How to make freemium pay

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.
Written by Phil Wainewright, Contributor

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.

In 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.

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