Monday, July 18, 2011

Freemium

Freemium is a business model buzzword that has become quite popular in the last decade. The concept is simple--it even has its own Wikipedia listing under Freemium--give away a subscription or a "lite" version of your product or service, and convert as many of them as possible to a premium version. The premium version has advanced features and/or funtionalities that create a tangible increase in value received by the customer, so much so that they are willing to switch from the free version to access these value-added enhancements.

I don't have any challenges with this model conceptually; it has been successful for many great companies. I do, however, take issue with companies that try to mimick this practice but fail in one of two ways--weak freemium version or lack of differentiation with the premium version.

Entrepreneurs who endeavor to use this business model have to play a careful balancing act, making the free version compelling enough to get users to go through the hassle of signing up while not giving away all of their valuable features in the basic version, holding back enough to motivate their free-users to upgrade. The model definintely backfires when the free version fails to provide any value to sustain the interest of the users, and it becomes devastating when the free version is too good and the premium features don't really add any value to the users.

This is the dilemma, or quandry, of the freemium model. I recently wrote an article wherein I mention 10 Free Tools/Resources an Entrepreneur would be crazy to not use. These are some good examples of products or services that give a lot value, maybe too much in some instances, for free. That being said, it seems like some of the most effective freemium models are the ones that get you hooked, then as your utilization of the product requires more users or more memory storage, they convert you to a paid version.

Here are some great articles and resources on this topic:

- Mark MacLeod, also known as StartupCFO, writes on this subject often. This is one of my favorties posts: Freemium Summit Notes

- Michael Pricess is adamantly against Freemium in this article

- An article about revenue earned from freemium and premium mobile apps