Freemium is Not a Business Model

http://www.markevanstech.com/2008/10/17/freemium-is-not-a-business-model/

by buckpost • 18 years ago

21 33 18 years ago

opal4• 18 years ago

Very true. On the web, it's not uncommon for free vs paid users to be 1,000,000 to 1. For desktop apps it may be different, but online, way over-hyped.

fbailey• 18 years ago

5% is the normal ratio

opal4• 18 years ago

4.53% is the accepted ISO standard.

nanijoe• 18 years ago

I thought I was going to read an article about how the author tried the freemium model and it did not work, and then he switched to something else and became rich. Well, you know what they say about opinions...

thorax3• 18 years ago

It's making billions of dollars in the gaming industry (particularly with the play for free, pay for added content MMOs). I don't think it's the fact that the concept of "freemium" is flawed for consumers, but you need to have very compelling premium content. Just be sure you pick segments where there's a strong incentive to upgrade as a natural progression of the service.

nihilocrat3• 18 years ago

I'm particularly curious about this market. It's definitely comparing apples to oranges, and thus this article can't really be said to speak to freemium MMOs. The market is different, the products are different, just about everything is different. I am wondering if anyone has done any in-depth research about MMO business models; working for an MMO company, it's obviously something I'm very interested in.

Most 'freemium' MMOs are Korean. I don't mean to make a generalization, but is the Korean gaming culture much more serious than the US/EU one, and thus this model is much more successful in Korea? Many (if not all) of these Korean MMOs are available in the US, but I have no idea if the nonpaying/paying gamer ratio is better or worse, and those figures might unfortunately be private.

thorax3• 18 years ago

I don't think it's apples to oranges, personally. Unless you mean "examples where it does work" versus "examples where it doesn't work" as a business model.

I'm no expert here, but these guys seem to believe addon and premium content will be the main business driver for MMOs long-term and try to make that point: http://www.techcrunch50.com/2008/conference/presenter.php?pr...

jcl• 18 years ago

Both Imvu and Gaia Online are U.S. companies supported by selling virtual items for the user's avatar to wear. The core functionality (chat/forums) is free. Second Life and Habbo Hotel are similar, charging for various kinds of virtual ownership.

jfornear• 18 years ago

People love to flaunt their upgrades.

charlesju• 18 years ago

I agree that there are risks involved with the freemium model, but I think there is still a lot more merit to those that use it.

I think one interesting case study of the Freemium model is iPhone games. It seems to me that most people want more than 1 or 2 levels and are willing to play only after they get a chance to test if the game is actually fun.

potatolicious4• 18 years ago

There's a difference between iPhone "shareware" games and freemium web businesses. After you beat the 1 or 2 levels on the iPhone game, the utility of those two levels drops of considerably... i.e. you can no longer derive much use replaying these levels.

With most freemium websites, the free service is offered perpetually, and thus the utility of keeping the free stuff stays the same as the first time you used it.

gertburger• 18 years ago

As I understand the article it suggests that the free side of freemium is feature full enough for almost all users leaving very few users willing to pay. Isn't this then just a case of balancing the features in the free and pay versions so that a larger chunk of users would need a entry level pay version for doing anything beyond the basics?

tdavidson• 18 years ago

That's how I read the article. The model is sound and has been used outside of the web for years: where we go wrong is how we tactically apply the model.

tstegart• 18 years ago

But an economically balanced model might not be palatable to consumers. If you don't make the free side full-featured enough, then people get annoyed and leave. And lets be frank, free users are the majority on most sites. So if your business requires the network effect (ie, any social network, etc) then losing those users makes your product less useful to people on an exponential scale.

The fact is, I don't think its a business model either. Its more like large scale marketing. The real business is the paid model, and offering something for free is merely a way of getting users to come to your site and gives you an opportunity to convert them into paying users. And as a marketing method, its pretty bad for exactly the reasons you mentioned.

opal4• 18 years ago

There is always a competitor willing to give more away for free with the bet that they can make up for it once they control the market.

This is for the WEB though where cost/user is low and cloning a product is easy. Other platforms are vastly different.

jhancock• 18 years ago

In a time when VC money is scarce, fewer can play the "accumulate users and charge in the unforeseen future when all your competitors have died". In this type of market, freemium is a tough play.

Which is nice. I prefer old-fashioned biz models where you put out a product and quickly find out if people are willing to pay for it.

potatolicious4• 18 years ago

The idea of freemium is to use the free features to hook the users, and then charge them for premium features. The problem with this model is that if your free feature set is too poor, people simply won't get hooked. And if you cover all the "core" features users look for (i.e. get them hooked) people don't want to pay for the premium (lower marginal utility).

