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The Free Economy Part 2: Freemium Rules!

Boy I don’t know about you but I am tickled pink with a business model called “Freemium,” where businesses provide a free version of a product/service to the masses and is supported by a “paid for” premium version by a sufficient number of subscribers.

I am sure like me, you are reaping the benefits of this model with a host of services ranging from “free” phone calls (Skype), “free” website hosting (Go Daddy) to “free” on line storage (SugarSync) and great services like Linked-in (Go Daddy and Linked-in are also add supported – see my previous blog dated October 9, 2009 on the add supported business models).

According to Wikipedia: The freemium business model was articulated by venture capitalist Fred Wilson on 23 March 2006.

Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base.”

As to the name “freemium” – it was a name suggested to Wilson by a blog reader (Jarid Lukin) after Wilson posted his original blog describing the model. The name Freemium has stuck.

As described in Wilson’s blog – the concept isn’t all that new. There have been many successfully companies using what is essential the same business model called “shareware” for years. CuteFTP is a product that I used for “free” (also add supported) until I discovered FileZilla (an open source business model we’ll talk about in a future blog). The Internet makes this model a whole lot more doable though.

For the freemium business model to work the free version of the service has to provide sufficient value to attract a base of loyal fans that after using the free version, become hooked on the service and are wanting and ready to pay a premium for a more advanced and functional version – at least this is the goal. Other spins on the model also rely on paid enterprise users (with significant more utility) to support the free users.

Freemium is a great marketing strategy and to work, it should have no “strings attached” to the free version. It’s also got to be a hassles free and nonthreatening (e.g. don’t ask for credit card information to sign up for free and honor the free users’ privacy from spam and scams). Don’t stipulate and expiration date either – this is not a freemium model but a “free trial” model – also an effective marketing strategy but it’s not a freemium model.

Freemium is a viable business model being adapted by many web 2.0 firms. It provides a lot of advantages especially in the early stages of achieving market acceptance and adoption. To work though, it must create a large enough base of loyal users who can be converted into loyal paying users by offering them advance features that they value and are willing to pay for. In other words, the service must solve real problems the market wants and values.

The title of my blog is a bit misleading: “Freemium Rules.” I am not attempting to provide you the “rules” of launching a freemium product but rather stating from a consumer point of view – “it’s an attractive model.” But for your business to thrive: free is not enough, it also has to be matched with paid.

Having said that then, here are some rules you need to know to be successful: Rule # 1 you need to know if you chose to use a freemium business model: “whatever strategy and pricing decision you choose to use, freemium or otherwise – make money!” And to borrow from Warren Buffet: Rule # 2 is: “Don’t forget Rule # 1!”

So have fun, create loyal customers and make some money doing it!

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