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

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.


Reader Comments (rss)

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  1.  
    identicon
    NAMELESS ONE, Sep 2nd, 2010 @ 2:54pm

    my success at web hosting

    900 free websites with ads made me 90$ USD /month
    3 main sites with ads netted me 2000$ a month USD in ads with 8million uniques in 98.

    The free sites are good for many reason it in a way adverts your service ( hint to holly wood ) and thats how i got the large sites and made the better money because they wanted specialized and custom help.

    same with server hosting
    as a former OVH reseller i started with zero money and a partner/investor. WE both put in 18hrs a day getting all things automated and by end of two months had 60 servers at a profit average of 25$ each. not much you say well if partner had not got ill and been unable to be the go between man as OVH requires i could easily be at a 100-200 server limit by now.

    for a guy on disability ...thats innovating...

     

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  2.  
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    trench0r (profile), Sep 2nd, 2010 @ 3:33pm

    hmm

    I play League of Legends.. I guess I've paid more in a month than most subscriptions.. but I don't see myself keeping that up.. what I like about it the "freemium" offering is that the game is a level playing field for everyone.. sure you can get "experience boosts" but that just propels you to a higher level which only pits you against those who got there by grinding the at the "free" level of experience per match.. meaning you will likely face people who have more experience playing.. the only thing you can't get without actual money is special "skins" for the characters in game, special costumes, which I see plenty of during my gameplay.. of course I only have the promotional material to go on but they are apparently successful.. (way better than demigod, even though I shelled out more money for it, because I liked stardock's policy regarding DRM.. the playerbase is a ghost town since there is no free to play element)

    just some food for thought when considering freemium..

     

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  3.  
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    interval (profile), Sep 2nd, 2010 @ 3:35pm

    Re: my success at web hosting

    "900 free web sites w/ads" I don't even understand what that means. But with that many sites, there obviously had to be some overlap in the "services" offered? Were they those annoying web pages that come up in searches that are nothing more than links to other websites that are very generally related to the search term? Damn those are annoying.

     

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  4.  
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    Eugene (profile), Sep 2nd, 2010 @ 3:42pm

    Quicktime is a good example of a "freemium" model that works (who came up with that word? I want to choke them). The Pro version of Quicktime is definably for people who need to do more things with the program than the average joe. Most people just don't need to export movie files into new formats, or cut-and-paste specific sections/frames of their video into new files. But when you *do*...Pro suddenly looks like a great idea.

    You're right though, it's not a thing you can just apply to anything with multiple features. Basically, you need a clearly split demographic of people interested in your product, with one group being laypersons and the other being experts/hobbyists. At least that's what it seems like to me.

     

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  5.  
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    Marcus Carab (profile), Sep 2nd, 2010 @ 3:55pm

    Stock photos are an interesting area where freemium seems to have some potential. I like the way Stock Exchange (free) uses premium search results to push to iStockPhoto (low cost) which uses big, attractive ads to push to Getty & Vetta (high cost, extremely high quality)

    I suppose it's a little different from freemium, though. Although the high-end stock photos are still infinite goods, there is a certain valuable scarcity in the management and quality control of a database of those photos (there's a lot of unusable crap on Stock Exchange, and even a fair bit on iStockPhoto, since they are minimally filtered) -- so it's really about using the infinite to push to the scarce, not just to the artificially-scarce, which is good. But there's also the fact that artificial scarcity actually improves value for most stock photo customers, since it decreases the chances of other people using the same material.

    I guess the approach is more one of traditional market segmentation than "freemium" -- but I wonder if there are still elements of that model that could improve other freemium services.

     

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  6.  
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    Me, Sep 2nd, 2010 @ 5:06pm

    Now I think the free version thing should be reversed, why don't they just give the full version away for 6 months as the trial period. The trial time can be debatable but I think it’s damn good enticing amount of time. What I am trying to point out is that if you’re using the full version first then downgraded to the free version after the 6 months, you will notice or miss the changes and features that you’re so used to or depended on comparing to the crippled free version then the desire to get the full version is much higher. You only know what you’re missing when you no long have them.

