Freemium has run its course

58 Comments

  • “We are now seeing the end of the freemium model — signing up users for free and trying to upsell,” said Christian Vanek, CEO of the Boulder-based SurveyGizmo, in a recent phone conversation.
  • “6.5 million unique users is not all that it’s cracked up to be. I don’t want hits. I want revenue. I want a real business,” said Matt Wensing, founder and CEO of Stormpulse, in an interview with Mixergy.
  • “Make a product people want to pay for,” said Marco Arment, founder of Instapaper, in a Planet Money interview.

Three easily available examples do not make indisputable evidence against freemium. Just like Dropbox, Evernote and RememberTheMilk do not make a case for freemium. But these three quotes reflect a return to the roots of marketing — starting with customer needs, choosing the needs you want to serve and getting your fair share of the value created.

In the oft-cited Hershey’s experiment that started the free-mania, behavioral economists from MIT tested customer preference for Hershey’s and Ferrero Rocher chocolates at two different price points. For one group, they offered Hershey’s at one cent and Ferrero Rocher for 26 cents. For another, they offered the chocolates at zero cents and 25 cents respectively. When the Hershey’s chocolate was free and the Ferrero Rocher chocolate was 25 cents, 90 percent of the participants chose Hershey’s. $0 price seems to have done the magic in driving customer adoption. The result became the foundation of the freemium school of thought — free is free marketing. First use the free version to drive adoption and build a large customer base, and then find ways to monetize that base by upselling the paid version and selling extras.

Ninety percent is an eye-catching statistic in books about the freemium model, but let’s stop and ask some basic questions about running a profitable venture.

  1. What do you know about your target customers?
  2. What urgent needs do the free and paid versions meet for these customers?
  3. Will the products remain relevant in the customers’ future?
  4. If fifty other sellers stand next to you and give away free Hershey’s chocolates, Skittles etc., what will happen to your share of the market?
  5. As a startup founder, which customers should you focus on first with your limited resources?

The five questions above are the key principles of marketing. Unfortunately, choosing a freemium model does not help answer these questions. Worse, it muddles the answers by misdirecting startup founders to focus on the product rather than customer needs. Stormpulse, a Web-based platform for managing weather risk, learned that free can attract all the wrong customers. The company’s CEO Matt Wensing told Mixergy, “Free brought us recreational users who tried us for superficial reasons, while those who found real value were the enterprise customers.”

Here is an alternative, which unlike freemium is neither new nor a fad:

Start with the customers, not your product. The product could be new but the customer needs are not. Whether it is a “bits” product with zero marginal cost or “atoms” product with non-zero marginal cost, customer needs come first.In fact, it is not a product until you have identified a set of customers whose needs you meet and who want to pay you for that value.

Make your choice. Stormpulse and the online survey platform, SurveyGizmo, both realized that a successful strategy involves making choices. They couldn’t go after every customer who is willing to try out their products. Instead, the leaders at both organizations chose to focus on enterprise customers, because these customers not only value the products but also have the budget to pay for them. Getting 90 percent of customers to take free Hershey’s chocolates with the hope that they will pay more for extras or will upgrade later is not a strategy. In fact, the presence of free products drags down the expected value of a customer. Which is another reason why SurveyGizmo decided to downplay its free offering.

Get your fair share of the value created. As Instapaper’s Arment said, charging for the product is still the simplest of all business models. Product innovation does not mean business model innovation. If your product adds compelling value to customers, charging for it is simply getting your fair share of the value created. You do not have to be ashamed of making a profit.

A small percentage of a very large number is indeed a large number, but can your startup stay solvent while you wait for the conversion to kick in? Freemium only offers the hope that non-paying users will fall in love with your product and start paying for it. Shooting an unlimited number of free bullets and hoping some will hit the target is a shotgun approach to monetization. It’s time to take a deliberate and targeted approach. Or as Vanek told me in our conversation, “it is time to retire the shotgun.”

Rags Srinivasan is a management professional who specializes in product strategy and strategic marketing. He is currently working on big data products. He blogs at Iterative Path and tweets at @rags

Feature image courtesy of Flickr user ColinGordon

58 Comments

Ken Rugg

I recently had the privilege of hearing Evernote’s CEO, Phil Libin speak. One interesting point that he made was that a key consideration when choosing the best approach to monotizing a service or product is to determine when it is at its peak value.

