Free Forever is Dead, Long Live The Freemium Model!


Is the freemium model a good model for your startup? Is it sustainable? How long can your product be free? Does it really have to be free? What is the catch? These are some of the questions for and against the popular freemium model among online businesses. Freemium is a business model by which a product or service (typically a digital offering such as software, media, games or web services) is provided free of charge, but a premium is charged for advanced features, functionality, or virtual goods. According to Chris Anderson the primary enabler of freemium is the decreasing cost of digitized products and services on the Internet.

Jules Maltz is a general partner at IVP in an article on Techcrunch said:

Freemium, like subscription, perpetual license, or service-based pricing models, is just a tool among many that helps your customers buy your product. Your first job is to understand your customers’ pain and build a product to solve it. While freemium is certainly not the right model for every company, when used wisely, it can be an extremely powerful tool.

The freemium model may be a business model that sacrifices revenues in the beginning but startup founders  always maintain the hope that free users will  become paying customers. Well, what if they don’t. You should factor that in your numbers right from the beginning. Building a business around the freemium model has its advantages and disadvantages. You should be prepared for the odds. Popular companies including Evernote, GitHub, HootSuite, Facebook, Twitter, LinkedIn, Spotify etc  have successfully built great companies around this model using different strategies unique to their businesses, but what worked for LinkedIn may not work for Spotify.

Dmitri Leonov, the VP of Growth at Sanebox, a company that lets users spend less time in their inbox by filtering out and summarizing unimportant emails also stated in an post on Mashable that:

There’s a lot to be said for creating something of value and charging money for it. If you’re not charging for your product, then your users are the product. This forces you to focus on two unrelated efforts: growing your user base and figuring out how to monetize it. There are many benefits to having free users and focusing on hyper growth. But the decision to go the freemium route should be based on math specific to your business — not a pricing philosophy. Because the reality is, the freemium model doesn’t work for the majority of companies who try it.

Sarah E. Needleman and Angus Loten of the Wall Street Journal are of the opinion that , the freemium approach doesn’t make sense for any business that can’t eventually reach millions of users. They further stated their article on Wsj that:

Start-ups are attracted to the freemium model because it is “deceptively simple”—lure users with free services until they’re hooked, then charge for extras, said Vineet Kumar, a professor at Harvard Business School, who is currently working on a study of the model.

“The problem is, it’s not always obvious what features should be free and which should be paid,” he said. What’s more, he added, offering too many features in the free version risks “cannibalizing your paid customers,” while not offering enough might generate little interest all around.

Accroding to Jason M. Lemkin, CEO @EchoSign:

Freemium is certainly stable, if subject to constant upheaval.  Yes, it has very very high churn, but as long as you have a viral component to keep them coming in, and you can get enough users (it must be millions) so you have a hope of converting enough to paid, you can build a real business here, of some scale.

Freemium alone has a ceiling.  But – it builds your brand. It exposes you to millions.  Which creates leads.  Highly qualified leads, many of whom need to go to a salesperson, but have already used the product, love it, and are almost ready to buy.  Combine that with unassisted Freemium, and that accounted for the majority of all of our revenue.

Creating a world-class product that solves an important pain point for users should be your focus,  if you should decide that the freemium model is the right fit for your business make the necessary research and be prepared for the strange odds.

Value creation should be  the foundation of any startup and the sustainability of a freemium business model relies on its capacity to successfully monetarize part of the value created.

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