Wednesday 31 March 2010

The Paradox of Freemium

One of the businesses I advise recently flipped over to a freemium model and – as expected – saw a step change in paying subscribers. It does lead to the question; in a world where we typically make money by making things and then selling them to others, how did we decide that giving valuable things away made commercial sense?

Firstly, for those who may have spent the last few years in a cave, I broadly define freemium as giving away something of substantial value along with an associated upgrade/expansion path which returns benefit to the organisation.

This is already commonplace. So many of the everyday tools I use have an element of freemium to their business model; google apps, zen agile, bitbucket, linkedin, mockingbird, a number of podcasts (which lead to paid-for books or other products), and of course almost every iPhone app I see these days has a fairly comprehensive ‘lite’ version.

For a long time we’ve given away tightly limited trial versions, exposing a very small subset of the functionality (or usage time) in order to coax users into a purchase to unlock the rest, and freemium is almost a reversal of this. Give away quite a rich set of functionality with no expectations, and you’ll pick up a group of buyers for that additional stuff on top.

Making this happen comes down to product design; you have to make sure that you hold back something(s) compelling enough to encourage purchases while making sure that your base product is functional and complete enough to be of significant utility on its own. There are so many ways to slice this, and sometimes the differences don’t even need to be rendered – you might simply impose several distinct licensing terms (free for academic or home use for example).

In one of my all-time favourite Ted Talks, Dan Pink says:

"The mid 1990s, Microsoft started an encyclopedia called Encarta. They had deployed all the right incentives. All the right incentives. They paid professionals to write and edit thousands of articles. Well compensated managers oversaw the whole thing to make sure it came in on budget and on time. A few years later another encyclopedia got started. Different model, right? Do it for fun. No one gets paid a cent, or a Euro or a Yen. Do it because you like to do it.

Now if you had, just 10 years ago, if you had gone to an economist, anywhere, And said, "Hey, I've got these two different models for creating an encyclopedia. If they went head to head, who would win?" 10 years ago you could not have found a single sober economist anywhere on planet Earth, who would have predicted the Wikipedia model.

I think those same sober economists would probably have said much the same thing about freemium, and probably much more recently. Getting customers to pay for your product by first giving most of it away wasn’t common sense – and maybe it still isn’t – but you certainly can’t ignore the evidence that it works.

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