The freemium business model: giving away pays
buytaert.net
buytaert.net
(1) Would you be wise to introduce the premium version at launch with the free version if there is enough value, even without that established free base to leverage off?
(2) Should (being the emphasis here in refering to good business conduct). Should a business have paying customers when a product is in beta version and isn't yet completely tested against up and down times, bugs etc...?
(3) If one were to go the route of having free users before having paid users, should the free users have access to what may be removed and added to the premium release in the future, for the initial purpose of gauging whether there is interest for certain features over others?
To elaborate on that last concern. If users do get to use everything for testing purpose, am I going to get into one of those weired battles with community when certain things get shifted over (even if everyone was notified at the beginning that this would occur).
(2) Let everyone use the site for free in beta. What you lose in concrete revenue you make up for in free bug reports, feature ideas, and feedback.
(3) Tell the free users the beta is ending and they'll soon have to pay. Feel free to give free accounts to some of the prolific community members, but don't feel bad charging people for your service. It's worth charging for - that's why you built it, right?
(1) Yes. You don't need a free version to sell stuff. But what does "leveraged" mean in your case? If it's a network effect, where your offer has no value unless there are already users (e.g. a dating site), you would need some way to build up users.
(2) All products are incompletely tested... it's an opportunity to show customer service... and version 2. There's a question of degree here of course. You're right, you do have a chance to try it out on free users - although bugs are just as annoying for them as for mium/fee customers. Maybe the way to think about it is: are they paying for the benefit you offer, or for the absence of bugs? People complain, but they still buy - because they know no-one is perfect. Provided you treat them with respect, they may even like you more because of it.
(3) People don't like it if you take something away, especially if they started to rely on it. It creates bad feeling. I think a free trial (time limited) will give you the info you need.
Though there seems to me a difference between releasing early to get people to use it, and releasing to get people to pay for it. The release early and often theme I tend to think should not be broadly applied to both.
Perfectionism aside...thanks for answering my questions.
If so, no one buys it - no problem :-) (assuming they can evaluate it first, e.g. free trial).
Though there seems to me a difference between releasing early to get people to use it, and releasing to get people to pay for it.
I don't know. You could be right. But both require a benefit to the user; and both exact a cost from the user - of learning; time and effort of changing behaviour to integrate it into their life and apply to their problem; constraining other choices/products to integrate with the product (depending on what kind of product you have). It's natural to think price is the cost of something - but it's simply not. (It's true though, that customers also think of it that way).
hehe I'm getting a bit of the answering-the-comment-while-being-edited syndrome :-) It's a bit disconcerting seeing from the other side.
2 - No. But let's face it, no complex software is ever finished. And it depends on the bug. Someone wants to use Lynx to access your webpage? A chinese user on an unpatched Windows 95 behind the great firewall doesn't see icon next to "post a comment"? Wisely balance the factors and just do it when you think it can make money for you.
3 - No. For testing purposes (I presume you mean the user is testing the app to see if it works for him), just make it clear that feature X and Y will be removed in Z days.
I'm working on software that builds and maintains business websites. Sorry for being vague, but I'd rather SHOW you guys when it's up. So in this case I think the freemium model will hurt my business and my customers, here's why:
No lead qualifying -
If you are targeting a specific niche having a free product encourage anyone and everyone to sign up. This drastically reduces the conversion rate. I know the argument here is one of marketing, but if a client signs up for a pet application and does not have a pet, is he really going to be an effective marketer? How many accounts have you set for free services you just wanted to "test out". For me I'd say about 20, and I've never been back since. I'd imagine they still have my accounts though.
No client incentive -
In my specific case my clients (businesses) will use the software to create a website. If the service is free, they essentially have no incentive, no motivation, and no time limit to proactively use the system. Consider the case where everyone had to pay the monthly fee up front, but came with a money back guarantee. "Did we not prove our product was useful? No problem, here's your money back". If a customer pays for your services, he definitely is going to spend time given it an authentic test run - his money is on the line!
Paying customers cover free versions?!
Again, depending on the product, and payment structure, your much more likely to generate more revenue from EXISTING customers, than you will be acquiring new ones. This is a very fundamental business/marketing principle.
Low efficiency -
If your business requires any type of customer support, the price for free jumps dramatically. Resources would be better spent servicing pre-qualified leads.
Paying customers are customers that value you. Doesn't that just sound like its a nice thing? I know we ought to work hard for our customers, but if you ENCOURAGE people to place no value in your service, you are asking for trouble no?
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So seeing as how my business is not launched yet, these are all just theories in need of testing. They also, as I said, may or may not apply to certain industries and products. But overall I think its worth mentioning.
I guess you choose a natural line, that doesn't need explicit enforcement - like 300 photos on flickr. There's no fuzziness about whether you have >300 photos or not, and the consequence of the older ones disappearing is gentle and non-punitive.
You can do the same thing with a software license, by having versions with different functionality - feature subset, capacity limits. Some companies have a "community" version that is free.
He's also talking about models where you benefit from the "free" users - for selling software, bug reports and feature requests are valuable information, for product quality and market needs.