Traditional products like cars or a bowl of noodles lose value over time so selling them is a good way to monotize. Other products like news papers or cable TV have consistent value over time, so a subscription or advertising based model can be a good fit. On the other hand, for products that *increase* in value over time and use, such as those that benefit from network effects, the accumulation of data over time or both, like Facebook or Evernote, delaying monotization with a freemium model can work well.

Barbara Tallent

Actually one of the enablers of the freemium model is the low cost of starting up and maintaining a service business these days. It was amazing for us to run a free service and have great conversations with our user base about what worked, what doesn’t, and what they are willing to pay for. The market research we were able to do with over 100,000 users of the product really paid off for us and cost us very little. As a market research tool, I’m a huge fan of the freemium model.

Robert Pease

Thoughtful post and believe much of the reason freemium has spun out of control is a result of the metrics of “success” that have become pervasive for early stage companies to measure themselves on and show “traction” to investors. Ends up as a bit of smoke and mirrors. Removing the friction to get a product in the hands of a potential customer is a good thing and a web-based, free-trial model does that so freemium has value in that role. I have found that the problem with free users is free users. Lots of feedback but hard to separate what is in the “it would be cool if” category vs. “i would pay for this if” category resulting in mixed signals.

decartes & kant

Offer anything free for a short time or small amount, one gets used to it and wants more so has to pay for it , free things great commercialism.?

Pat Toothaker

Reblogged this on Mid-Core Gamers Network and commented:
The “freemium” model, known as “free-to-play” in gaming, has been prevalent throughout the rise in mobile gaming. Rags Srinivasan at GigaOM see this as a risky “shotgun approach to montetization.” You may quickly build a large user base but there is no guarantee of converting that user base to revenue. While Rags’ observations are not about the games industry he makes many valid and applicable arguments. The freemium model has brought success to many developers, especially Zynga (FarmVille, Words With Friends). The recent news of Zynga’s weak earnings may support these concerns about monetization of the freemium model.

David Gates

This article brings to mind something a user should consider when they start using a product / service: “if you are not paying for something, you are the product – not the customer” (which i think comes from a discussion on Metafilter).

The freemium model only has legs for a business if you can see how you are going to monetise the users (be they customers or product for someone else). In my experience, there is too much focus on “just getting users” without looking beyond that point. Remember the underpants gnomes in Southpark?

I wrote an article recently on the Rapid Innovation Group blog seeking to kick away the option of the oft-occurring simplistic response to stage 2 in the underpants gnomes plan (“Adopt the Anything But Advertising Revenue Model”).

Buck Baran

It seems the curent mindset is that people are expecting services/goods for free. Why buy the CD/dowmload when you can hear it on the I-radio at your request? Free also suggests a lack of confidence in one’s service/good.
1. My target customers have nothing in common except they are fans of my music.
2. Customers do not know what they need. They need to be told.
3. Relevancy is up to the customer.
4. If everyone gives away their service/good (without VC support) they will go out of business dragging me down with them.
5. My focus is on the customers who LIKE and are FANS of my music and will decide to purchase because they can’t hear my music anymore in the “Cloud.”

Scott Lacy

Spring Metrics began life as a freemium business. We quickly learned that in our space, the freemium approach was a high-resource, low-yield path to building a business. We attracted too many of the wrong folks, who in their zeal to check out the latest free “thing,” didn’t spend much time learning what our service was all about. The support burden became onerous, and our conversion rates to paid weren’t high enough to justify the model.

We’ve since evolved our product to where it has obvious value, and our paying customers now spend roughly 3x what our previous customers spent. The move away from freemium also allowed us to shift to a concierge support model in which we spend a LOT of time with our paying customers. That increased engagement with paid customers is a reward all of its own. When we call our customers, they call back. That didn’t happen in the freemium era.

If you’re interested at all in how moving away from freemium can impact your customer experience, I blogged recently on the subject: How to Love Your Customers.

