Freemium -– a business model that works by offering basic services for free but charging for premium features — is being viewed as the new way to do business in startup land. It has its champions and its detractors. But if you want to make it work for your startup, here are some tips.

Earlier this year, I asked the readers of this blog and those who follow me on Twitter what the one app was that they couldn’t live without. Among the most common names offered up were Evernote, Remember The Milk and Dropbox.

Since then, those three apps have become indispensable to me as well. And they all happen to be benefiting from the business model championed by venture capitalist Fred Wilson known as “freemium.” They’re not alone — numerous companies have walked down the freemium path since he first wrote about it in 2006, among them Freshbooks, Jott.com, Box.net and of course, the granddaddy of them all, Flickr.com. More recently, San Francisco-based startup Xobni eschewed the ad-supported model to go the freemium route.

One of my old editors, Damon Darlin, now at The New York Times, over the weekend wrote about the success being enjoyed by Evernote. And it in reading Damon’s article, the qualities of a successful freemium product finally became clear to me.

As Darlin notes, Evernote is making about $79,000 a month from its paid services –- not enough to turn a profit. And while just 0.5 percent of its customers convert to paying the company $5 a month (or $45 a year) within 30 days of signing up for its free service, that figure rises to roughly 4 percent if users have used the free version for closer to a year. Why? Because Evernote is a digital drawer of sorts. The more you use it, the more you cram into it until — sure enough! — you have to get a bigger drawer, and that costs money. Given how in harmony the usefulness of this app and its level of engagement are with one another, Evernore more than any other app seems poised to see its customers switch to the paid model. Now all the company needs to do is figure out how to make it even easier to digitally clip and cram content.

Remember The Milk, on the other hand, is a simple to-do list, albeit one on steroids. In other words, it has a narrow but deep focus on one single domain. Not only have the folks at RTM made it dead simple to add tasks and delete complete ones, they have seamlessly integrated the most important part of any to-do list: reminders. Remember The Milk will send you reminders of your tasks in the form that works best for you: via SMS on your mobile phone, IM or email. It even mashes up the location of your tasks with a map.

However when you use the app while on the go (such as when you’re actually out running errands), its utility grows exponentially. And that is precisely what RTM charges for: its pro version includes support for mobile phones such as iPhone, BlackBerry and the Windows Mobile devices. With it, you never have to wait to be in front of your computer in order to start making a to-do list. The difference between the free and premium offerings is very clear, which as a buyer makes your decision to pay up an easy one.

Finally there’s online storage-syncing service Dropbox. While it disobeys the most basic rule of freemium — “no downloadable apps” — Dropbox more than makes up for it by being easy to install and even easier to sign up for. You start out with 2 Gb of storage space for free, which doesn’t take very long to use up. At that point you have two options: switch to another offering or buy a premium package. But while the thought of paying $120 a year to upgrade to the 50 GB package may make you balk, chances are the $9.99-a-month subscription service looks pretty affordable.

That’s why the premium versions of some of the more popular freemium apps are really subscription services. Which speaks to point No. 6, that if you encourage your customers to use your application often, the easier it will be for you to sell them something else in the future.

A few weeks ago I decided to move all my data from Dropbox to another online service, Jungledisk. The reason: I wanted to archive all my folders and information from 2008, for which I needed more storage than my current Dropbox account could offer. It was about 45 GB of data, which meant I’d have to upload it to Jungledisk, and even with a really fast connection, it would take forever. Suddenly it dawned on me that the more stuff I put on Dropbox, the more difficult it would become for me to switch to another service. Instead, I upgraded to 100 Gb a year.

Same goes from Evernote, which is becoming more valuable to me by the minute. Again, even if I wanted to go elsewhere, it wouldn’t be that easy to switch.

I’m sure there are many more ways to build great freemium applications, but one has stood out for me above all the others. It comes from Phil Libin, CEO of Evernote, who tells The New York Times, “Our product is our marketing.” Indeed — that’s where it all starts — and ends.

Recommended reading: Check out Andrew Chen’s piece on how to create a profitable freemium startups.

  1. Good article Om. Dropbox, Evernote and RememberTheMilk are three freemium services that I couldn’t live without either!

    We’ve been spending our time working on freemium within the education space. Currently we offer limited #s of free classes and a paid service which offers unlimited access to premium classes for a monthly fee.

    I think the big challenge with freemium is two-fold. First, deciding what to charge for and what to leave free. Or, as the meme spread a while back, having too much “free” and not enough “mium”.

    The other thing is realizing that free users should, if you’ve designed your service right, be more likely to convert over time (your examples of Evernote and Dropbox are evidence of this). However, that is challenging for services that are just starting as there often tends to be a “warm-up” period required before the conversion rates are significant.

    Modeling these things is tough but on the other hand they do get easier with time. Kudos to you and folks like Andrew Chen for writing helpful stuff for all of us entrepreneurs pursuing freemium and subscription biz models.

