay to be on the list, employs staff to internally audit the content, and uses fraud detection technology.

What it comes down to is that people will pay for information so long as it’s trustworthy. Not all user reviews are created alike, and members find Angie’s List ratings to be far more useful and trustworthy than the reviews readily available for free elsewhere.

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Now, are reviews you pay for really better and more trustworthy than reviews accessible at no cost? If you’re the one paying for them, then you’d argue yes, of course they are.

Here’s where consumer psychology enters the picture. One problem with the daily deal market is that, regardless of an item or service’s inherent value, consumers tend to value things higher when they pay more for them. The flip side is that something available for free—like most user reviews, or even newspaper or magazine stories delivered online—is valued less, or not at all.

A New York Times story from five years ago sums up the idea this way:

Angie’s List takes the view that content you pay for is more valuable than what you get free.

Tens of thousands of Angie’s List’s paid subscribers apparently agree.

Brad Tuttle is a reporter at TIME. Find him on Twitter at @bradrtuttle. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.

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