John Rockefeller

As a customer I am infinitely more likely to upgrade my already paid account to a higher level paid account. But if I have a completely free account then have to start paying once I upgrade, I will likely look elsewhere.

Bottom line: if you run freemeium, charge a small token amount even for your most basic service.

contactbrendan2011

Sorry, usually I’m write there with GigaOM articles, but in this case I have to disagree with your conclusion.

You begin with 3 quotes from people who are very obviously against freemium, or it is counter to their revenue model. Then you proceed to state these aren’t evidence against freemium (well, of course they are 3 VERY biased quotes) and how because of this, successful freemium companies aren’t a case FOR freemium. Wait, why not exactly??

You then continue to cite nearly 100% anecdotal references to why freemium is ending with absolutely nothing to back it up with.

Really weird conclusions are drawn from this article, like if you’re using freemium- you’re not putting your customer first. How does this make sense exactly? The freemium model makes the product available to more customers, for free, and giving them additional value if they want it. Here, the customer is getting the level of value they want and in many cases for the price they want. I also disagree that freemium has any effect whatsoever on the quality of your product, another conclusion that is seems was made up out of thin air in this article.

Karan sood

It’ll be wrong to discount the freemium approach just yet. Aren’t some of the most successful websites currently based on it, take linkedin for example. 80/20 and long tail rule still hold true in most businesses. I think the bottom line is understanding the free customers and determining if there needs will change over time.

Kevin Garber

The thing is that for most start-ups one of the biggest “problems” is the marketing problem. Freemium models can often help create a self-perpetuating viral marketing funnel which is very valuable to start-ups. I in fact would like to argue the other way, that ad models would often be better suited to freemium models.

Diane Strahan

Freemium will remain just as free trials, coupons and promotions remain. As long as company valuations are based on eyeballs, engagements, registrations, adoption growth —- customers regardless of whether they are paying ones or not —- freemium will be a business model with legs and life. Twitter, skype, and so many others before and beyond evernote and dropbox use and have done well with this business model. I agree it is more of a business model debate than a “bring a service to market” debate. There are lots of financial models, freemium is one that works well where marginal acquisition costs are low to 0 and scale is easy to support at little to no cost.

Rohan Jayasekera

Like some other commenters, I agree with much of this post but think it engages in unwarranted criticisms.

(1) “Start with the customers, not your product” is presented as an “alternative”. But product-market fit applies regardless of monetization approach, and to imply that those choosing a freemium model ignore it is just making things up. Yes, some of them do ignore it, but those aren’t the ones who deliberately choose freemium as a thought-out strategy, such as Evernote.

(2) It takes quite a lot of nerve to name Dropbox, Evernote and Remember The Milk as not making the case for freemium without saying why their success cannot be repeated. I believe it can — in some situations.

This article would more accurately have been entitled something like “Don’t Go Freemium Without Considering the Alternative”. Instead it claims that freemium has run its course but doesn’t back that up.

Rags Srinivasan

Rohan
Business model is creating value and capturing your fair share of it. If the purpose of product-market fit you mention is to find a need and define a product for it, why is charging for the value-add not considered?
When users sign up for the simple reason it is free, we fail to get the key information “what job is the customer hiring the product for”.

There are likely many reasons Evernote or Dropbox succeeded. And we cannot say whether it would have failed had it decided to charge for it after a free trial period.

On your second point, 3% to 10% of startups live past 3 year mark. The baserate says the most likely outcome for a startup is not success. Looking at few successful companies that made due to variety of reasons (one of which is Freemium) and saying that is repeatable is wrong.

It is surprising to see freemium is treated as accepted truth while strategic marketing is seen as fad.

Rohan Jayasekera

It is equally surprising to see freemium so completely dismissed. You assume that anyone who chose freemium failed to consider the alternatives, but you have presented nothing to support that, instead referring to a bunch of irrelevant things. Is it so impossible for you to accept the possibility that freemium might be the best choice in some cases? Just because it wasn’t covered in B-school doesn’t mean it can never work.

Top Scientist

The experiment doesn’t show what you imagine. In particular, the percentage of people who choose the more expensive chocolate isn’t relevant. It’s the raw number.
How many people chose no chocolate at all when the cheapest option was 1 cent? It’s not clear if that was even a valid response in this highly artificial experiment, and if it was the data isn’t given. And even if the figure was low, it may not be low on the Internet, where dragging out your credit card to make a small payment is a large hassle.

Atomic Tango

Steve Jobs didn’t care what customers needed – he disdained research. He created products first then made customers want them. Millions of artists and fashion designers and engineers and chefs and garage bands and novelists and engineers draw from their TALENT and IMAGINATION to create products first, then they find the people who might want them in a worldwide market. While there’s nothing wrong with determining what customers need and serving those needs, don’t belittle those who have an idea not based on customer research. Indeed, during the research phase, the public has rejected many products – the minivan, telephone answering machines, Red Bull, and “Seinfeld” to name a few – only to consume them voraciously later on. Customers often just want more of what they already know at a lower price. Meeting customer needs is great, but so are innovation and invention.

Rags Srinivasan

I do not have data to refute your claim about Steve Jobs. Neither is there enough data to support it. Nevertheless that is not relevant to the case being made here.
None of what I recommend takes away talent, imagination, or creativity. We are talking about running a viable venture here, one that would thrive over next 5, 10, 20, 40 years not a creative artifact like music or painting.

Certain popular product research returning wrong results, as you cite, are a consequence of bad starting point, bad research and data collection and bad analysis. The examples do not negate the need for starting with customer needs.

However you look at, value is created by filling customer needs. By needs we don’t limit ourself to utilitarian needs, we include emotional needs as well. If the needs exist then they are either met by something inferior or by nothing at all.
Customers may not know how to fill the need that is where the talent, imagination and magic of innovators come into play.

Felipe Coimbra

Yep, we decided to not even offer free trials for half of our products at 63squares.com We found it that offering a 100% money back guarantee to be a better approach.

Jeffrey R. Fish

As I continue to get updated apps on my iPhone for free, I rue the day they all (hundreds?) have to be upgraded for a fee. And I wonder how many apps I (or others) will chose to upgrade or just delete. The model of ‘free’ definitely has its flaws.

That said, your use of Stormpulse is a bad one. Offering their service on a (flash-based) website for free and them expecting others on their iPhone to pay $500 (!) to use an iPhone version does not strike me as understanding your market. Not offering options of price for more robust versions of the app is simply bad business strategy. And they still haven’t listened!!

Sure they may get enterprise users to sign up but I wonder how many people in NYC would have signed up for a $5 app when the hurricane was about to hit last year. I guessing that it may may eclipsed their business sales. Not to mention reenforcing their brand/name as the go-to place for storm tracking in a world full of mobile users.

For Stormpulse: Freemium isn’t the issue….it’s lack of scalability.

Matthew Wensing

Appreciate the opinions but your facts are wrong: Last year we charged $500 for an entry-level Enterprise subscription (~$45/mo), which included the iPad app for free. This is not the same thing as charging $500 for an iPhone app.

The idea of charging a one-time, App Store price ($1-$10) for a product that delivers its highest value to a small niche product is not a good one. How many sustainable businesses are being built on one-time $5 apps?

Not sure what you mean by lack of scalability.

gregorylent

run it’s course? ok, let’s OUTLAW freemium … that would help to get the chaff out of the internet airwaves ..

stylifyyourblog

Freemium Model cannot be left out completely , the biggest names in the internet industry follow this Model and its been very effective in revenue generation.

But the thing with it is that users gained from this approach are very less likely to turn into customers. Therefore a passive way of earning revenue has to adopted like Advertisements.

In these times ,making a service fully paid is a sure short way to lose a lot of exposure & attention that could have been otherwise earned easily . Once you have the attention , providing a premium version of the service will surely reach a larger audience and have higher adoption

Rags Srinivasan

Some of the startups that gained exposure and attention happened to have freemium does not imply any new venture starting with free will gain that level of attention. Free is not free marketing nor it ensures success.

I would classify earning revenue through advertising, which predates the origin of freemium is a different business model. This is a 2-sided market – you attract one side with entertainment/content and sell that to another side as Ad revenue.

Kwpolska

$75/mo for a survey service. Seventy-five dollars per month. Are they crazy? Who in a right mind would pay so much for something like that? Sure — some services are more expensive. But they let you use a free account, too, without hiding it in a bloody footprint!

Rags Srinivasan

Those who see the $75/m price as high are likely not the target segment or do not yet see the value of the product. For most who just need a survey tool for what Matt called as “recreational purpose” there are other alternatives. The pricing is a result of their understanding of customer segments and their needs.

d

Disclosure: I used to work at SurveyGizmo.

There are lots of folks who pay more, and if you look at the feature list you’ll see that there is a boatload of difference between SurveyGizmo and low end survey tools.

Janna Bastow

It can be an effective approach, but it’s certainly not efficient.

It’s only effective if the company can afford to provide their product for free, en masse. If they can’t, they’ll burn their resources before they hit a level of usage that creates a compelling product that adds value to a different type of customer (a paying one). These companies need to be backed heavily, or have a higher-than-average upgrade rate – Freemium isn’t suited for everyone.

In any case, it’s not efficient. A lot of effort and resources need to go into supporting a freemium base of any kind, whether the upgrade rate is high or not.

In B2C applications, freemium offerings are more effective – if only that consumers rarely pay for the types of services that applications offer. It’s unlikely many would pay for most of what Twitter offers. The B2B end of such services look at how they can provide tangible value, such as the exposure gained from Promoted Tweets. While a low percentage of users opt for this, it’s charged high enough to justify it, and the company is backed by enough power to keep the freemium product for the rest of the userbase stable.

As soon as you start looking at pure B2B services, there’s very little reason to consider a freemium model.

Dmitri Leonov

I agree with Rags wholeheartedly (http://mashable.com/2012/06/05/freemium-model-doesnt-work/). Certainly freemium model works for some companies, but those companies have a) fantastic product, b) network/viral effects and c) value that increases over time. Most companies assume freemium will work for them, because it worked for Evernote and Dropbox. That’s simply not true.

Matthew Wensing

Thank you, Dmitri. Nailed it. The only viral/network effect that matters to all startups is distribution. Once freemium accomplishes that, it may be time to reconsider the utility of the strategy for your business.

Kin Lane

I’m also bummed that Gigaom will now stop its free blog after this post. Freemium just doesn’t work. And we will have to only pay for access to the wealth of knowledge available at GigaOm.

Rags Srinivasan

I don’t speak for Gigaom. Here is my outsider observation.

Consider who they are targeting with what products and how they are monetizing it.

The Gigaom blog is targeted at a segment that has appetite for tech new and some analysis. They monetize this through advertising. That is a calculated strategy vs. a hope.

The GigaOm Pro is not targeted at the same segment that reads the blog. They target a different segment that values the actionable insight they get from meticulously researched reports and most importantly has wherewithal to pay for the service.

Kin Lane

The post is just too all or nothing for me. But I think that was intention of post.

Response to opening quote:

1) Alright COSTCO stop giving away samples. The sales funnel is dead. Long live the sales funnel!!

2) You have 6.5 Million users and you couldn’t sell any of them of premier features or anything that made money. I agree. Shut it down….it was a mistake.

3) Agreed. But are they mutually exclusive? I think your taking his comment out of context.

So if I offer freemium, I now can’t have a business model? I can’t have freemium and use a sales funnel to get to know my users and understand what they are willing to pay for?

Maybe if the post was titled…”The hard questions to ask before offering freemium”…it would be relevant. But there are so many ways Freemium works and doesn’t work…to discuss after title like that.

Black and white statements like this work for pageviews, but not for real business decisions. You have to get to know your industry and audience better.

Matthew

Re: #2: I’m glad we didn’t take that advice. We’re charging now and things are great. The problem was that our product does not lend itself at all to “premium features.” When the only thing you can give away is the only thing worth charging for, freemium isn’t the right choice (unless you’re VC funded).

Rags Srinivasan

Kin
Let us distinguish between a calculated and measured approach to marketing with trials and samples vs. getting as many as possible because with free and hope to convert them.
Sticking with Costco example, the customers are already there (because they paid $50+ a year) to buy many different things. The whole Costco strategy – segmentation, targeting, supply-chain, product mix etc – are overlooked when you look at product samples. Costco’s strategy and business model is not based on free samples.

Regarding point 2: If 6.5 million users do not see unique value in the product, have alternatives and willing to switch yes it is not worth serving them and instead choose to serve the segment that finds unique value and willing to pay for it.

Giving away a product for free -forever- and hoping they will become customer or create marketing is not sales funnel. Choosing the right segment to serve, targeting it with compelling positioning and offering them a product they want to pay is the preferred alternative.

Regarding business model – what is business model? It is value creation and value capture. If we choose to disregard finding out the value we add to customers and fail to capture any of it, there is indeed no business model.

Matthew Wensing

I’m glad we didn’t take your advice and “Shut it down.” Things have been going great since we shifted from freemium to free trials. Not all product-market combinations are compatible with freemium.

Vikrama Dhiman

Interesting. Mathew, what product are you associated with?

Steven Willmott

This is really a non-sensical article: Freemium models make sense for certain businesses and not for others. Sectors may change over time – but a title like the above is really just flamebait.

If you’re in a network effect market (e.g. dropbox, skype, …) where there’s cumulative value to all users due to new users, Freemium is an incredibly valuable strategy. If you’re in a non-network effect market it’s just a marketing choice which may be good or bad depending on the product.

Focusing on revenue is all very well – but revenue is the outcome of a marketing and sales process. It’s not the process itself. You’re ultimate aim is to reach paying customers of one sort or another, paying fees one of one sort or another – freemium or not is simply a question of the route to take to get there: wide accessible funnel + filtering or narrow focused sales team to pick and choose your targets. Both can work – but it depends on the market.

Rags Srinivasan

Steve
Revenue is not an accidental outcome of sales and marketing process. It is part of the business model. Freemium punts on the tough question on customer segmentation, needs and setting a price.

Atomic Tango

my typo: “Just LOOK at this article as a case in point…” (My kingdom for an edit or delete button!)

Atomic Tango

I agree with Steven. While I’ve never been a fan of Chris Anderson’s “Free” argument, we’ve certainly seen successful startups use the freemium model, such as LinkedIn. Just like at this article as a case in point: don’t we consultants give our blogs and articles away for free to the vast majority of people, in hopes of being hired by the few?

Ian Andrew Bell

Agree with the advice but not the premise. I agree with @rags that we need to focus on building stuff people want and will pay for, and there is a long-standing addiction in Silicon Valley to the monetize-later strategy, which I do think actually works where you have lots of big players looking to grow horizontally through acquisition and leverage their scale. That isn’t the case these days.

That being said, Freemium works. It is working at hundreds of startups in the valley and thousands of companies worldwide. Where Mr. Srinivasan may have missed the point is that in many Freemium-style businesses, value is extracted from the free users that benefits the business model as well.

Freeloaders could provide the eyeballs for ads or content created by paying users, they could be the “product” that is sold to paying users in a social context (ie. dating sites), or they could generate data through usage that sustains a corpus of information that other people wanna pay for.

Most likely, they could be propagating the brand/service and helping it get more customers as a benefit of being viral. This is the most obvious way. Free is almost never truly free, except when you have decamillions from ambitious VCs and hopes of selling to Y!/G!/MSN/AOL.

The statement that “Free is free marketing” is overly simplistic and not universally true. Being free, mated to the mechanics of behavioural virality and a fundamentally sound product value proposition, works better.

cubski

Very interesting article. While I do agree on most of the points, it is still evident that the “freemium” model is an effective approach. But I entirely agree that a company should start with there customers not their products.

Matt Sharper

“the “freemium” model is an effective approach”
no. its not

drewmeyers

That’s debatable. Many successful companies have taken that approach…one of which is my former employer, Zillow. Which is now a public company and doing quite well.

drewmeyers

That’s debatable. Many companies have succeeded with this model – one of which is my former employer Zillow. Now a public company.

Lucas

Would you mind adding more to the conversation than simply dismissing other peoples comments, maybe add fill out your argument and add some evidence?

Atomic Tango

“a company should start with their customers not their products” – no, they shouldn’t

Comments are closed.