Freemium

Giving away what others charge for

New business models are forming all around us, developing on the back of rapid technological innovation, our desire to take more control of our lives and through ever shifting economic and political circumstances. The turn of the century saw an explosion of online businesses, many of which are now history and their business models confined to the bin. Some however have survived and even thrived beyond their wildest dreams – Google, eBay, Paypal, facebook, Myspace, LinkedIn, Skype and Flickr to name a few. They’ve changed our business and social landscape and are hollowing out established markets in the process.

 

Freemium was born in the white heat of the dot-com boom and bust. The free to use models that tried to advertise themselves to success failed to gain the critical mass to make them viable. Today however we understand a great deal more about how Freemium models work and we’ve seen some highly successful businesses transform themselves through their thoughtful deployment.

So what is Freemium?

 

It’s the go-to-market-model that sets out to give away most of what it offers and takes payments for upgraded, premium services from a few. The few can be as small as 1% or as high as 15% of the total customer base. The model relies on viral marketing and low scaleability costs. This is the inverse model to the old marketing gambit of giving away a few samples and attracting the majority to buy your product.


There are three principal types of Freemium model; the free trial, the free supports the paid-for; and Free as standard. The first is obvious, the second is described above. The third distinct type is a service, as it usually is a service, that is free to deploy by your customers but when used by their target market is charged for – therefore the service is free at the point of deployment and when value is created those utilizing the service get charged. The best example is Google’s Adwords. Google made advertising links available to their customers free to deploy, they access the Google users that use their search facilities for free, but once someone ‘clicks’ on the advert – value is created – and at that point the advertisercharged. It’s a very scaleable, very low barrier to deployment model charged for only when value is created for the customer.


The software-as-a-service (SaaS), online games and iPhone apps markets are three markets deploying the Freemium business model to great advantage. There are lessons to learn from existing participants should you consider that this may be a model you can successfully deploy. Pandora, the online music service launched in 2005 with the first ten hours of listening free, after which people were asked to pay $36 a year to listen to music. They soon attracted 100,000 listeners who used up nearly every one of their free minutes then left them dead. That year they switched to an ad-supported free to use model. Their advertising revenues last year were £50 million, they attracted 20 million unique users and their premium service take-up was less than 1%. That 1% generates a large revenue. Last year they launched a new, higher cost premium service that has already attracted 300,000 subscribers and contributes 15% to total revenue. LinkedIn took the decision to take the Freemium approach in 2009, offering enhanced services from $25.95 to $499.95 per month.


The ‘Pandora’ and ‘LinkedIn’ examples along with ‘DropBox’, ‘Tripwolf’ and ‘Flat World Knowledge’ all illustrate key learnings:


First: build scale and trust early on, have a great retention strategy and also build your customers’ engagement with you. In particular, acquire active users who will be your viral marketing agents. Incentivise them to make referrals – this is your marketing cost.


Second: extend your free service offer to a premium service and continue extending the functionality of your service, increasing that which is paid for. This will embed your services into your customers’ lives or processes and increase your propositions value to them over time. There will be those that want the faster, better, advertising free, more secure, more functional upgraded service after they’ve got used to the free service. ‘Tripwolf’, the Austrian travel-guide provider differentiates its free and premium offer by the degree of professional content in the guides. For example their Berlin guide is paid for whereas their Hong Kong guide isn’t as it doesn’t contain sufficient professional content. ‘Flickr’, the online photo storage and viewing service, turned to Freemium in 2006. They offer enhanced services. The result is a service attracting professional photographers who value the upgraded service proposition and as a result ‘Flickr’ has attracted a new market sector to address.
Third: the business needs to be able to operate on a variable cost basis.

Timing is all important in launching new services. With the new UK government set to reduce costs across most high spending departments anything offering increased value for money to them could look attractive. This worked for ‘Visual Ed’ in the US, who provide Freemium services to help schools set up safety and security services. In the same way ‘Flat World Knowledge’ deployed the Freemium business model in the open source text book market. They are making fast inroads into this $8 billion market. What services might now be seen as very attractive to UK public functions as they seek to improve their productivity in these debt burdened and straightened times?


Closer to home is the ‘Webnotes’ service offering a press clipping service to public relations firms. Starting out in 2007 with just $35,000 of investment capital they claim their new premium services help marketing professionals quickly generate media monitoring and competitive intelligence reports, faster than their competitors.


Of course, as in the case of many start-up ventures, not all Freemium model businesses have thrived or even survived. ‘Ning’, the social network business is phasing out its free service and concentrating on their premium customers. This is after $120 million of venture capital has been injected with no signs of profit. ‘Ning’, meaning ‘peace’ in Chinese, is shedding staff and inviting free use customers to migrate off their service or upgrade to the premium service. The give-it-away-and-we’ll-all-get rich model is as broken today as it was in 2001 in the dot com bust. But the Freemium service clearly identified how revenue can be made in the giveaway world.


So what of the future of the Freemium model?


The Melbourne based management consultancy firm, ‘The Thinking Network’, illustrates one new form of the business model – “Try out the service and pay us what you think it is worth”. This model focuses attention on the value gained from the service engagement and asks the client to pay a fee that they think is appropriate afterwards. The advantage is a fast uptake of engagements but the downside could be poor return for effort – low rate realization in consultant speak. The upside is that this approach doesn’t require such a long and high cost sales cycle and implies trust in the relationship and the vendors’ confidence in their offering right from the outset. Risky and novel it may be. However, it may be a great way to get ahead of the competition.


Whatever your view, the Freemium business model is here to stay in the online and real world. It will have its supporters and detractors, successes and failures, but occasionally it will generate a Google, eBay or Paypal and completely change the business landscape in their sectors. Forever.

 
How could you best deploy a Freemium business model?
Who in your organization could best look into this?
Which of your business partners and suppliers could help you develop a Freemium offer?


Case Studies in Freemium: Pandora, Drop-Box, Evernote, Automaticc and MailChimp


Freemium in communications – Skype
Freemium social networks – LinkedIn
Services in USA uses Freemium
Freemium in college book supply
Freemium metrics

First published in INSIGHT

 

The Thought Leadership centre for KingstonSmithW1

Please visit http://www.kingstonsmith.co.uk/kingston-smith/ksw1/Insight/Insight+W1

 


David Smith, 14/01/2011

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