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.
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I complimented your freemium article on LI & Twitter. But, since you don’t follow me (@craigmschwartz), I couldn’t DM you the following: There’s an extra “e” in item #8.
Jim Quanci says
A number of Autodesk partners are having good success using Freemium in a B2B environment. There are consultants that have built quick simple delightful apps that give their target customers immediate value – and leave them asking for “more” – leading to serious custom software development engagements. Part of doing this right is building simple little apps – apps that can be built in a day or two – and refined in a week or two – that are so simple support is nil (and most importantly the customers using the app are delighted to talk to you when you reach out asking if they want “more”). There are also the “large desktop app” developers who use freemium purely as a lead creator – where lead creation is frequently 1/10 to 1/100 the cost of their other lead creation activities – and that result in “warm” leads (customer is happy to hear from you after being delighted with your free simple app). Think about how you react to a cold call – and think about how you would react to a call or email from someone that gave you a free app that saves you several minutes a day (an hour or two a week). Again its important that the app is very simple, actually delivers real value, and is most attractive to your target customer. Think about what people use to pay to create sales leads in the old days… huge amounts of money… when today a simple little useful app can do better. Two years back I wasn’t so sure… today I am sure freemium can work in a B2B environment – with ROI 10x the “old” lead creation activities. I also know a few partners that took freemium apps and turned them into several million dollar per year businesses – when after building a large following, they started charging a modest fee for the app (though yes this is a rare event… not sure its any rarer a success then the “old way” of throwing large amounts of money at traditional marketing).
So far, freemium is working quite well for us at http://www.eevid.com: in essence, a simple, yet strong, innovative method to establish proof that the content of a particular email has been delivered to a third party at a verifiable time.
Although addressed to individuals and companies alike, eEvidence is a PRO service in the sense that it provides legal evidence to anyone about the contents and delivery of their emails.
Obviously, individuals and small companies are to be using such service just now and then, thus we concluded there weren’t real chances to get significant revenue for them. We still wanted them in though, so we decided to offer the possibility to certify up to 50 emails a year for free, a reasonably good free value offering.
We condier free users as our marketing investment, which lets us focus on targeting businesses for sales. The service is simple enough to be used by anyone, but also simple to become part of any email-realted workflow within enterprise software solutions, such as SAP.
We’ve encountered a huge range of premium opportunities beyond free users. With a freemium conversion range above 12%, it seems we are on the right path.
Carlos, seems like a real success story for you for sure. 12% is an excellent conversion rate. It appears that you’ve hit on a great split in your freemium/paid products–just enough of a taste for people to get a feel for your product’s value, but not enough that it steals serious users. I also think that this is a excellent platform for a freemium offering as I’m assuming it’s pretty easy to use.
We were also blessed by the excellent review Neil J. Rubenking from PC Magazine wrote about the service. (http://www.pcmag.com/article2/0,2817,2405775,00.asp). That helped spreading the word around the world.
Curious about it? Just try it out yourself and you tell me if Neil is right when he concludes that the service is “ridiculously simple to use”.
Andy Brundell says
This is good stuff. I could offer at least one additional Pro: I think there’s some evidence that if your startup is looking to get acquired, typically for rolling your product into a larger platform, then having a large number of freemium users makes you more attractive as a target. What I have also seen is some variations of freemium where rather than have tiered plans with differing support levels/feature access/etc, which typically gate you at some point (i.e. you can do 3 of X for free, but you want 5 of X so it’s time to give us $99/month,) the upsell is transactional. In this model, you want 5 of X so give us $20 each for the extras as a one-time thing and you’re good to go. You may not have committed the user to such a large spend, but you’ve established them as a paying customer.
Phil Morettini says
Andy, thanks for your great addition to the topic. -Phil