The freemium business model: giving away pays

http://buytaert.net/the-freemium-business-model-giving-away-pays

by FiReaNG3L • 18 years ago

40 22 18 years ago

He says that Open Source + Freemium provides marketing + development, but that you need a premium product that pays the bills. Similar to my argument here:

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

13ren9• 18 years ago

How to enforce the division between free and premium?

I guess you choose a natural line, that doesn't need explicit enforcement - like 300 photos on flickr. There's no fuzziness about whether you have >300 photos or not, and the consequence of the older ones disappearing is gentle and non-punitive.

You can do the same thing with a software license, by having versions with different functionality - feature subset, capacity limits. Some companies have a "community" version that is free.

He's also talking about models where you benefit from the "free" users - for selling software, bug reports and feature requests are valuable information, for product quality and market needs.

One danger is that if you whet people's appetite with a free version, you can be priming them as fuel for a free/open source competitor! E.g. Photoshop enabled The Gimp; Unix vendors enabled Linux. This happens if they really need/want some feature in the premium version, but it's too expensive for them.

Maybe this concern doesn't apply to retail/consumer subscriptions because they aren't expensive; definitely not worthwhile anyone creating an open source competitor in the first place; and not targeting programmers (who could create a competitor).

jpavlik• 18 years ago

Good idea, though I'm digging Chris Anderson's journey through freemium on his blog.

13ren9• 18 years ago

As a software vendor who wants to be benevolent, but not rip myself off, I really like this about Freemium: do “good” and “well” at the same time. (see links to pg's "be good" at the end)

But for selling software, if you were truly benevolent, wouldn't you give it all away for free? Denying people who can't pay reduces the good you are doing - doesn't it?

Maybe an answer is that there's nothing wrong when people pay - because then they do get the value you created. It's only an issue when people cannot pay, and you deny them, because it's only in that case that your potential for doing good is unfulfilled.

I think the latter case only happens when (1) your prices are too high for the value particular users get from your software; or (2) too high for their wallet.

I think the solution to the first problem is to price your software (roughly) in proportion to the value customers get from it. E.g. "per seat" or "per server" or "volume-base" pricing does this. It's better to under-price than overprice (in reality, there's a huge range of values that customers get from a product, some get much more value from it than others - if you price too low, some get a fantastic bargain; too high, and you deny some).

For the second problem, some kind of charity version is appropriate, where you give it away to someone who just can't afford to pay for the value they would get from it. e.g. student versions. In economic theory, a loan would probably be appropriate; but a gift is nicer and simpler.

These problems become simple if your software actually helps people earn or save money themselves - then it's a non-issue that they can and should pay for it.

essay: http://paulgraham.com/good.html

video: http://www.omnisio.com/startupschool08/paul-graham-at-startu...)

pchristensen2• 18 years ago

Balsamiq wrote a good piece about what to do for case #2:

http://www.balsamiq.com/blog/?p=382

13ren9• 18 years ago

HN discussion thereof: http://news.ycombinator.com/item?id=337821

Retric3• 18 years ago

That is an artfully done straw man argument. Freemium is about advertising not price.

13ren9• 18 years ago

Thanks for reading, but your cynicism about my motives is misplaced.

zepolen• 18 years ago

What do you do if the users abandon you?

axod• 18 years ago

Improve your product. If they're not 'sticky' you're doing something wrong. That said some things will always be high churn - dating sites, house purchase sites etc - So you'd want to maximize the revenue as much as possible while you have the user.

samson2• 18 years ago

The questions I have while working on my project is when to introduce the mium in freemium.

(1) Would you be wise to introduce the premium version at launch with the free version if there is enough value, even without that established free base to leverage off?

(2) Should (being the emphasis here in refering to good business conduct). Should a business have paying customers when a product is in beta version and isn't yet completely tested against up and down times, bugs etc...?

(3) If one were to go the route of having free users before having paid users, should the free users have access to what may be removed and added to the premium release in the future, for the initial purpose of gauging whether there is interest for certain features over others?

To elaborate on that last concern. If users do get to use everything for testing purpose, am I going to get into one of those weired battles with community when certain things get shifted over (even if everyone was notified at the beginning that this would occur).