    1. Joe

      I think the key is to actually think about free/premium models from the very beginning. In my conversations with good product managers, I have learned that good applications have strong concepts from day one and are very clear on what they are going to charge for, when the time is right.

      Dropbox guys have been pretty much on the ball when it comes to that simple focus. I think they didn’t quite know how much or what they were going to charge, but they knew what was the basic storage and how they will get people to premium tier. More storage. In their case.

      If you really think about it, what we are doing here at GigaOM is no different. GigaOM and GigaOM Pro are two distinct offerings and they are offering fairly unique services to both type of users.

  2. Om, this is a great description of three applications that I use every day. Others that I have come to rely on include 1) Zumodrive, a Dropbox-like competitor that also allows variable amounts of local storage to be consumed, 2) Google for email and Apps (Spreadsheet, Documents, Presentations, Calendar, Tasks, Sites) and finally 3) Instapaper which has changed the way I read online content.

    My only disappointment with this article is that you left maybe the most important point for the final paragraph with no follow-up. You quoted Phil Libin, CEO of Evernote, in The New York Times saying “Our product is our marketing.” You agreed.

    We tend to forget that it all begins and ends with building a product or service that people want and need. Next it is vitally important that we deliver a flawless user experience. All of these companies do that exceptionally well. The “Free” part of Freemium must be compelling because without that, users have no motivation to upgrade to premium services. No one really wants more of a useless hard-to-use application.

    1. Andrew,

      If you read my blog for a while, you know that I am a big fan of brevity. Sometimes, a guy just says something so perfect that you can’t add anything to it. Phil, did a great job of summing the most important point.

      Glad to see you enjoyed the article. Of course, if there are other things you would like me to write about, drop me a note. That is still a free service in gigaom land. :-)

    2. “… it all begins and ends with building a product or service that people want and need. Next it is vitally important that we deliver a flawless user experience.”

      All done with …Marketing. Remember the important part of marketing is listening. listening to what users want and listening to their feedback in order to make sure your users (your market) are getting a flawless user experience.

      “marketing” is much more than advertising (which I’m assuming you are interpreting marketing as). My first marketing textbook had 22 chapters. only 2 chapters were about advertising.

      1. Mike –

        I am clear on the difference between marketing and advertising. My comments were an attempt to remove them both from the equation and that was maybe a mistake. However, I think we are both saying the same thing.

        Some product guys would argue, but you are absolutely right that the listening part of marketing is what should drive the product. It’s much easier to perform the other marketing tasks when, in Phil Libin’s words, the product is it’s own marketing. My interpretation of those words is that the product is a direct response to the needs and feedback of it’s target users.

  3. [...] one of the leading online blogs, has just posted a brilliant article on how Freemium can work for your startup. The most high profile ‘freemium‘ model in the UK market is the Globrix property [...]

  4. [...] Om Malik looks at how to create a sustainable freemium business – GigaOm [...]

  5. I have recently become a heavy Evernote user and by the 2nd month I dropped my $45 on the table for a year’s premium membership. Not only is Evernote great, and it certainly is and you should try it if you haven’t, but I continue to own my data. I can get at it whenever I like. Should they go belly up 2 minutes from now I have a synched copy on my desktop. Should they start charging too much I can keep accessing my local data, export it to another application and even use their API to do the work for me.

    For me it isn’t just about getting me hooked its about knowing that I’m not stuck. I never would have signed up if I thought I was going to tied to it in the long term (unless I want to be). I like the freedom of knowing I can “take my toys and go home”, plus I think it gives the company the motivation to keep innovating and making the product better. Its just like a cell phone company. You get much more responsive service when you only have 2 months left on your contract compared to when you have 2 years. Maybe I’m just more sensitive to this kind of thing, my cell phone is prepaid after all.

    1. Joshua

      What our describing is a new rule: how to make data be your best friend and help you build a great business. The customer have access to his or her own data is important and should be the key component of any data-based service.

      1. Therein lies the dichotomy. A primary reason for switching to a paid subscription for many freemium services is the entrenchment of a user’s data … yet the lock-in, IMHO, is also a primary deterrent given that so many startups fail in the first place. After all, the only thing worse than using a free service you love that goes belly up is paying for a service that goes belly up.

        I believe that adoption rates would be higher if companies focused more effort on instilling confidence that the startup’s business model is as safe as the data you’re uploading to their web site.

        Something tells me I’m not the only person who sees a new site and questions even investing the time/effort of loading information into it because I question if they’ll be around in 6 months.

  6. The validity of the Freemium model does not require further proof, what is required is proving the free model. the one Sun uses- where it basically gives stuff for free and expects customers to only as an insurance policy of something going wrong. More here http://blog.gandalf-lab.com/2009/03/death-of-billion-dollar-opensource.html

    The key in Freemium is to have a forced pay option once you know that the customer is hooked on

  7. [...] post by Om Malik this morning has me contemplating an idea that I realize no one who can make the decisions will buy [...]


Comments have been disabled for this post