To Freemium or not to Freemium?

Call me old fashioned but shouldn’t a business make money? Seems obvious, but many Tech startups have been giving away Free services for years e.g  Twitter, etc. And they don’t have a fall back monetisation business model. Number of eyeballs first before a business model.. Times are changing with this downturn. VC funding is drying up with a US 61.5% drop. It’s back to bootstrapping startup basics and survival with a Freemium model. But not everyone agrees. There is much debate around the Freemium model.

freeloveThe best things in life are free, But you can keep ‘em for the birds and bees, Now give me money, (that’s what I want) that’s what I want.” (1959)

The difficulty is “For the Google Generation, the Internet is the land of the free.” Some more mature web based businesses such as Salesforce.com don’t do free, offering only time limited trials. New startups like our Website Monitoring web app have to make a choice: Free; Freemium (the idea from VC Fred Wilson in ’06); or trials/premium. A free version is now almost expected in many markets to keep up with competition. Marketer Sean Ellis has gone as far to say Freemium will outcompete premium only offerings.

Its not easy to get the Freemium balance right. Give too much away for Free and you’ll have little/no revenues OR give too little away and the Freemium marketing model is ineffective. Dharmesh Shah of Onstartups believes the Freemium Model is challenging, (plus some of my own thoughts):

  1. Functionality Mix – Its difficult to decide the functionality that you give away on the Free version and hold back on premium version.
  2. Cost of Free users - Supporting a ton of free customers costs and there maybe not enough money coming in from paying customers to subsidize the free version. Support can also be a problem as ‘In the land of the Free’ users still expect a high level of support.
  3. Premium version pricing – Premium versions need to have multi-tiered pricing with a very low cost starting plan to tempt users off the Free versions.
  4. Poor conversion rates – From free to paid can be as low as 3% or at best 10% we’ve heard. Also users may try and work the system and share the free version between company users. Unfortunately many users will never pay for an app.
  5. Higher attrition rates - Freemium attrition can be unpredictable and higher than traditionally priced products with premium users switching back to free versions.

TechCrunch is still endorsing Free: “Rather than launching a service with a freemium model, I think it’s important to gain a large and passionate user-base first.” Some startups say: “don’t offer a free plan!” Andrew Chen of YouSendIt.com has blogged about his positive experiences of moving from Free to Freemium with his 5 lessons learnt.

Its not an easy decision. Free means lots of users but no revenues (or a little from Ad’s) but the potential of something much bigger if you hit on that killer app. A 30-day free trial only option will result in real users who demand a high value proposition. At least then you will know if your app can be monetised. The Freemium model offers a half way house to gain traction and the opportunity to convert some users, which is particularly helpful during the early startup days. However Freemium is full of pitfalls if executed poorly.

With any of the price plans marketing an app take alot of investment/money. Even with Free plans sooner or later money will have to come in to pay the bills. There is no escaping it – monetise!

About these ads

Tags: , , ,

14 Responses to “To Freemium or not to Freemium?”

  1. Richard Garside Says:

    I love free stuff, but wouldn’t expect high quality network monitoring for nothing. Getting something for free though would be amazing.

    For free I would expect something like my site being checked once a day. That would have been a life saver in the past.

    You could offer more, for people who would be willing to advertise your service on their site. A link saying ‘Monitored by Aware monitoring’ is not a lot to ask if you provide them with an excellent service.

    The important thing for me with price plans is not to jump up too quickly. I think it’s important to have a really cheep option for people who don’t desperately need your service, but would quite like it.

    When it comes to working out what features are worth what, you can only find out by asking people.

  2. Nick Barker Says:

    Hi Richard

    Thanks for the comment. We love free stuff too – Gmail, Twitter… The list goes on and on.

    Great real world advice for our startup and others. Thanks. Your right people will always pay for a valued quality service or product. So price plan idea could be:

    Level 4) Free service offering basic low frequency checking
    Level 3) Very low cost service with more regular checks
    Level 2) Mid range service (need to think about functionality for this one)
    Level 1) Top end Premium service will all the Bells & whistles

    I think we need to test the market with price/functionality combinations to see what people are willing to pay.

