The Misapplication of Freemium

freeCropThe word “freemium” is tossed around a lot these days, but the term is often misunderstood and misapplied. Formed by combining the words “free” and “premium,” freemiumis a business model that involves offering basic web services or products for free, while charging a premium for advanced or special features. The model has become very popular with Web 2.0 application companies.

Here is where companies get it right: Freemium works when the tolls ahead are well-defined before the user signs up for the free version. When the fee trigger is based on the number of uses, features, e-mails, or another relevant metric related to usage, it’s reasonable for a customer who is finding the product useful to start paying for it. In many cases, the free version will also require having a credit card on file, setting clear expectations for eventual payment. The company provides a low-barrier way for users to try the product, but it’s clear from the start that the free ride won’t last forever.

Here is where companies get it wrong: Free is not in itself a sustainable business model. Therefore, freemium does not mean that the core product is available free, and you plan to figure out how to charge for it later. A very large segment of society will use something because it’s free with absolutely no intention of paying for it ever. These are not customers you want to pad your stats with. Although Internet businesses tend to associate success with big user numbers, you do not want freeloaders and need to deter them from signing up in the first place. They will never pull out their wallets, yet they will use your bandwidth, tax your customer support, and—most importantly—they will distract you from figuring out which features and services customers value enough to actually buy. As I have mentioned before in my Get to Revenue Fast Article, you need this feedback to prioritize your development and strategy.

Call me old-fashioned, but I would rather have 100 paid users for my product than 100,000 enjoying my work for free. If you create something of value, you should have the confidence to charge for it.  For more on this topic and how to get to a paid version, see this presentation from the folks at 37 Signals, it’s one of the best I have ever seen at framing the issue.
[youtube]http://www.youtube.com/watch?v=0CDXJ6bMkMY[/youtube]

One comment

  1. afedorov says:

    Great article, Bob. I’d agree that the biggest key is laying down the expectation that eventually the product must be paid for and that you need to commit your billing information at sign up. The drop-off rate will be higher than it would be by tricking users into believing that the product is simply free, but those users will hopefully see the value and continue to upgrade. In our case, it was free to use Basecamp to have a couple of projects when we started out, but now we have graduated to the most expensive plan and are happy to pay the bill.

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