    Comparing to coming from the free version first then your desire to move up is less because you’re used to the free version while don’t know what you’ve been missing. Often time there is a major feature comparison of the full version to the free version but what about other little bitty features/enhancements that can stand out such as nicer eye candy UI, more option lists... etc). The resistance to change inertia is just too great.

     

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  7.  
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    Blamer .., Sep 2nd, 2010 @ 5:46pm

    Flickr have their freebies about right I'd say. Heavy users are okay with paying to go beyond reasonable storage/upload limits.

    Soldat I paid for, but mostly that wasn't about the extra features. Rather I reflect on that 'purchase' as really just a fixed-price donation going towards something I want to be associated with, with a deal sweetener of being able to be visually identified as such to other players.

     

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  8.  
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    Jon Renaut (profile), Sep 2nd, 2010 @ 6:02pm

    Re:

    Flickr is actually a great example of how the free accounts make the paid accounts more valuable. I've paid for an account for years - it's one of the few websites I actually pay money to. I do it for two reasons. One, I like having a backup of 30 gigs of photos or whatever it is I have up there.

    But more importantly, it means that I can post pictures of my daughter, and her grandparents and aunts and uncles and all my contacts on free accounts can see them. Each additional person that I know who has a free account makes my account more valuable.

    Flickr has other benefits, too (I'm really pissed that they no longer print to the Target three blocks from where I live, though), but it's a fantastic example of how the free part makes the paid part more valuable.

     

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  9.  
    identicon
    Mojo, Sep 2nd, 2010 @ 6:39pm

    re: my success at web hosting

    @Nameless One: Great, you made some money with ads and websites, but i'm not sure what point you were trying to make or how it pertains to the "freemium" discussion. Care to clarify?

    Oh and one more thing... I find your last comment, "not bad for someone on disability" confusing and offensive, honestly. What does having a disability have to do with someone's limited "success" with web hosting? Are we supposed to wipe a tear from our cheek and say, "good for him, he's disabled and knows how to brag about making a few bucks with web ads?"

    A story about an ice skater with one leg is a story worthy of mentioning a disability, but you're just some guy with a completely random, undisclosed disability and thinks it means the public at large should be more proud of his web hosting becasue of it.

    Why? Frankly I think it's crass to use your mystery "disability" to try and draw more attention to yourself, or to try and convince people your dubious accomplishment is more noteworthy.

    I hope a one-handed hacker crashes your sites.

     

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  10.  
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    Modplan (profile), Sep 2nd, 2010 @ 7:22pm

    This has something that has been dressed up under a new coat in open source known as open core licensing - the "main" product is free (including being put under a BSD like license or otherwise), but you sell proprietary extensions and plugins. There's also one or 2 projects (like Virtualbox) that use an open source "community edition" and a proprietary version, presumably with some form of arbitrary "any more licenses on x premises and you pay" or otherwise EULA.

    How much of business is simply dressing up old concepts in slightly new clothing...

     

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  11.  
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    John, Sep 3rd, 2010 @ 1:36am

    Freemium? I think you mean shareware. Software companies were using this model way back in the days of bulletin boards.

     

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  12.  
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    Mike Masnick (profile), Sep 3rd, 2010 @ 2:29am

    Re:

    Freemium? I think you mean shareware. Software companies were using this model way back in the days of bulletin boards

    No. Shareware and freemium are pretty different -- though there may be some overlap. Shareware was mostly a voluntary donation-type model. Freemium is about paying for additional features.

    But, no one was really arguing that it was "new," just that there were some problems with the model.

     

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  13.  
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    Anonymous Coward, Sep 3rd, 2010 @ 10:50am

    Freemium Success Story

    A good example of a Freemium success would be the online game Runescape.

    They allow people to play for free (with banner adds) for as long as they would like, but they only get access to half of the game world and skills.

    The reason that they are so successful (the largest MMORPG by active users) is that they pay careful attention to making the free version fun.

    I would love to see a blog post going into more detail on their success.

