Betting on Freemium

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  • 19 June 2014
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Familiar to all. Used by many. Understood by few.

We’ve all seen the ads: Try our amazing new product/service for free!! Literally 100% of us. At least according to a recent study entitled Consumer Adoption of Freemium Products & Services conducted by iYogi. Although there’s no such thing as a free lunch, marketers and product managers have learned that giving a customer a free “taste” results in a paid lunch almost half of the time (42% to be exact according to the same iYogi study). Although a gross oversimplification, this is the driving factor behind a Freemium business model.

Defined in the strictest of academic terms, Freemium (a mashup of the words free & premium) is business model where in you give away a core product for free and then generate revenue both directly (by upselling premium products to a small percentage of free users) and indirectly (through advertising and other means).

To date, much of what has been written about Freemium falls under what might be called the “Hoover Dispute” theme—is it a viable business model or does it simply suck? The ensuing cacophony has been attention-grabbing, with impassioned calls-to-action from proponents (including Chris Anderson; former editor of Wired Magazine and Author of Free: The Future of a Radical Price), and opponents (including Malcom Gladwell; author of The Tipping Point and Blink) alike. While entertaining, this debate has largely missed the obvious—although the tactics may change, with results like the aforementioned conversion rate, Freemium is here to stay. So, rather than debating its merits, let’s figure out the best ways to make Freemium work.

Leading organizations understand the foolishness of viewing Freemium as a game of absolutes, but instead recognize that it’s a calculated game of probabilities (i.e. more ‘Poker’, less ‘War’). Extending that analogy, those wishing to sit at the table, play a hand and win should understand not only what cards they can play, but also what they can do to stack the deck in their favor. While there are many levers can be pulled, the following are three that should certainly be considered:

Lever 1: The ‘Law’ is On Your Side

Research has shown that organizations whose core business takes advantage of Moore’s Law and its derivatives are uniquely suited to the Freemium model. The combined effect of exponential growth in processing power, bandwidth, storage, etc. with the simultaneous decrease in cost for each results in an area ripe with business opportunity and competitive advantage when compared to other more conventional industries or competitors. Companies like Dropbox, Youtube, and Pinterest are great examples.

Lever 2: Infect them…with desire.

While following the ‘Law’ ensures a robust infrastructure that’s ready to ramp up to client demand at a moment’s notice—the question remains, can the product/service reach a viral level great enough to create a sufficient number of users that convert to paid customers to sustain the business in the long term? The most successful freemium organizations know that just like a virus they must keep mutating to deliver their product/service to the customer in the most efficient and effective manner possible, all the while infecting the customer with a passion for that product/service so strong that they then beckon friends, family, and co-workers to join as well.

How does this ‘bug’ get transmitted? Successful Freemium organizations engineer their offering to take advantage of as many types of virality as possible to maximize their user reach, including:

Socially—users grow the product through continued use inherently increasingly the interest (e.g. Pinterest)
Collaboratively—While the product may be used individually, users want to collaborate with others so they extend an invitation to join (e.g. Dropbox)
On Communication’s Coattails—every message that is sent is adorned with a digital signature of the product (e.g. Windows Live Hotmail)
With Incentive—users spread the word to others in order to receive a personal benefit (e.g. money from Gilt, or extra storage space from Dropbox)
Signature—a logo is embedded into the product itself for non-premium users to market the product, only to be removed for premium subscribers (e.g. Uservoice)
Embedded—essentially a widget that can be embedded in other sites, and in doing so markets the product further (e.g. YouTube)
Integrally—Users invite other users because it’s the only way they can use the product. Best type of virality, highly conducive to network effects (e.g. Skype)
Old Fashioned Word-of-Mouth—if a product or service is really awesome, people talk about it (what’s your example?) 

Lever 3: Monetize those Eyes

Converting free users to paid users is the essence of any Freemium enterprise, but what really sets leading Freemium organizations apart from the rest is their ability to leverage those eyeballs in more ways than one. While subscriptions might be the essence, for many Freemium organizations they are but one way to generate revenue from users. Many organizations attempt to leverage as many of the following avenues as possible:

Most Scalable Revenue Streams:

Subscriptions—the classic Freemium concept, free user subscribes for premium features
The Network Effect—a large user population provides an ample amount of data that can be analyzed and sold
Ecosystem—revenue sharing via partnerships with 3rd party vendors, a la Google Apps, or iTunes
Ancillary—Any sort of fees (processing fees, setup fees, transaction fees, discounts, float, etc.)

Least Scalable Revenue Streams:

Advertising—Embedded advertising within a product or service
Services—Training, content creation, Installation, Programming, etc.
Products—Equipment, devices, hardware, etc.

Freemium detractors argue that in differing from purely subscription-based revenue, the Freemium business model hasn’t succeeded as promised; however wouldn’t most agree that many businesses endeavor to create as many streams of revenue as possible? I know I would.

If you have read this far, it’s likely that in addition to being an incredibly smart, dedicated, and attractive person, you are also very likely someone who has experienced the power of the Freemium model firsthand and are curious implementing it in your organization. By now, it should be clear that Freemium isn’t for everyone—the above are only a few of the countless considerations requiring evaluation before implementation. Entertaining the thought of conducting a deeper evaluation around the viability of launching a freemium offering? Just ask! Together, we can figure out how to best stack the Freemium deck in your favor.


Contributed by Tim Bowman and Nick Buckley. 78% of US



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