3 situations where the 'freemium' model doesn't work

Freemium may be trendy and draw some attention to a new company or product, but ultimately, it may be the ticket to failure for many businesses.

It's the business model of the 21st century: offer a preliminary or "lite" version of your product or service, usually via the Web, and charge for premium add-ons or versions as customers get hooked. It works for LinkedIn and Skype, right?

Freemium may be trendy and draw some attention, but ultimately, it's the ticket to failure, some startup experts believe. Sarah Needleman of The Wall Street Journal published a report on places where the freemium model has gone wrong, and questions whether the "freemium" model employed by many businesses -- particularly Internet-based companies -- really pays off in the long run.

She provides three situations where freemium doesn't necessarily pay off:

1) Low volume of business: "The freemium approach doesn't make sense for any business that can't eventually reach millions of users. Typically only 1% or 2% of users will upgrade to a paid product."

2) Limited-scope products: "The strategy also often isn't effective for businesses whose range of products is limited in scope, because paid users generally expect to get better or different versions of what they've already received free of charge."

3) Selling mainly to corporate customers: "Enterprise clients typically have budgets for buying goods and services, thus, they aren't as drawn to free products."

Many companies, particularly online or software startups, have ended up with little revenue and a lot of non-paying customers, Needleman writes. Sometimes, startups have launched with free offerings, recognized the long-term weakness in their strategy, and have been able to turn things around with a pay-for-play model.

This post was originally published on Smartplanet.com


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