     

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  14.  
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    vivaelamor (profile), Sep 3rd, 2010 @ 1:45pm

    Re:

    "Quicktime is a good example of a "freemium" model that works"

    Afaik Quicktime Player is just a rather cumbersome video codec and I would be surprised if anyone would suggest getting people to pay for access to a media format. Adobe do a similar thing with Adobe Reader, but went one step further by making PDF an open standard, which allows anyone to make their own implementation anyway.

    The kind of 'freemium' model this article refers to appears to be offering the same kind of product but with less features. Quicktime Player is not the same kind of product with less features, but a complementary product essential to growing the market share of Quicktime Pro. I don't think anyone buys Quicktime Pro for its enhanced playback abilities. This distinction highlights the 'cut-off point' mentioned in the article. Quicktime Player is free because it needs to be free, not because they are hoping people will pay for more features by setting an arbitrary limit on what it can do.

     

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  15.  
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    vivaelamor (profile), Sep 3rd, 2010 @ 1:55pm

    Re: Re:

    "No. Shareware and freemium are pretty different -- though there may be some overlap. Shareware was mostly a voluntary donation-type model. Freemium is about paying for additional features."

    I think the line got blurred so much that traditional shareware became donationware.

     

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  16.  
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    Donald Haase, Sep 3rd, 2010 @ 3:43pm

    Converting users

    There are two ways that freemium software is used that tends to make it work (that I've witnessed, and haven't been mentioned yet)

    1) Transitioning from personal use to business use. I've seen this happen frequently in work, and with friends. Person X uses fremium software Y at home because it's free and its feature set suits his needs as an individual. Person X finds that software Y would probably be extremely benefitial in serving a role at his work. As Y is already familiar with its use, it's an easy choice, and now to use it in a larger environment the pay version is required to make use of it.

    2) Provides a less annoying method of 'trial software'. Similar to the above, I've had to test out software and prove that it might work in a production environment. With traditional 'trial' based products, we are limited to whatever arbitrary timeframe the company sets, and it's usually a painful process to reset this without purchase. With freemium software though, even if the use may be limited, it can be tested in a longer period of time.

     

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  17.  
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    Chris Heggem, Sep 3rd, 2010 @ 6:36pm

    Going Beyond Freemium

    Thanks for the article, it was a very interesting read!

    Using cookie-cutter strategies for your business rarely provides optimal results. In-depth testing is required to determine what is the most effective monetization model for your business. While Ross Pruden may have experienced better results by switching away from freemium, a more robust form of testing is required to find the optimal monetization method for your business.

    Take for instance, Lavasoft. They use a freemium model with great success, but they have a very unique implementation with TrialPay. In Lavasoft's case, the freemium business model has generated millions of dollars in additional revenue that they wouldn't have made otherwise. Here is a case study sharing the details: http://bit.ly/a6SjSS

    Also, it is appropriate for software startups to understand all the ways other successful software companies monetize before they commit to any model. 184 successful software companies share their best customer acquisition and revenue generating strategies in this report: http://bit.ly/adkfYY

    It may very well influence how you decide to optimize your company's software monetization and customer acquisition strategy.

     

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  18.  
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    vivaelamor (profile), Sep 5th, 2010 @ 5:01am

    Re: Going Beyond Freemium

    "It may very well influence how you decide to optimize your company's software monetization and customer acquisition strategy."

    You sound like the sort of person who might actually come up with a word like 'freemium'.

     

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  19.  
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    Andrew Olerio, Sep 30th, 2010 @ 11:29am

    Mike, well written. For another great blog post on freemium not working, check out http://www.softwarebyrob.com/2010/08/18/why-free-plans-dont-work/. Also, David Skok of Matrix Partners has a great blog post on the topic, The Power of Free, which can be found at http://www.forentrepreneurs.com/business-models/power-of-free/

     

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  20.  
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    Justin, Nov 10th, 2010 @ 7:37am

    That was a really great article. Nicely put.

     

    reply to this | link to this | view in thread ]


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