Tichy• 18 years ago

Seems to work well for Xing.

JoelSutherland• 18 years ago

Misleading title. Freemium IS a business model. Giving away things for free is not.

If anything, this article is a good description of how freemium can work. It seems to work well in the corporate market and it doesn't work when there are only minor differences between the free and pay versions of a product.

jrnkntl• 18 years ago

Flickr is the perfect example of a well worked out Freemium example. Same story for last.fm. You can do it, but I think that the features you're offering 'extra' are not just 'extra' but great and enhanced adds to the service they're already experiencing.

iamdave• 18 years ago

Freemium is flawed because most people don’t need more features than what they can use for free.

I guess wholesale stores like Costco and Sams club are flawed because people don't need more food than what they can get at a cheaper unit price. Just like buying groceries wholesale gets you the better deal by virtue of unit price, it's the same with Freemium.

Let's look at BaseCamp. BaseCamp under Mark's logic is a flawed product because no one ever manages more than one project at a time, which is what you are limited to with the free version. It only makes sense to buy in bulk what you can get for free because more often than not, you get more for what you pay for.

I don't think freemium users are missing the point of business, I think Mark Evans is missing the point of business: make money.

olefoo• 18 years ago

Freemium is just another name for the old Razors/Razor Blades model.

It's all about finding the right complements of your core business that people will pay for. Whether it's an ad-free service (flickr,basecamp), access to critical resources (most every dating site), or nice software that works best w/ your hardware (iTunes on windows).

The two variables you want to track especially closely are the per customer cost of acquisition and profit per customer.

//the OP is either linkbait or just dumb

//O yeah. http://news.ycombinator.com/submitted?id=buckpost

sanj• 18 years ago

If there is a foothold for freemium, it’s the corporate market where customers are willing to pay for high-quality services as well as customer support. This is why companies such as 37Signals and Freshbooks have thrived because enough customers want more than freemium services.

Which means "yes, it is a business model."

The key to Freemium is the same key to crippleware: give away enough that a user can experience enough of the product to acknowledge its value. Keep enough back that you can charge for it. That balance is hard, but not impossible.

The strange thing that I've found over the years is that the balance requires creativity to pull off. Using a magic number (>1000 accts, >100 friends, >2G of space) is a mark of being lazy. The question whether you can offer substantially new abilities to the customer. Something that makes the product different in a way that isn't a simple extrapolation of what it already does.

pchristensen• 18 years ago

http://www.pchristensen.com/blog/articles/freemium-isnt-a-bu...

mjnaus• 18 years ago

The title should have been: "Freemium might not be a good business model for most consumer applications". That title would have made sense...

HeyLaughingBoy• 18 years ago

The danger in the freemium business model is understanding just what features are worth paying for and which ones are not.

About 12 years ago there was a circuit-board layout program (PADS-PCB) that followed this model. The paid version started at about $900 (and went up to about $5,000 IIRC depending on features you wanted) and the free version was limited to small circuit boards and 70 components. I downloaded the free version to use in my "basement business" and never needed to upgrade: 70 components was plenty for me. Talking to a salesperson a few years later, I found out that the company lost money hand-over-foot because only relatively few companies needed to build boards larger than the freeware version could handle: the market was changing and electronic component integration was increasing so a single part could now do what a couple years before would have required 5-10 parts. Most of the companies that were happy with the free version would have had no problem paying the $900 had the free version not been available. The software was excellent and even the free version would have been worth the $900, but obviously if it did what you needed, there was no reason to pay.

lux• 18 years ago

In my experience, freemium can be a really tough sell, and it depends on who you're after as a customer. Consumers (man I hate that word) will pay extra in small amounts as evidenced by the iPhone app store, online games, etc. but I've found it can be tougher to get them to pay for something less fun-oriented. They aren't businesses, after all.

My first business distributes an open source app and sells a paid version of it. We've been in business for 7 1/2 years now and it's been my sole source of income for 7 of those (subsequent business attempts aside :). But that's targeting businesses, and not necessarily small ones either. The freemium side of open source works to a certain size in the corporate world, because of things like the perception of support. But in this case it's software as an install not a service, and so there are problems with scale.

My next business tried to sell something to individuals (ah, much better than consumers :), and that was really tough. I discovered that about 99% of our revenue was going to come from advertising, which hit a plateau and couldn't continue to grow like we needed. C'est la vie.

My newest business is again targeting business users, again with a kind of freemium model (we offer a basic free account), and I really think we might be onto something big with it this time. So it can definitely work, but it does have its own set of challenges, and sometimes they can be killer ones.

Freemium is Not a Business Model

Related Stories