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.
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.
It's not a simple way to go, though, because as Aaron Levie, CEO at online collaboration vendor Box.net, pointed out at a recent talk called “6 Reasons You Would Be Crazy Not to Give Away Your Software For Free,” presented at the Web 2.0 Expo in New York City last month, it's not easy to convince people to pay for something they are getting for free.
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.