One of the hottest trends in the software business over last several years has been the rise of the “Freemium” business model. For those unfamiliar with the term, a Freemium model is characterized by an entry level version of your software which is totally free to users–forever.
This business model has actually been around in the software industry since the 80’s and was originally referred to as “crippleware” or “lite” entry level versions of software. The term “Freemium” apparently entered the software industry lexicon when used by Jarid Lukin of Alacra in 2006. But enough history. Regardless what you call it, the model on the surface is well suited to the software business due to no (or very low) cost of goods sold.
Whatever term you use, the model is predicated on creating a large “free” user base quickly, usually by using viral marketing methods such as referrals and word of mouth along with other very low cost methods such as SEO. The large free base is then “monetized” by selling advertising to their eyeballs and/or upselling them on premium software features or services. The Freemium model today is widely used in the software biz across a number of form factors including Open Source, SaaS and traditionally licensed software.
What’s most interesting to me about the model is the trendiness of it the last few years since the term Freemium came into use. I see many companies that appear to be adopting it because they feel like so many others are using it — that it must be the right thing to do. But is it the right thing to do in all cases? In my opinion–it is not. Let’s take a closer look.
Freemium Model PROS
- Fundamentally viral: he more users you get–the more users you get. Free users will refer other users who could turn out to be paying users.
- Allows you to upsell your own (free)customers–upselling a customer that’s already incorporated your tool into his workflow is generally easier than selling a new customer from “scratch”.
- Keeps prospects in your target market away from being locked in by the competition.
- The barriers to entry to your product line are at the minimum possible (even less friction than free trials and money back guarantees)
- Great for startups to say be able to say “we have XXXXX gazillion users”.
- Enables Free Beta testing of new products with a large number of users.
- “Free” traffic and user bases can sometimes be converted to advertising revenue.
Freemium Model CONS
- Usually has low conversions rates to paid version, average is about 1-5%–although this obviously varies widely.
- If you do offer customer/technical support to free users, it’s potentially a large expense unsupported by little if any revenue.
- If you don’t offer support or only offer poor/reduced support to free users (such as forum-only support), what does that do to your conversion rates to paid users–as well as your overall reputation?
- If you do offer reduced or no support to free users, lots of time can be wasted trying to figure out who “qualifies” for what level of support .
- 95% will never pay you a dime–are they REALLY customers?
- In addition to customer technical support costs, if you’re SaaS-based the cost of data/bandwidth/hosting for free users can be significant.
- Requires EXTREME application ease-of-use to work well.
- There is some evidence that having a free version reduces your conversion rates on free trials of your paid product.
The main reasons I don’t like Freemium models, except when circumstances clearly call for it:
- Having a free version conditions the market that “free” is the appropriate price.
- A free version can reduce the overall value perception of your product
- It’s critical to the success of a Freemium model and difficult to get the free/paid feature set split “just right”. If you don’t get this split just right, you either won’t be able to attract enough free users (too little value in Freemium product) or you won’t be able to convert you Freemium users to paid versions (too much value in the Freemium product).
- “Free” is a mentality that’s hard to overcome in a user; it’s much harder from convert a free user to a paid user than it is from an entry level (cheap) paid user to a premium paid user. An example of this is the difficulty of online newspapers in converting readers to paid models after years of “training” them that their content should be “free”.
- I’d prefer to use available profits on professional marketing programs rather than starving the marketing budget due to excessive support/hosting costs.
Even taking my biases above into consideration, there is definitely a place for a Freemium business model in some situations:
The Best Circumstances to use a Freemium Model
- Although the Freemium model has worked in B2B markets, in general I believe it’s better suited to consumer mass markets where viral is possible, price points are already low and free user bases and traffic can be high–making it possible to monetize the traffic via advertising
- Entering a market with a very strong, embedded competitor.
- When attacking a market with very limited resources or lacking in marketing skills.
- With a product has a great “social pull” which lends itself well to viral marketing.
- Freemium has already become the standard in your market segment, so you’re almost forced to follow suit.
- As an act of desperation when nothing else has worked.
I’m sure there are others circumstances where a Freemium model makes sense–the list above is what comes to mind quickly.
So that’s what I think about Freemium–many will not agree. What’s been your experience with it? Leave a comment below with your own thoughts, lessons or best practices.