Finding a Freemium model that works for you

I was chatting last night with the CEO of one of the biggest software-as-a-service companies about how he could release a version of his product with a freemium model. The options that seemed best for him were these four:

1) Time limited (30 days free, then pay. This is the Salesforce model)

• Upside: Easy to do, low risk of cannibalization
• Downside: Many potential customers will be unwilling to commit enough to give the software a real test, since they know that if they don't pay they'll get no benefit after 30 days.

2) Feature limited (basic version free, more sophisticated version paid. This is the WordPress model)

• Upside: Best way to maximize reach. When customers convert to paid, they're doing it for the right reason (they understand the value of what they're paying for) and are likely to be more loyal and less price sensitive.
• Downside: Need to create two versions of the product. If you put too many features in the free version, not enough people will convert. If you put too few, not enough will use it long enough to convert.

3) Seat limited (can be used by up to some number of people for free, but more than that is paid. This is the Intuit QuickBooks model)

• Upside: Easy to implement. Easy to understand
• Downside: Might cannibalize the low end of the market.

4) Customer type limited (small and young companies get it free, bigger and older companies pay. This is the model used by Microsoft's BizSpark, where companies less than 3 years old and under $1 million in revenues get Microsoft's business software free.)

• Upside: Charges companies according to their ability to pay. Get fast-growing companies early.
• Downside: Complicated and hard-to-police verification process.

 

He hasn't decided which one to choose, but I like 3 and 4 best. They allow you to reach the largest potential market with the most useful product, and then convert the ones that are likely to be the best, most committed customers.

Comments

[Ben Watson @bitpakkit]

I am still a big fan of feature-limited for another reason. New platforms are often hard to learn, and you can ease rapid adoption by not putting all the bells and whistles on the free version. It would be good to think about each of the four options from a pure user point of view.

1. Time Limited - test-drives are fun and useful, but give people a chance to extend to the trial. When I was at Microsoft we decided to extend trials to 120 days for complex products.

2. Feature Limited - The basic version is easier to learn and use. Once you get the basics you may want to go for more advanced features, based on the actual value you get out of this tool/utility.

3. Seat Limited - Try it out on a department or use it for free while you grow your business. It's our way of helping you to grow your business and adopt tools and processes that will ultimately make you more profitable.

4. Customer Type Limited - Cash strapped? We are here to help. We believe in what we have, and what you are trying to do - and ultimately feel that we can become partners when the time is right.

Good post. Made me think hard about it.

[Eric Franchi]

Chris,

Great breakdown. Coincidentally, I wrote a blog post on Freemium yesterday as well. Sites that are not having luck/success with the ad model but offer real value should look closely at your #2. Classmates, Match, etc. thrived 7-8 years ago on this model.

Eric Franchi

[David Loughry]

Each of these four freemium models has good points and may be right for some contexts.

However, it could also be argued that: All four seem to assume that even if asked, people won't contribute based on the value they receive from the software, since they all use some kind of required payments for at least some users. All four could take greater advantage of the participatory and networked nature of the moment we're living in (Web 2.0, social software, social networks, video/photo sharing, wikis and Wikipedia, blogs and so on, as well as increasing networked participation in social and political movements and environmental efforts).

The power law applies to contributions of many kinds. Some people contribute a few photos to Flickr, and some people contribute many photos, and as Clay Shirky has shown in a TED website video, their photo contributions exhibit a power law distribution. If you ask people to reward the software company based on the proximity of the situation, such as the value they receive, their ability to pay, the software company's position, and other factors, AND let people know there are many flexible ways for them to reward, from money to links to thanks to referrals to improvement ideas to coding to other products/services to user support on the software forums and so on, you should get a power law distribution of contributions. Given enough users, there should be plenty of rewards going back and forth between the software company and the users to create enough growth for both of them. Perhaps more satisfying and diverse kinds of growth too. On the software development side, everyone gets the full version, so that is simple. If the software company adopted such an approach, the publicity and marketing value, and the gains in user trust and goodwill, not to mention improvements to the software itself, could be enormous. It might or might not be more complicated, but it could be more efficient in many ways and also more fun. Just imagine. If you're thinking about implementing this approach, please read on.

The above approach is part of the ProxThink growth model. For more details about this growth model, arguments for it, how it works, to see it in action, and information about how to adopt and adapt it, see the ProxThink website (under Quick Links, click Brief Introductions and then Growth Model). For a broader overview of ProxThink ideas, tools, models and standards, which can boost thinking, creativity, growth and sustainability, see the "Proximity Focus Bears Fruit" post on the ProxThink River blog (find it with the Search box on the blog), or just visit the ProxThink site. Even if you implement some of the above ideas without using the standards and processes of the ProxThink growth model, please reward me on the ProxThink site for helping you move in that direction. Rewards which relate elements in the proximity are ProxRewards, but mostly we use the shorter and more fun version of the word, which is "proxri."

I hope the CEO Chris is talking about reads this comment and contacts me. I'll collaborate with him to implement the ProxThink growth model. Better yet, I hope Chris alerts the CEO to this comment, so we can create something great that Chris can write about in his books and/or in Wired.

Remember, the best way to predict the future is to create it.

David Loughry
ProxThink

[Paul Miller]

Chris

an interesting post, and one that throws up the differences between consumer and enterprise freemium propositions; something I've delved into a little deeper in a post of my own today...

The 1% 'rule' you talk about in the Wired article earlier this year may not apply in the enterprise... but what's the equivalent there?

