Think about the freemium model for a second, because it's completely counter-intuitive. You create content or a piece of software, and instead of charging money for it as a good capitalist should, you give it away for free.
What?!
Hold on a second, because before you think it's entirely nuts, there is a method to this madness. The idea is to get some people to pay while building a critical mass of users to allow you to expand the business much more quickly than you could with paying customers alone.
In fact, Levie admitted that Box.net didn't start out freemium. They charged for their services the old-fashioned way, and they actually made money -- more money than they have since on a month-by-month, per-user basis. It seemed there was no reason to change.
But Levie and his partners wanted to grow big -- fast. They realized they could make money quickly by charging everyone, but they couldn't grow or scale as quickly as they wanted to using that approach.
So Levie, who, like another smart, young entrepreneur named Zuckerberg, started his business in his dorm room, went to one of his financial backers and told him his idea to give away part of the service for free. The billionaire businessman thought he was off his rocker. Levie did it anyway.
"If you want scale, you need low friction. Happy customers will pay you. If we continued to offer value, [we figured] some percentage [of customers] would be paying," Of course, Levie added, in order for freemium to work, you have to have a good product in the first place.
By giving away storage and sharing services, Box.net was able to get inside organizations it might not otherwise have been able to penetrate. Freemium, it seems, is the Trojan Horse of business. You sneak inside an organization with freebies, then use your presence as a way to leverage sales of the pay version of your product.
Levie says salespeople both love and hate the freemium model. On one hand, they are selling to people who are already using the product. On the other hand, some of the prospects will resist paying for something they are getting for free.
While freemium has worked for many companies -- Box.net boasts 4 million users now, so Levie got that scale he was looking for -- Levie says it's an approach that takes lots of patience. Companies using this approach must be willing to delay gratification and understand that some users will never pay, no matter what.
But if enough do pay, they will support those who don't; and if those who pay provide enough income while allowing you to achieve your overall goals, freemium can be a reasonable approach, even if it sounds nuts on the face of it.
— Ron Miller is a freelance technology journalist, blogger, FierceContentManagement editor, and contributing editor at EContent magazine.
No actually I don't mean that. Those use an open source-added value model, which I've explained previously if you want to go through the many comments is not the same as Freemium.
It's such a small percentage of their overall income, that it's not even worth measuring. So it may be that at some point they want to go Freemium or hope to, but right now their corporate cloud business doesn't amount to much.
Google is a bit different. They offer you services for free with no expectation that anyone will ever pay and they make billions on ads.
Companies like Box.net do exactly what you describe. They may get in the door with the free version, but when the organization needs a bit more bang, they pull out the bucks.
The trick is finding the right mix for that free product to show people that it's worth buying, yet not so good that they will never buy it.
Yep free must ultimately lead to paying something. Unless your intention is NOT to make money immediately or anytime down the road. Public relations and promotion might lead one department to go the "free" route while expecting to recoup the losses later with another department, and maybe an entirely different service or product. I suspect Google's "free" products are not ultimately a complete loss to Google's bottom lines.
I tried, maybe unsuccessfully I may say, to say something along these lines on my previous posts to Ron's otherwise excellent article. But you Nathan, have managed to make your point in a manner so elegant that I feel the need to express my congratulations on your mode of expression.
I really liked the parte where you say: "On the surface this sounds like it is easy to make naive statements and misinformed conclusions about what this really means, "Freemium" is not "Free". Free is just that. No cost, no option to supply the vendor with any kind of monetary remuneration - with the perhaps the exception of an optional donation. Freemium on the other hand works by offering the "user" the ability to download the non-tangible digital product or service, and then offering the user the ability to become a client or customer often times by selling a value added service such as the promotion of in-house or third party advertisements, product placements that the customer may or may not choose to purchase."
And I like this not because I disagree with Ron, I repeat that I respect his honest intention and his understanding of the Freemium concept, but because I am worried of the effect that what you term "misinformed conclusions" can be taken by some people and invest efforts and expect results from futile attempts to achieve success. And I may be accused of misinterpreting your meaning of that, but then, so be it...
