The freemium business model is based on a service that the majority of users get for free, while a small percentage of users convert into paying customers. Those paying customers become the basis for the long-term financial success of the company.
That is what common wisdom says. However, this is a misconception. A freemium isn’t a business model. It does influence your overall business model. But a freemium is, first of all, a growth tool. A marketing tactic to grow the acquisition of non-paying users or potential customers.
Understanding this difference is key to understand what’s freemium and why your business model is something else.
- A freemium is not a business model
- Freemium business model origin story
- The Freemium business model started with a comment
- On the power of free
- Freemium isn’t new
- Key metrics for the freemium
- Freemium is not a size fits all business model
- Beware of the cost structure
- Free isn’t free after all
- Is your one big enough to pay the bills?
- Are you using the freemium just to get VC money?
- A final remark on how to do the Freemium right
- Freemium business model: Dropbox case study
- How to align your business model to a freemium offering
A freemium is not a business model
You create a product or software, you make it available for free on the web, thus (if the tool is good) it gains visibility quickly, and you call your company a freemium business model.
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:
Freemium business model 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 like Skype, Flickr, and a few others.
According to Fred Wilson, the advantages of a Freemium business model were multiples, 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.
The Freemium business model started with a comment
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.
That is why he invited people to comment and to come up with a proper name for this business model. A commenter, Jarid Lukin suggested the name Freemium model.
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.