Software Startups Realizing That Cookie-Cutter Freemium Doesn't Always Work Well

Business Models

from the but-don't-miss-the-point dept

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.

Filed Under: business models, freemium, startups