Since we talk a lot about the use of "free" in business models, it's common for people to assume that we love any and all business models that use "free." In particular, one assumption is that we think all "freemium" business models are great. However, that's simply not the case. What we're talking about here is how and when to use free in a business model. The important thing to recognize there is that when we're talking about free, it's in trying to figure out where it makes sense in the business model -- not to say that "everything should be free" or that "any business model that uses free is great." Yet, often, people seem to assume that we think any business model that has "free" is wonderful. The unfortunate result of this is that any time someone uses free as a part of a business model and it's not effective, people think they've "debunked" what we have to say.

For example, last year, we wrote up a post explaining why so-called "freemium" business models probably are not a good idea for many software startups. There are some it can work for (and work really well, as Evernote continues to show), but it really doesn't make much sense for a lot of others. That focused on a link from a software startup founder who found that freemium didn't work for him. There's now a similar post from the creator of the popular Instapaper app, talking about why he's pulled the free mobile version of Instapaper, hitting on many of the same points that we raised with the initial post about why Freemium just isn't right for certain businesses (especially software). The only reason I saw this was because Dave Harper pointed us to it, suggesting that it might debunk some of our positions -- though Dave was very cool about realizing the difference once I pointed him to our earlier post.

However, I really think it's important to highlight this particular issue, because it's one that comes up a lot: when talking about the importance of free as a part of a business model, that does not mean that all "free"-based business models work, or are even good ideas at all. What's important is to recognize when and where free makes sense and where it doesn't. "Freemium" business models for software can be tough, though it very much depends on the specific software and service being offered. It's very difficult to figure out what should be free and what should be premium, and quite frequently people underestimate just how few of the free users will ever switch over.

But none of that means that all free business models (or even all freemium) business models don't make sense. We've always tried to drive home the idea that there are no cookie cutter business models in the digital world, and it's important to understand the underlying economics to better understand where free might fit as a smart piece of your business model.

I think the worst thing about the focus on things like "freemium," or even the intense focus on the word "free" itself, is that it often leads to cases where people can't get past the "free" part, and when the larger business model fails, they blame the "free" part, rather than recognize that perhaps it was the way "free" was used as a part of the business model that was the problem.

A few weeks ago, we ran a webinar about "using free as a part of your business." One of the speakers was Phil Libin, from Evernote, who gave a very detailed presentation (you can view the whole thing here) about how Evernote has turned "freemium" into a success story. I found his points fascinating, in part because I've actually never been a huge fan of the "freemium" model for software -- where you get some basic features for free and then to use more, you have to pay. I don't talk about "freemium" very often, because I'm not convinced it's a strategy that works in most cases. It can obviously work in some specific cases, as Evernote has discovered, but it can be tricky to apply elsewhere.

There are a few reasons for this. First of all, the basic concept of "freemium," involves some rather arbitrary choices. You provide "x amount" of storage/users/projects/features/etc. for free, and you hope that people will pay for increased storage/users/projects/features/etc. But where do you make the cut off? That's quite tricky to figure out, because there's no fundamental reason for the cutoff points. When we talk about using free in a business model, we generally focus on freeing infinite goods and selling the scarce goods, but "freemium" offerings for web services don't tend to make any such distinction. The "free" versions are basically given away as marketing in the hopes that people will upgrade.

But in many cases, that doesn't work for a few key reasons: first, you now have incentives to make the "free" offering worse. That's never a good thing. In the effort to get people to sign up for the premium version, you have bad incentives. You don't want to make the free version "too good" as then people won't feel the need to upgrade. I find that to be a bad incentive structure in many cases. On top of that, there's a part of this that's a "give it away and pray," type strategy. Yes, you're offering more features, but figuring out that right mix of what's free and what's paid is really incredibly tricky, and you simply have to learn to accept, as Libin has done, that the vast majority of people using your app are just there for the free version. For Evernote, one of the keys to making it work is that the app itself becomes more and more useful, the more you use it. That leads to greater conversions over time. That's honestly rare for most apps which have a more or less steady-state usefulness.