One danger is that if you whet people's appetite with a free version, you can be priming them as fuel for a free/open source competitor! E.g. Photoshop enabled The Gimp; Unix vendors enabled Linux. This happens if they really need/want some feature in the premium version, but it's too expensive for them.
Maybe this concern doesn't apply to retail/consumer subscriptions because they aren't expensive; definitely not worthwhile anyone creating an open source competitor in the first place; and not targeting programmers (who could create a competitor).
But for selling software, if you were truly benevolent, wouldn't you give it all away for free? Denying people who can't pay reduces the good you are doing - doesn't it?
Maybe an answer is that there's nothing wrong when people pay - because then they do get the value you created. It's only an issue when people cannot pay, and you deny them, because it's only in that case that your potential for doing good is unfulfilled.
I think the latter case only happens when (1) your prices are too high for the value particular users get from your software; or (2) too high for their wallet.
I think the solution to the first problem is to price your software (roughly) in proportion to the value customers get from it. E.g. "per seat" or "per server" or "volume-base" pricing does this. It's better to under-price than overprice (in reality, there's a huge range of values that customers get from a product, some get much more value from it than others - if you price too low, some get a fantastic bargain; too high, and you deny some).
For the second problem, some kind of charity version is appropriate, where you give it away to someone who just can't afford to pay for the value they would get from it. e.g. student versions. In economic theory, a loan would probably be appropriate; but a gift is nicer and simpler.
These problems become simple if your software actually helps people earn or save money themselves - then it's a non-issue that they can and should pay for it.
essay: http://paulgraham.com/good.html
video: http://www.omnisio.com/startupschool08/paul-graham-at-startu...)
Most Movie theaters use a similar model where they make little money on the tickets and most of their revenue from the concession stands. Consultants can use the razorblades model where they will give you a free "consultation" and then charge to fix the problem. But it's hard to scale as they have limited space and high cost's for the initial transaction.
So what defines a good freemuium model is having a useful second tier of service and a vary cheep to serve lower level. A good example of this would be an online resume builder with a lot of templates and a paid review service. The fact a movie theater shows movies is not their business their business is setting people up to overpay on food ditto for our online resume review system. But, the movie studio's want their cut so movie theaters need to charge for tickets even if they are not making money from this.
BTW: TV/radio is ad-supported. PayTV has apparently not worked out as a good business.
Interesting your point about the cinema concession stand - though there's also student discount tickets; and "gold-class" premium seating (here in Australia, anyway).
Since you haven't made any connection between your follow-up and the issues I was raising, I'm assuming there isn't one. You were just posting.
"As a software vendor who wants to be benevolent, but not rip myself off, I really like this about Freemium: do “good” and “well” at the same time. ... But for selling software, if you were truly benevolent, wouldn't you give it all away for free? ... I think the solution to the first problem is to price your software (roughly) in proportion to the value customers get from it."
I was trying to say you misrepresented freemium by describing the reasons to use it in terms of social good. A totally ruthless business person may decide to use it because it let's them maximize their profit. Giving away service for less than their cost to the company is all about building or maintaining market share which is why it can be illegal for monopolies to under price their services in the US.
Anyway, their are plenty of models that involve giving away services Drug dealer giving away the first hit, TV / Radio. However, it's only Freemium if you have a built in connection to better service level and keep offering the free service. A Photo sharing site that only let's people download your pictures 100 times an hour before you had to pay would be a freemium service. If using freemium makes you more money than charging people for that level of service how does that fit into social good? I mean you make more money and people who don't pay get a free service what's not to like?
PS: It's easy to use a straw man argument without intending to. Just be careful when you start describing or defining what something really means or what it's benefits are because you can easily overlook what it's about and have a long essay that misses the point.
I'm concerned about social good, for the reasons pg discusses (morale, confidence, people want to help you). It feels good to do good. That's my topic. Freemium is not my topic.
I agree that Freemium could be used by a "totally ruthless business person" - but that explicitly isn't the case I was talking about (though evidently not sufficiently explicit).
Therefore, you aren't addressing the part of my comment that I'm interested in - that's because you saw it as trying to define Freemium in a way you disagree with. Maybe I could have been clearer that I wasn't defining Freemium. Actually, I consciously chose the qualification "But for selling software" to distinguish my subject from Freemium - I happily concede that this qualification may have been inadequate to the purpose. Maybe also I shouldn't post that in a comment on an article about Freemium - but the article also was about doing good and doing well, so there is a relation - though clearly not the one you expected. BTW what you say about Freemium seems pretty reasonably to me from my wider reading, although I don't take a position on what it is or isn't; I'm not arguing that.
At the moment, the issue of doing good is very important to me, personally, and I can't afford to let it slip away. If my topic wasn't wasn't so important to me, I would happily switch to your topic (definition of Freemium) and discuss that.
PS: That also explains why you give advise me to be careful when I start describing or defining what something really means or what it's benefits are - it's because you thought I was doing that. I wasn't.
http://www.pchristensen.com/blog/articles/freemium-isnt-a-bu...