The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.
- Is a freemium a business model?
- The origin story
- Giving it a name
- On the power of free
- Freemium isn’t new
- Freemium is not a size fits all
- Beware of the cost structure
- Free isn’t free after all
- Is “your 1” big enough to pay the bills for them all?
- Are you using the freemium just to get VC money?
- Freemium business models that work: Dropbox case study
- How to align your business model to a freemium offering
- Freeterprise: Free dominating also the enterprise space
- What questions should you ask before you go with a freemium?
- Key metrics to track to understand whether the freemium is working
- A final remark on how to do the Freemium right
To understand this key difference let’s look at the whole story behind freemiums.
The origin story
On March 2006, venture capitalist Fred Wilson wrote an article entitled “My Favorite Business Model” which said:
Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.
He mentioned examples of this successful business model at Skype, Flickr, and a few others .
According to Fred Wilson, the core advantage of a “Freemium business model” is about fast customer acquisition. But he made clear that it had to be as frictionless as possible:
A customer is only a click away and if you can convert them without forcing them into a price/value decision you can build a customer base fairly rapidly and efficiently. It is important that you require as little as possible in the initial customer acquisition process. Asking for a credit card even though you won’t charge anything to it is not a good idea. Even forced registration is a bad idea. You’ll want to do some of this sort of thing once you’ve acquired the customer but not in the initial interaction.
The main aim was to “eliminate all barriers to the initial customer acquisition.” He didn’t have yet a name for this kind of revenue model.
Giving it a name
At the end of his article, Fred Wilson had clear in mind what the Freemium business model looked like. However, he didn’t have a name for it.
Thus, a service and product wholly free and frictionless, where most users don’t pay, and a small base of users pay for a product that has premium features.
Over the years Fred Wilson kept emphasizing the importance of free. Today the freemium business model has taken over also the gaming industry. But it has also become the most debated business model in the software industry.
On the power of free
Building a free product and make it available to anyone and then expect to make money isn’t the right strategy.
Instead, the “free” within the freemium, if appropriately used, can be a lever for quick success.
As Fred Wilson pointed out in October 2008 “freemium is far from dead, in fact, it may be the business model de rigueur.“
What did he mean? He recounted in a later article:
Facebook is a perfect example of freeconomics at work. A woman who works for a major media company was in my office recently. She quoted her CEO as saying “why doesn’t Facebook just charge a monthly subscription fee, they’d be making money hand over fist?”. Well I believe that if Facebook did that, they’d be vulnerable to other networks offering a free service. And certainly not every one of those 200mm+ users are going to cough up a monthly subscription. But by offering a friction free service, they have built a powerful and growing network that they are now starting to monetize in various ways and that they will monetize even further in additional ways. And they are super hard to compete with because they are free.
So that you know what key questions to ask that person to make sure the freemium is the right growth tool for your business. Some of those questions are:
- Do we have the resources to sustain a free product? Many forget that a free product still requires a lot of maintenance, updates, support or else. If you don’t have those things in place, your free product won’t be good, which will make it flop quickly.
- Is the free product cannibalizing my premium offering? It might sound obvious for some people, but engineering a free product isn’t easy. Do you know how much of that free offering is enough to be valued? Do you know how to strike a balance between what you offer for free and what instead should be paid? Is the free product in line with your overall business strategy?
- Is the freemium in line with my overall business model? For instance, if your organization is primarily structured on a sales team, which works with enterprise customers a freemium might make sense as it enables your brand to be known by more people. But will the fact that more people will know my brand a way to speed up the process of acquiring another potential enterprise customer? If not, is a freemium aligned with a business strategy where I want to get the lower-end of the market?
Below an example of how a freemium decision tree might look like: