Be Selective and Make a Point, Any Point

freemium-bag2One of the great things about blogging is that you can pick one aspect of an argument — any aspect at all — and comment on it. Apparently Jason Fried of 37 Signals didn’t agree with something I wrote about the freemium model. Using it as a springboard, Fried argues in a blog post of his own that “the bar for success in our industry is too low.”

Then yesterday a piece pops up on Gigaom called How Freemium Can Work for Your Startup. This piece references the “Using ‘Free’ to Turn a Profit” New York Times piece. Om Malik says “And it in reading Damon’s article, the qualities of a successful freemium product finally became clear to me.” Then in the next paragraph Om acknowledges that Evernote doesn’t generate enough revenue to turn a profit. Later he says “I’m sure there are many more ways to build great freemium applications, but one [Evernote] has stood out for me above all the others.” The product may be excellent, but until their business cracks a profit I don’t see how Om can say it’s a model for how to build a freemium application (or a business).

Fried’s comments jumpstarted a spirited debate on Twitter, with many of those tweeting in support of his stance. Lost in the hullabaloo, however, was the fact that my post was actually about the qualities of a good freemium application, some of which are regularly preached by Fried himself. My headline — How Freemium Can Work for Your Startup –- pretty much says it all.

I used Evernote as an example of a freemium application that’s successfully converting its free users to paid ones. Indeed, the more people use an application like Evernote, the more likely they’ll be to pay for a premium version of it.

Fried’s partner in 37Signals, David Heinemeier, once wrote of Basecamp, their flagship application.

It didn’t turn into a smash hit overnight either. We ran Basecamp for a year alongside our other obligations before it was doing well enough to pay all the bills and afford our full-time attention. Most good businesses didn’t become great ones within the 12-18 months that the poster boys of the startup lottery did.

If the ensuing success of Basecamp is any indication, then patience is a virtue. With that in mind, perhaps we should give the companies that are trying the new freemium model a chance to blossom. With enough time — say, 12-18 months — the likes of Dropbox and Evernote have a good chance of becoming profitable, largely because they, much like Basecamp, are striking a chord with their customers.

I like to think of this transition from free to premium as similar to the one made by a baseball player starting out in the minor leagues and working his way up to the majors. Like any good player, freemium applications can increase their odds of success if they follow some basic tenets. Many of the ones I outlined in my post were the result of conversations with several developers over an extended period of time.

The reason I wrote the post in the first place was because this is an emerging business model, and one worth paying attention to. If you read the full article (not just the selection that Fried focuses on) you will see that I stayed away from the profit discussion because of how young the startups I wrote about are and how nascent the model remains.

Of course Fried is right about the need to be profitable. No one, least of all me, is arguing against that most basic principle of business. But when you’re using a new business model, that can take time. I mean, it took nearly a decade for Amazon (whose founder/CEO Jeff Bezos, incidentally, is an investor in Fried’s company) to turn a steady profit.

If Fried read this blog on a consistent basis then he would know that we consistently examine the need to be profitable and the best way(s) to make that happen. In particular, we’ve talked about the correlation between viral growth, traction and revenues. That’s because, in the end, we all want to know what — other than advertising — will work. I think on that point Fried and I do agree.

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