13ren9• 18 years ago

My own experience is with software that was free for a year before my first sale (though I made it available for sale pretty much near the start). So I did do what you are thinking. But I developed it entirely in public: the first version (released) took me 2 hours to write. This approach was great for countering my perfectionism.

(1) Yes. You don't need a free version to sell stuff. But what does "leveraged" mean in your case? If it's a network effect, where your offer has no value unless there are already users (e.g. a dating site), you would need some way to build up users.

(2) All products are incompletely tested... it's an opportunity to show customer service... and version 2. There's a question of degree here of course. You're right, you do have a chance to try it out on free users - although bugs are just as annoying for them as for mium/fee customers. Maybe the way to think about it is: are they paying for the benefit you offer, or for the absence of bugs? People complain, but they still buy - because they know no-one is perfect. Provided you treat them with respect, they may even like you more because of it.

(3) People don't like it if you take something away, especially if they started to rely on it. It creates bad feeling. I think a free trial (time limited) will give you the info you need.

samson2• 18 years ago

I can relate to the perfectionism syndrome. But the release early, release often theme seems not a good counter while going at paying users. Sometimes that early release simply isn't worth paying for yet, it may take several iterations to get to something that is worth a package fee. I agree all products are incomplete both in testing and in functionality and that should be used to temper perfectionism.

Though there seems to me a difference between releasing early to get people to use it, and releasing to get people to pay for it. The release early and often theme I tend to think should not be broadly applied to both.

Perfectionism aside...thanks for answering my questions.

inerte• 18 years ago

1 - Release the paid version when it's ready. Early cash, and free users don't care if you have a paid version.

2 - No. But let's face it, no complex software is ever finished. And it depends on the bug. Someone wants to use Lynx to access your webpage? A chinese user on an unpatched Windows 95 behind the great firewall doesn't see icon next to "post a comment"? Wisely balance the factors and just do it when you think it can make money for you.

3 - No. For testing purposes (I presume you mean the user is testing the app to see if it works for him), just make it clear that feature X and Y will be removed in Z days.

defunkt• 18 years ago

(1) Your "launch" should be introducing your premium version. In other words, the day you deploy your billing code should be the same day you leave beta.

(2) Let everyone use the site for free in beta. What you lose in concrete revenue you make up for in free bug reports, feature ideas, and feedback.

(3) Tell the free users the beta is ending and they'll soon have to pay. Feel free to give free accounts to some of the prolific community members, but don't feel bad charging people for your service. It's worth charging for - that's why you built it, right?

apsurd• 18 years ago

Freemium is certainly a better model then "we'll figure it out later", but I think it is very dependent on specific markets. The reason I say this has a lot to do with my own project.

I'm working on software that builds and maintains business websites. Sorry for being vague, but I'd rather SHOW you guys when it's up. So in this case I think the freemium model will hurt my business and my customers, here's why:

No lead qualifying -

If you are targeting a specific niche having a free product encourage anyone and everyone to sign up. This drastically reduces the conversion rate. I know the argument here is one of marketing, but if a client signs up for a pet application and does not have a pet, is he really going to be an effective marketer? How many accounts have you set for free services you just wanted to "test out". For me I'd say about 20, and I've never been back since. I'd imagine they still have my accounts though.

No client incentive -

In my specific case my clients (businesses) will use the software to create a website. If the service is free, they essentially have no incentive, no motivation, and no time limit to proactively use the system. Consider the case where everyone had to pay the monthly fee up front, but came with a money back guarantee. "Did we not prove our product was useful? No problem, here's your money back". If a customer pays for your services, he definitely is going to spend time given it an authentic test run - his money is on the line!

Paying customers cover free versions?!

Again, depending on the product, and payment structure, your much more likely to generate more revenue from EXISTING customers, than you will be acquiring new ones. This is a very fundamental business/marketing principle.

Low efficiency -

If your business requires any type of customer support, the price for free jumps dramatically. Resources would be better spent servicing pre-qualified leads.

Paying customers are customers that value you. Doesn't that just sound like its a nice thing? I know we ought to work hard for our customers, but if you ENCOURAGE people to place no value in your service, you are asking for trouble no?

--------------------------

So seeing as how my business is not launched yet, these are all just theories in need of testing. They also, as I said, may or may not apply to certain industries and products. But overall I think its worth mentioning.

The freemium business model: giving away pays

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