"Paid Part", Not "Free Part", Is The Problem With Freemium
Freemium = "Free part" + "Paid part"
Over the past few years, the freemium model has been studied quite extensively by the best (Harvard Business School) and the brightest (Andrew Chen).
However, the level of skepticism with freemium has increased given the less than stellar news surrounding companies like Evernote and Dropbox. One of the key arguments against freemium is the “free part”, i.e., the challenge of achieving meaningful revenues with the typical 3% conversion rate. More specifically, it’s the need to have an ever increasing - and really large - number of free users and the concern that users who remain free for a long time period rarely convert to paid but keep costing the company.
First off, I strongly believe that when it comes to business productivity apps, freemium is a time-tested, viable business model not just a fad. Look no further than Adobe’s PDF business which consists of the free Adobe Reader and the paid Acrobat product. The Acrobat franchise which has existed for well over 20 years and now includes a set of complementary SaaS products is estimated to be well over $1 Billion in revenues and growing.
As someone who’s managed freemium products at both Adobe and YouSendIt (an early pioneer of the freemium model), I have a counter-rhetoric observation: The biggest challenge with freemium is not the “free part” but the “paid part.” In other words, from a monetization perspective, the “paid part” is unattractive to most customers.
To make my point, let’s first level-set on two principles that determine the business viability of any product:
- People will always pay for things that they value
- The amount people will pay is commensurate to the value they derive from it
So to determine the viability of any freemium business, we simply need to ask the following two questions:
Question 1: Do you have a product that can be monetized? [PS: No one is interested in paying for a web browser today]
Question 2: Do customers perceive your paid features to be valuable enough to pay for? [PS: No one will pay for syncing of files across devices today]
To illustrate my point, using the aforementioned questions, let’s look at a few companies with freemium models:
It's now clear why...
Evernote is struggling with monetization, Dropbox while being successful a couple of years ago is increasingly facing monetization pressures and Slack is experiencing the so-called revenue hockey stick.
Long live the freemium model!
Varun Parmar
CEO, Doculus
I haven’t done deep research here… but definitely wanted to jump in and share my thoughts… apologies for a long writeup. Here are the scenarios where I believe "freemium model” drives $$ for the business: 1. When used as a marketing strategy to draw attention and/or to reduce barrier to entry — Getting people to try your new product. This is based on an important assumption that the freemium shows how the product solves the user’s problems, but leave some must have features - a) needed for large scale production rollout (common in Enterprise Security offerings, we do it with my product ET Intelligence, or b) a killer feature that only a certain % of users will crave for (Slack’s pricing tiers, or LinkedIn’s end-user premium licenses). 2. Scenarios where the “service” that is being made available for free is not the product, the end users or their data is the “product” that is being used or sold-to for driving $$. Google has shown the path here that many others including LinkedIn have followed. 3. Scenarios where Freemium is the platform that you want the community to adopt so that you can up-sell add-ons (services, support, . Open Source product based companies have been using this. Such as Red Hat. I also think that the Adobe model falls into this category. Thoughts on your questions: --------------------------------------- With the different scenarios laid down, I think the questions you are asking, esp. the first question (Do you have a product that can be monetized?), isn’t the right question for Freemium model. In fact, it is the 1st order derivative of the second question… as in, if the answer to 2nd question is YES , the answer to 1st question has to be YES. So, you can optimize by asking just 1 question, i.e. the 2nd question. With these question… the Slack comparison seems a bit out of place. Rethinking the questions you are asking: ------------------------------------------------------- If I had to rethink the questions, here is what I would ask… starting with the goal first: Goal: Build a platform based business (e.g. Red Hat, Adobe?) Q1. Does the freemium provide the needed features to help build a community around my product? Q2. What % of the truly “need” that paid [killer] feature or add-on that runs on the platform? There is no formula... you need to run some tests before you arrive at the business model, conversation rates, etc. Goal: Build a freemium to paid conversion model (e.g. LinkedIn end-user offerings, Slack, Atlasssian, Asana, etc.) Q1. Does the freemium solve enough of user’s problem to show how my product is the best out there or does it have something that users will fall in love with (emotional or need based bonding)? Q2. Does the paid version have capabilities that a reason % of users perceive value enough to upgrade or pay? ... thoughts?
I see similarities between freemium and open source in some ways - both drive pace of innovation up but drive prices down.. With open-source licensed software did that same but benefited the creation of Cloud based services where devops excellence and agility has become the differentiation as against any one feature. I see the possibility of freemium increasing the drive towards platformization.
LinkedIn's premium sub revenues are only 20% or so of their total net revenue. I wouldn't classify LinkedIn as a Freemium centric business. LinkedIn is closer, IMHO, to Google in that sense where "user" is the product and businesses pay to get either information on him/her or access to him/her.
Co-founder @ Clarify | We’re hiring!
10yIf you look at freemium for what I think it really is — a marketing strategy distinguished by minimizing barrier to entry — it would follow that freemium only makes sense if: - The majority of freemium users eventually upgrade to paid — if you’re not converting the majority of your users, you either built the wrong product or your free part kills your target market’s pain as-is - Your freemium users are an unavoidable prerequisite for the product to be valuable to your paid users; without them, the product wouldn’t make sense, let alone sell (e.g. Acrobat, LinkedIn) I think the dubious rep that freemium has earned stems from the fact it is so often misapplied. For #1, the split between the free part and paid part didn’t hit the mark or it just never made sense in the first place (as you point out, Varun); other marketing and customer acquisition strategies would have been a better, smarter fit. And the number of products for which #2 applies simply isn’t very high. Any business model that relies on freemium without one of the 2 prerequisites above — i.e. one where the majority of freemium users never convert and those users aren’t a necessary evil to support paid customers — will face challenges.
Great insight, direct and logical