    Best

    Nick

    P.S. Like the idea of ‘Monitored by Aware monitoring’ ;)

  3. Dan Says:

    This is definitely a tricky one since everyone expects something for nothing. Running a Facebook app has definitely showed me how demanding people who aren’t paying for a service can be.

    I don’t know what metrics you’re planning to provide – whether it’s raw data or if there’s some kind of analysis going on – but if it’s the latter, maybe the free/cheap version can show you there’s a problem but not what’s causing it. Crudely; ‘You’re site’s about to come crashing down around your ears, upgrade to the shiny premium service (which is a bargain, by the way) to find out why’.

  4. Nick Barker Says:

    Hi Dan

    Thanks for the comment. Glad I posted about Free. Many seem to have experience of using or managing free products like your Facebook app.

    Interesting idea. Give half of something away for free so that they will want/need the other half. When I was reading up about Free services/products an example was giving away a razor but charging for the blade. Need to put our thinking caps on.

    Thanks for the suggestion.

    Best

    Nick

  5. Nick Barker Says:

    Twitter comments:

    Adam Bird: “it could be seen as a brave move to go premium only, but then fortune favours the brave.”

  6. Nick Barker Says:

    Twitter comments:

    Darren Ramowski: “tough one. difficult to go premium only at a later date if you start on free or freemium.”

  7. littlemango Says:

    Getting the balance is a real challenge. There are many ‘customers’ who really don’t expect to pay for anything online. Even in a B2B environment, it’s difficult to get clients to pay for a valuable service.
    Getting the pricing right is quite a challenge too.
    There’s a lot of trial and error.

  8. Nick Barker Says:

    Hey Littlemango :)

    Thanks for the comment. The saying, “there ain’t no such thing as a free lunch” is as true today as it was in the 1940’s/60’s. Attitudes seem to be changing with the recent growth of micro payment e.g. iTunes, etc. The recession is also forcing monitisation with the drop in Ad revneues.

    Consumers are increasingly willing to pay small amounts for services / products they value. Business users have more money and so will pay a higher rate. If we as startups can bring a strong value proposition then we can get paid. It’s pricing v’s perceived value. I look forward to trying to get it right.

    Best

    Nick

  9. Nick Barker Says:

    SaaS writer Phil Wainewright of ZDNet has kindly linked to this post, saying in his post What your bank can teach you about freemium: “Social media blogger Nick Barker wrote a thoughtful blog post about the model”

    Thanks Phil :)

  10. Bangexpress » What your bank can teach you about freemium Says:

    […] he’d be willing to pay a modest annual fee to use. Social media blogger Nick Barker wrote a thoughtful blog post about the model late last week and Adobe’s Acrobat.com initiative is also relevant, for reasons I’ll circle […]

  11. 7 ways to price SaaS and Web Apps « Nickpoint Says:

    […] to price SaaS and Web Apps By Nick Barker With Web 2.0 Ad funded sites going out of fashion subscription based services are on the rise. Setting the right pricing for your SaaS and Web App service is a difficult decision. It is also a […]

  12. Martin Thomas Says:

    Hi.. Your post got me thinking… What is more valuable for a software company (like facebook or flickr). 1,000 paying users or 100,000 non-paying users? What are your thoughts? View my blog post here: http://www.purlem.com/blog/?p=57

  13. Sell my number plate Says:

    Great post and something to really ponder over. At the moment I’m trying to strike a balance of providing some information for free to draw users in/earn money from ad’s, and charging for services, its just difficult to get the balance right!

  14. Nick Barker Says:

    Thanks!! Free v’s Premium is a difficult balancing act as we’re finding out with our website monitoring web app.

    I recently read this ‘Guide to avoiding free mistakes’. It says: “Offer something that the customer values more than the price“. A Premium service needs strong justification against your own and competitor free offerings. “What is it worth if it’s free?”.

    I don’t think there is a easy answer to this challenge apart from have a solid strategy, keep understanding your target customer needs, and trial and error learning to find the right balance.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


Follow

Get every new post delivered to your Inbox.

%d bloggers like this: