How to make freemium pay

How to make freemium pay

Summary: At the heart of a 'freemium' business model is a notion that makes me viscerally uncomfortable: giving something away for nothing. But in the right hands, it can work well. Here are three examples of how it can work for SaaS providers serving the business market.

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TOPICS: CXO
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At the heart of a 'freemium' business model is a notion that makes me viscerally uncomfortable: giving something away for nothing. Services are given away free in the expectation of being able to sell paid-for, premium services to a subset of customers later on. In essence, the free subscriptions are a marketing cost that is recouped once the premium services start to take off. Fair enough, but in the heady atmosphere of recent years, some people have driven this model to extremes. Twitter and Facebook are examples of what I would call the 'lunatic fringe' of the freemium business model: enterprises that give away services without any preconception of how they'll eventually recoup the cost of acquiring and servicing those free subscriptions. From a business perspective, this surely is unadulterated folly.

Woman chasing dollar signIn more cautious hands, the freemium business model is one that can work well, and in this posting I'll present three examples that show how it can work for SaaS providers serving the business market. Despite my uneasiness, freemium is a business model I've experienced for myself, having practised it with some success in a couple of website ventures. The trick is to strike the right mix, combining a virally attractive free service that reaches the right prospects, together with a distinctive set of premium services that offers those prospects a clear value proposition.

My first example provides some encouragement for free-of-charge consumer services that are looking for ways to extend into paid-for business services. This is exactly what online file storage and sharing provider Box.net has done. The basic service is intensely viral, and the paid option simply adds features that make the service more business-friendly, such as multi-user accounts. With this simple proposition, the company has already recruited more than 30,000 businesses, with anything from 3-4 up to 100+ users. "With everything that's going on in the economy, we feel we have a pretty good business," Box.net's VP marketing Jen Grant told me last month.

A new version introduced last month adds social features that improve Box.net's richness as a collaboration platform, at the same time as deepening the functionality available in the paid version — version histories, file locking and an administration console. The strategy has the right mix of maintaining the appeal of the basic version — "We want to be as viral as possible so that a consumer user sees the benefit," said Grant — as well as providing plenty of incentive for professional and business users to upgrade to the higher functionality of the paid version.

My next example is a business service that is using its free version as a marketing tool to get businesses started on the service. When I first heard about Helpstream's freemium business model, I was frankly skeptical. The company planned to give away a sophisticated, enterprise-class helpdesk application, and it would only charge customers who implemented add-on features such as the ability to put their own branding on the application. What I hadn't understood was that Helpstream's 'secret sauce' is in community-based help (what it calls 'social CRM'). It targets Web-centric businesses that really rely on the Web and on having good, cost-effective customer support — and no company wanting to build a Web-facing community support site is going to do that without putting its own branding on it. The paid option thus becomes a necessity rather than an option for Helpstream's prospects.

Helpstream has made the freemium model work for it by focusing on a specific class of customer and cleverly tailoring the proposition to their needs. When we spoke earlier this year, the company had signed up 130 customers, of which 20 are enterprise-class paying customers. But interestingly, most of the 100,000 users on the system are associated with paying implementations rather than the 100-odd non-paying helpdesk-only accounts.

My third example is on-demand presentation service SlideRocket, whose freemium model I've written about in the past. SlideRocket has the classic combination of a viral free version along with a paid version that adds valuable extra features. On top of that, it supplements its revenue potential with a marketplace, unveiled last week, from which users can buy third-party images, video, cartoons, custom fonts and other add-ons to enhance their presentations, including professional services. [UPDATE added 8am Mar 10: Rafe Needleman writes about another example of this approach from Timebridge, a free-of-charge online meeting scheduling provider that makes its money by taking a cut of third-party web meeting and teleconference bridge services booked by its users. Needleman calls this model 'beyond freemium'.]

Innovations like these are crucial to the long-term health of the freemium model, which requires providers to become ever more adept at making attractive propositions to the right prospects at the most propitious time.

Topic: CXO

Phil Wainewright

About Phil Wainewright

Since 1998, Phil Wainewright has been a thought leader in cloud computing as a blogger, analyst and consultant.

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13 comments
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  • I don't like the sound of 'freemium'

    It is as free as crippleware and trialware was for the desktop apps.
    I hate them and and moving the same concept from the desktop to the web is no innovation to me.
    Linux Geek
  • Freemium, or FreeLunch ?

    SaaS companies taking this approach are really following in the long-established footsteps of ShareWare suppliers, I think ?

    But the 'lunatic fringe', apart from burning through VC cash, is doing another bad thing : teaching people to expect things for free. It's not sustainable, and it reinforces the tendency for the masses to quit a service the instant it tries to charge for something, and to move on looking for the next free food. As long as we recognise Facebook etc as blips in the reality curve, we're OK - but millions of people have come to think they're the norm, and that's not good.
    netevidence
    • i think the same.

      And even Facebook and some "successful" companies can have a lot of fame and popularity (and thousand if not million of customers) but lack on profit.

      While they can keep their business model for a while, but for the rest of companies, to giveaway a product for free will not give profit.

      Economically talking, DUMPING is illegal.
      magallanes
      • Facebook's way out

        Social networking isn't open, so Facebook is in an enviable poosition of having a gigantic share of the market, and they're only getting larger.