Freemium, as Paul also excellently explained, has to be taken as part of an overall Business Plan for a product or service. And Fremium has to be deployed strictly according to such a Plan, never as a stand alone strategy or as a "de facto" Business Model by itself. That is, no one should develop a product or service to be deployed as Freemium as its main purpose or channel of existence for it will never have existence solely as Fremium. It can't be done that way for it would be a direct road to ruin. This is my position on Fremium.
I fully endorse that Fremium is now a very useful strategy and can become part, sometimes, a very important part, of a Business Plan for a product or service. And for this contribution to the discussion Ron is to be praised. However, from the point of view of any business my suggestion is that Fremium MUST BE PART of an Overall Plan which clearly states the extent and balance of "Free" in the overall business effort.
With over 50 comments, Ron's post on Fremium has taken a life of its own and has become one of those unavoidable issues to follow. I pay my respects for that to Ron as the real value of IE is to post comments on issues that cause many of us to react and to engage because of their pertinence in this media. Again Ron, my respects and congratulations. hope to see a lot more from you as engaging and satisfying as this thread. This is what makes IE a reference and outstanding site in this Google-McNknowledge Fuzz that some consider the web to be.
Thank you for your thoughtful article. After having read Chris Anderson's (Wired Magazine Editor in Chief) book last week rightfully titled "Free", and having personally offering a free iPhone app for my organization, I feel I should make a comment on this particular subject.
Blatent promotion of Marxist (pro-welfareism through wealth-transfers) utopia, and a number of unprofessional direct Wikipedia citations aside, "Free" offers a very valid argument for Freemium "Web 2.0" products and services online.
While the prices of products and services consistently increase over time due to the reality of the world's economic hyper-inflationary depression, phenomenally as Chris Anderson pointed out, the cost of most web-services and downloadable digital non-tangible products are actually experiencing the direct opposite effect; deflation (costs are dropping).
On the surface this sounds like it is easy to make naive statements and misinformed conclusions about what this really means, "Freemium" is not "Free". Free is just that. No cost, no option to supply the vendor with any kind of monetary remuneration - with the perhaps the exception of an optional donation. Freemium on the other hand works by offering the "user" the ability to download the non-tangible digital product or service, and then offering the user the ability to become a client or customer often times by selling a value added service such as the promotion of in-house or third party advertisements, product placements that the customer may or may not choose to purchase.
Companies are finding the Freemium optional "value added service" approach to be more profitable over a short time, as well as in the long-term. A superior 'free' product that social networks pick up on can garner much success in a hyperspeed context. The Freemium network affect after early adoption can lead to a critical mass causing your free non-tangible product or service to generate the vendor significant profits.
A unique and early 20th century example of a free product that was monetized after it was acquired later is when Mirabalis released ICQ for free, thus taking control of this market. The revenue generation model was an interesting one as they never made an attempt to profit from the service until they sold it to America Online several years later. The value was in the user data, which AOL was able to serve ads to later on and with much success.
It will be interesting to see how this unfolds in the coming years as we see more Internet-based firms make a shift to this seemingly counter-intuitive (by those in blind support of the archaic 20th century "pay now") business model.
To be honest, I'm getting tired of explaining this ad infinitum.
Obviously free is not a business model. That's what the billionaire investor told Levie early on and the idea is not to give it all away, but to attract enough users to build a critical mass.
Somebody has to pay for this to work. I think I've made that crystal clear.
Free cannot sustain long term without pay to support it.
Again, it's a fallacy to suggest this is just for startups. Many established businesses have gone this route.
I'm not sure how many times I have to say it, but the idea is to get people to pay.
I disagree with the last statement too. If the product is good enough, some percentage of people will pay. If it's not good enough, it doesn't matter what your business model is because nobody will ever pay for it.
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Recently, the Obama administration has been of two minds where privacy rights are concerned. On one hand, you have an administration that vowed to veto CISPA and mandated open data for government websites. On the other hand, you have an increasingly out-of-control Department of Justice on a fishing expedition at AP and demanding legislation to let the FBI wiretap private, encrypted communications and levy fines if a company fails to comply.
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You might be surprised to learn that the FBI has generated hundreds of thousands of secret information requests since 2000, many of which go to Internet companies seeking information about individual users. You may be even more surprised to discover that in all those years, only one Internet company has challenged these secret requests.
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