Tuesday, July 24, 2012

To "Freemium" Or Not To Freemium, THAT Is The Question!

Yesterday, I read a controversial blog post by Rags Srinivasan on Gigaom -- titled "Freemium Has Run Its Course."  "Freemium," of course, refers to the business model used by many online/tech companies in which customers are given a choice of using either a "lean" free product or a more "sophisticated" feature-rich paid version of that product.  (The free version is intended to entice a broad swath of customers to try the product, so that some meaningful percentage of those free users ultimately upgrade to the paid version in order to get more of what they want.  In this way, the free version is properly considered to be a marketing expense).

In any event, Rags obviously chose his "Freemium Has Run Its Course" all-or-nothing conclusive title to (1) induce readers (like me) to read his post among the other billions of posts yesterday, and (2) generate lots of passionate responses from those readers (like me) who were baited by the title.  Bravo Rags!  Check and check!

Now, let's cast aside Rags' blogging tactics (which I commend, by the way, because he succeeded in creating this dialog which is much of the point anyway) and, instead, focus on the substance of his post.  Certainly, as Rags himself concedes in his own comments, the question "To Freemium or Not to Freemium?" does not intelligently lend itself to one black and white one-size-fits-all answer ... except for one ... and that is, "Well, it all depends ...."

Here are just some considerations/guidelines/reality checks on whether a Freemium model is right for you and your business, based on my experience with several companies that have effectively used it (including both former companies SightSpeed (consumer-focused video chat) and Musicmatch (consumer-focused online music software and services)):

(1) at the risk of stating the obvious, freemium rarely, if ever, is the right choice for products that target enterprise customers.  Enterprise products, if worth their salt, offer compelling value to customers based on significant (and frequently massive) investments in R&D.  Enterprise products generally offer significant depth for the target niche market -- a market willing to shell out significant cash if convinced of the value proposition.  And, in these cases -- in Rags' own words -- "You do not have to be ashamed of making a profit."

We fall into that camp at my company, online video technology leader Sorenson Media, in which we have invested tens of millions of dollars over the years to develop differentiated and proprietary professionally-focused video solutions.  We don't employ a freemium model.

But, we do offer the freemium model's cousin -- i.e., "Free Trials" -- as an integral part of our business model (and, importantly, to facilitate pure customer satisfaction).  Free trials -- in which we offer prospective customers the full paid product for a limited period of time -- are a frequently used enterprise-focused tool so that those prospective customers can see the product benefits first-hand before they drop down a chunk of real meaningful change.  If an enterprise customer-focused company is confident that its products offer meaningful and valuable benefits, then the free trial is frequently the right thing to do.

(2) Based on the discussion, and by implication, the freemium model is primarily a consideration for consumer-focused products and services.  That fit the bill for the consumer-focused online video chat and music products of my two former companies SightSpeed (acquired by Logitech) and Musicmatch (acquired by Yahoo!).  And, in the consumer case, the answer most definitely is not black and white (I again refer you back to the comments in Rags article which sufficiently detail some of the considerations).

One significant consideration of whether the freemium model is right for you is whether the "network effect" is important to your overall customer experience -- i.e., a critical mass of customers.  In the case of SightSpeed -- i.e., a consumer video chat application -- we employed a freemium model not only to monetize via the upsell, but even before that to propagate our video chat application outward as much as possible (and with the least amount of friction) in order build adoption and a directory of users.  The more users, the more utilitarian and compelling the overall customer experience.  Without users, after all, there would be no one to call!

So, "To Freemium Or Not to Freemium" is a question properly asked as you build your overall consumer-focused business and business model.  And, there are no absolute answers here.

On the other hand, Rags' title -- "Freemium Has Run Its Course" -- is just a tactic used to get you to really think through the issues.

In this way, perhaps Rags will lead you to ultimate riches ....

... pretty clever, eh?  (okay, not so much ....)