        At some point in the near future, FB could switch to obnoxious advertising (full page between links?) and still lose very few members. Where would disgruntled people go? Their friends, pictures, and history are all on FB. A social network of five isn't that useful.
        daengbo
  • You are not Dancho!

    So how come your site has his picture and article linking to you?


    <li style="background-image:url(http://i.zdnet.com/images/auth/ddanchev_122x152.jpg);">
    <h2>Dancho Danchev <em><a href="http://blogs.zdnet.com/SAAS/?p=706">Zero Day</a></em></h2>

    <p><a href="http://blogs.zdnet.com/SAAS/?p=706">New study details dynamics of successful phishing</a></p>
    </li>
    javajunkie@...
  • RE: How to make freemium pay

    Excellent post, Phil. In a SaaS model, as you've written many times, efficient customer acquisition is everything. As I wrote about on our blog (inspired by your post), we launched a free email disaster recovery service last fall as an on-ramp to our paid email archiving service. This has been a huge win for our clients and our growth.
    nrmehta
  • RE: How to make freemium pay

    Another example of this is what's happening in the book industry - record execs please take note.
    On my prs, I've got over 600 books, most of which are a mixture of oldies from manybooks and project gutenburg, and freebies from the likes of Baen and Tor. As a result, I've got to know authors that I wouldn't otherwise have known about, and when I'm buying ebooks or dead trees, I'm looking for those authors.

    Cory Doctorow gives all his books away as ebooks, and encourages you to pass them on. When the readers want a physical book, then there's a lot more people looking for his stuff.

    freemium pays - you give away the stuff people can copy, and sell them the stuff they can't.
    philculmer
  • RE: How to make freemium pay

    Hi Phil, great post, this sentence says it all "The trick is to strike the right mix, combining a virally attractive free service that reaches the right prospects, together with a distinctive set of premium services that offers those prospects a clear value proposition." Rob Tarkoff, SVP/GM at Adobe and my boss, will be talking at the SaaS Summit tomorrow about our success to date and future plans for Acrobat.com following this model. It is hard to do, and I agree there are many examples of freemium 'businesses' that make me uncomfortable. But the concept is very exciting when it works, IMO benefiting both businesses and the customers they serve, and opening up a path that is particularly well suited to bringing disruptive collaboration offerings to market.

    -Erik Larson
    Director, Acrobat.com
    ErikLarson
  • RE: How to make freemium pay

    Hey Phil, you forgot to mention Zoho as a example..... it's the ultimate freemium!

    Earl Rudolfo
    cybersurfer2349
  • Device Based Freemium

    I am especially interested in the teaming of hardware device makers with SaaS providers using so called 'freemium' business models. Another method that has worked very well is to get users up and running on free trials. Then, after 30-90 days, to continue using the service from the device, start charging a small monthly subscription amount.

    For more information on this and related topics, visit:

    http://blog.saasrealist.com/

    Russh49
  • I'm a FREEMIUM convert. You will be too!

    Great post, Phil. Reading your post and all of the comments, I think back to how we felt when we first launched SalesView FREE a year ago. It was our first foray into the Freemium model and we had all of the usual concerns... how would it impact our direct sales channel, our brand and perception of our product, our ability to convert to Premium, etc.

    Well, I am now without a doubt a FREEMIUM convert. Hell, even our sales guys are fans. Our FREE product has become a tremendous engine for our business, from branding & awareness, to lead generation for our sales team, to self-service conversion from the 'long tail'.

    Provided your development & operating costs are reasonable (which for any SaaS company, they had better be) I would be hard-pressed to think of a more cost-effective customer acquisition strategy than Freemium.

    On branding & awareness alone, if I compare a typical SaaS company's spend on advertising & trade-shows alone to the cost of providing a FREE service, it's a no-brainer. Look at your cost-per-lead. Could you serve a free user for one year at or below that cost? My guess is that you could, and still provide a useful service with compelling up-sell points. And remember that most prospects aren't even in a buying cycle when they first learn about you. So if your marketing department is doing their job there is additional cost to then nurture leads via drip marketing campaigns, etc. Now wouldn't you rather "nurture" those leads with a working product that actually delivers value and keeps your brand in front of the user each and every day? Think of the sheer number of branding impressions alone! (For our typical FREE user that's roughly 45 impressions a day - which would be very expensive in traditional media buy terms!) And when your users are finally in a buying cycle, your FREE product is there to see the fabled "raised hand" and complete the up-sell to your PREMIUM offering.

    Again, that's just the ROI on branding & awareness. We could move on to conversion rates, sales productivity/efficiency, customer profitability, etc.

    To have a look at how we've done it, check out:
    http://www.insideview.com

    For those of you new to (or still skeptical of) Freemium, I strongly recommend Andrew Chen's blog 'Futuristic Play' - http://www.andrewchenblog.com
    (Check out his Jan 19, 2009 post on Freemium. Think of it as Freemium 101. He even provides a free spreadsheet for those of you pondering the economics of it all.)

    Good luck!

    Marc Perramond
    Product Guy
    InsideView
    http://www.insideview.com
    socialprise
  • Here's our approach to freemium

    Great article! I wonder what you will make of our new approach to freemium - http://blog.1daylater.com/post/430390913/the-wondaylater-golden-ticket We've come up with a free pass system we think could solve some problems created by the classic 30-day free trial.
    paul_newcastle
  • Helpstream - RIP

    Guess it didn't work out for Helpstream - huh!!

    themarketingmojo.com
    tewksbum