The problem is that while the "free" version is supposed to act as "marketing" for the paid version, it's often wildly mis-targeted. Many people use the free version solely because it's free, and have no interest in signing up for the paid version at all. So that's not the right target market. If you're going to charge for something, you need to give people a real reason to buy, which often is offering something entirely different that is enhanced by something free, rather than limiting something free.

Unfortunately, however, the whole concept of "freemium" (including the catchy term) has received so much attention that many startups now jump right in with a cookie-cutter "freemium" offering -- and now they're learning why that's a mistake. Ross Pruden alerts us to a really interesting article from an entrepreneur who went the cookie-cutter freemium route, and eventually backed away from it and saw his revenue shoot upwards. He then explores a few other companies that have gone through similar evolutions, and saw the exact same thing happen.

This isn't surprising, given the problems described above about "freemium." Unfortunately, however, the author of that blog post, Ruben Gamez, jumps to the wrong conclusion that "free plans don't work." That's taking it a bit far. Freemium type plans can work in some cases, and "free" by itself can work wonders, if done right. But that tends to involve using free to enhance the value of something else, rather than using it as a sampling.

Charles Cooper, over at News.com, has a long history of being quite skeptical of business models involving the use of "free" and, at times, likes to poke fun at us who believe such models are a key part of the economy and innovation. This might be seen as particularly ironic, since Cooper works for a company that gives away most of its content for "free" and makes money via the business model of advertising. That said, he's got a thought provoking piece asking if the current financial crisis will spell doom for the "freemium" model, which is one of many "free" models.

It's a good question, but I think the analysis is a little bit off. First, he narrowly (and, I believe, incorrectly) seems to define Freemium as offering a free version now with the idea of offering a premium version later. But that's not what most freemium models do. They tend to offer both a lower level free version, and, at the same time, a more advanced premium version. While those models can be risky if they are trying to offer other infinite goods in the premium version, many premium offerings actually focus on scarce goods (bandwidth, server time, support, etc.).

Second, Cooper's thesis seems to be that the "Freemium" model is really about giving things away and then praying that a business model shows up. While this may be true for some (poorly thought out) businesses, it's not necessarily true across the board. Plenty of businesses start out by recognizing they need to grow attention first, before that can be turned into a business model, but that's different than using a "give it away and pray" business model.

Finally, Cooper seems to assume that most VCs won't take the long term view on the companies they invest in. Again, that may be true in some cases, among weaker VCs. But good VCs are actually more likely to see the value in doubling down and building up core business during any expected downturn. In the end, Cooper's attack seems like a random attack on "free," based on a few faulty premises not backed up by what's actually happened in the market.

Adobe made some news today by launching a free web-based low-end version of Adobe Photoshop. The idea is that Adobe hopes this will convince people to upgrade to the for-fee desktop software packages or (potentially) higher end online offerings from Adobe. This should be an interesting experiment for a variety of reasons. First, it definitely makes sense for Adobe to head down this path -- because if it didn't others would pop up and do the same (in fact there already are a few web-based Photoshop clones out there). So, joining this space earlier, rather than later, gives Adobe a chance to help define it, rather than be defined by it.

Adobe also has an advantage in the fact that it dominates this market. Even with free offerings like The Gimp out there, many graphic designers and photographers swear by the Photoshop interface and tools. The question, though, is how well this offering will be adopted. There are already some concerns about performance, which can matter a great deal when doing image editing. Furthermore, if this free online offering is there to serve as a way to push people to sign up for paid offerings, there will be pressures on the development team not to make the product as good as can be -- and that will keep open a wide opportunity for others to come in and provide a better product. No matter what, it's nice to see yet another large traditional client-side software provider experimenting with web-based offerings. Finally, simply porting a desktop software to the web isn't all that appealing. Services like Writely took off not because they were word processing clones (or free) but because they offered something useful that was different. In the case of Writely, it was the ability to do real-time collaboration over a document. So as long as Adobe focuses on creating those useful things that are different than what can be done on the desktop client, this could have some potential. But merely moving a feature-lacking version of a desktop client to the web probably isn't enough.