[Clyde Smith]

I've been doing ad-supported web publishing that includes a hip hop press release site where posting is free and all revenue comes from ads.

However the advertising on the site doesn't do well enough to truly support the site as a business so I'm getting ready to launch a new site that will offer free ad-supported posting with additional paid options that are part of the same service.

I'm mentioning this because going free with paid options, with or without ads, seems to be a way to take the Feature Limited approach without having to create more than one version. Of course, there are many examples around once you look at it that way so I'm certainly not claiming to be a trailblazer!

[Hashim Warren]

Chris,
what do you think about this...

there's also the "Patron" model. That's where you ask users to give money in exchange for special privileges, like exclusive access to info about the product, a badge saying you are a patron, or insignificant features like more storage space.

Flickr used to use the Patron Freemium model, and Remember the Milk does so today.

What do you think? Is this a 5th option or just a variation of option #2?

[Bertil Hatt]

I prefer the #2, because it's the one with the widest adoption, and the one that gives the company the most data and insights to develop more, new, original services: it's the model developped by Google, and thanks to that, they have learnt unexpected lesson — and now control Cloud Computing, Voice Recognition and Automated Translation markets (all feats declared out of reach when the company was founded). You can call it the bold choice, and it certainly demands solid financial shoulders, but in a down market, servicing the many who try to find cheap opportunities on-line is a great long-term strategy.

There is another option, combined with #2 (label #5 or #6, depending on what you think of the comment by Hashim Warren) that is not considered here, where those who pay offer something to others, or to there friends: call in the mecene model, or the "I'll lend you my book when I've read it", but it really helps. Imagine you use a editing software with a free reader, but you want to ask clients about possible correction, or modification: you can pay extra to let them do those — but only for your documents. This can help the paying user to differentiate from competition, and show his partners how easy-to-use the sotware is, without having to change from your system. A friend has modeled the delivery market with that idea: big, central houses show to their smaller partners the benefits of heavy-duty parcel-tracking ERP (and then force them to adopt said-service); in the end, the big software that offered the most to secondary users won that battle.

One can imagine a similar model as sponsorship: a certain piece of software can be paid for internal company use, or sponsored for wider use (industry-specific, e.g.) by a company willing to have its name associated not to content, but software — not unlike white-label services.

[Michael A. Banks]

Chris,
How does free work for freelance writers?
--Mike Banks

[Chris Anderson]

@Mike. If you have a blog, which illustrates your writing ability and ideas, you're already using the Freemium model.

[Michael A. Banks]

True, Chris--I do have a blog. Okay! I just hadn't viewed it that way. Thanks.
--Mike

[Michael A. Banks]

Addendum: I am giving away some book excerpts, which have higher visibility than my blog.

[Michael A. Banks]

Have you looked at the Concord Free Press, Chris? Books published and distributed free. It's for literary fiction only, but I assume it could be a marketing tool for a writer's other work.

With this, the author doesn't have to put up money--and with a book you have work in a "recognized" format that certainly looks better than a hardcopy or electronic manuscript/PDF. More convenient as well.

Here's the spot:
http://www.concordfreepress.com/
--Mike

[Guilhem]

Hi everybody, hi Chris,
First, thanks for this very inspiring post. It made me think quite long :)

The blog model is a really interesting one, that shows that working for "free" is a time investment to buy some credibility. I'd like to have your opinion on other points that seems interesting to me:

- the "materialist" model is true for books but also for movies and music. Have the electronic version for free as a "real" ad, and by the book / concert ticket / dvd / cd / vynil collector / goodies...

- the (almost) opensource model, in which you build an identical kernel for every users, but then sell support, training, custom dev, ...

- the "charity" model, give it all for free, everytime, every type of businesses, every size, but guess that some people will feel the need to pay you for your job

- finally, the volume model sounds very good to me. You give it for free upto a certain volume (of messages, of database entries, of gigabytes...). The very interesting point is that you allow people to really use it as they would do if they were already using it, but you would only need to pay when you reach an intensive (to be determinated) level...

Thanks again !

[rowland Jones]

I was interested in Mike Bank's comments re freelance writers: having worked as freelance writer director producer and all round media prostitute, my experience was that it was rarely possible to persuade people to pay for a service that they had received for free prior to that!
I put a similar question to Andrew Dubber (NewMusicStratgeies) I now live in Italy and work as a musician, and aiming to make a major effort to establish and 'profit' from, a web presence and this year: but if I allow free downlaods, and say I get 2000 downloads in the US how does this help my work here in Italy?
I like the idea of the limited number of free downloads: probably because it fits more neatly with my more traditional ideas ideas of 'promotion' !

Rowland

[Richard Padilla]

I just saw your freemium speech on smartplanet. I was interested in the idea of how companies are now realising that in order to gain more market share per say is to enable as much "freeness" as we say in the Caribbean to their products and services. I wondered if anyone thought of using freemium marketing in delivering IT Services or even Cloud Computing Services to SMEs and wondered if you have any ideas or thoughts on the matter. I preparing to develop a PhD project on the development of SMEs in the Caribbean and do believe that this is the way to get them on the ICT bandwagon and enable them onto the world markets.

[يوتيوب]

good fun and useful, but give people a chance to extend to the trial. When I was at Microsoft we decided to extend trials to 120 days for complex products.

[watch american dad online]

You seem to have got the niche from the root, Awesome work

[cable]

Thanks for sharing this. It helps put a bit of structure and provides a baseline framework towards thinking about Free & Freemium in a more formalized way and builds on the opinions that Fred and others have put forth in the recent past. Very helpful.

[Generic Viagra]

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