business models

Is Freemium Losing its Mojo?

By Mark Evans in Startups 4 Comments Tags: , ,

In theory, the freemium business model sounds compelling. You give users a healthy taste of a service, and then sell them a premium version once they’re hooked. It’s sort of like the free samples you get at the grocery store.

The problem is most users are perfectly content with the free service, which means less than 5% of people upgrade to the premium service. As well, people have high expectations about a free service as many of them also expect good customer service.

For startups, it can be an exacerbating situation because they have demanding customers who are unwilling to pay for a free service they like and regularly use. This frustration was highlighted in a blog post by Tyler Nichols about his Letter from Santa service, which attracted lots of traffic but little revenue.

For startups, freemium is a tempting option because it lets them attract users and, at the same time, create potential for revenue down the road. When done right, freemium can work really well or, at least, enough to build a business. Some good examples are Dropbox, Freshbooks, Skype, LinkedIn, Flickr and Pandora.

Does a Free Service Have No Value?

On other hand, freemium can also fail because offering a service for free can suggest the service has no value, even though many users might find it valuable. It explains why premium services often sit quietly the corner, while the free service is a raging party.

While there are many good things about freemium, my faith in it has dissipated in recent months. While it’s a better option than trying to get a lot of users to attract advertising, freemium can be tough slogging and expensive to maintain and support.

It’s one of the reasons why I like startups that offer paid services without a free option. These startups believe their service has enough value that customers should pay for it.

The danger may be the high expectations of free make a paid service less attractive, but the upside is customers that do sign up generate revenue. It means a startup can become a business with a modest number of customers.

While it would be inaccurate to dismiss freemium as a viable business model, I do wonder whether freemium’s appeal is beginning to wane as startups look to gain traction and, at the same time, revenue to support their growth.

What do you think? Can freemium be a successful business model for startups? If so, what are the keys to making it work?

If Users Want to Pay, Let Them

By Mark Evans in Startups 1 Comment Tags: , ,

While on vacation in Quebec this week, we stopped a campsite at a national park had featured wonderful showers.(Note: When you’re camping, any shower is wonderful!). So it was with some excitement I headed towards them with a vision of rustic luxury.

Sadly, the showers required two quarters to work. Sadly, I was standing there with $1 and $2 coins, and there was no change machine that could spit out the quarters. If if was possible, I would have paid more than 50 cents in a heartbeat.

So what’s this post about other than remembering to bring a bunch of quarters next time I camp?

Well, it reminded me of a struggle I had with a client who insisted on offering a completely free online service, while I was advocating he also provide a premium option because there are consumers who actually want to pay for something.

After much back and forth, the client prevailed but it didn’t dissuade me about the fact there is a segment of consumers happy to give you money if you let them. You don’t necessarily have offer a rich set of features but enough to convince them that upgrading to the premium version makes sense.

The thinking behind my “if you let them, they will pay” thesis is grounded in the idea that expectations are higher if you pay for something as opposed to getting it for free.

For some consumers (and I stress some) there is comfort in knowing that paying offers them not only additional features but other considerations such as better customer support and knowledge they are providing the company with money so it can continue to provide the service.

And I don’t think these consumers expect significantly more features than a free version of the product. There only needs to be a small set of features that offer more performance, convenience and usability.

This is the reason most startups should build in premium services into their service rather than coming out with a free service, and then looking to create or launch a premium service down the road.

The problem with only offering a free service initially is while it can attract customers, it can be difficult to effectively introduce premium services later. Why? It has much to do with setting expectations. If you come out of the gate with a free service, consumers may have a difficult time seeing you as anything other than free.

If, on the other hand, there is also a premium service with a few more features, expectations has been established from the start. The premium services may need to be overhauled or tweaked but they will already have a place at the table and, as important, consumers may decide to pay, which will provide much-welcomed revenue.

My belief is many start-ups embrace free-only because they’re more concerned about attracting users and/or they don’t have an strong idea about how they will generate revenue. This approach is a mistake for many reasons.

The key is not only creating a cool service that people may want to use but doing the required legwork to discover what consumers want and what they would be willing to pay to use.

It’s a simple proposition but frequently ignored. If a start-up doesn’t think their service is worth paying for upon its debut, neither will consumers – now or down the road.

When Should Startups Start Charging?

By Mark Evans in Web 2.0, Web-based Services 4 Comments Tags: , ,

One of the challenges facing many online start-ups is getting people to actually pay for their services, which probably explains why so many of them offer free services. This is great for consumers but leaves start-ups scrambling for ways to generate revenue so they can transform themselves from projects into businesses.

I have come to the conclusion that this approach is untenable because there’s too much risk and uncertainty inherent in the belief that a business model will eventually emerge. As a result, I think start-ups should have a revenue-generating business model from the start, even if it’s a freemium model with a free, basic service.

Given this philosophical approach, it was interesting to hear Sean Ellis’ presentation at meshU yesterday. In a nutshell, Ellis believes many startups should launch their services without charging for them. Instead, he suggests start-ups focus on creating services that resonate with a small group of engaged users, who will provide them with insight, guidance and feedback on how to evolve a service so can have broad appeal.

This is a process Ellis describes as the “gratification engine” – something that start-ups need to spend more time focused on as opposed to trying to attract more users by adding features.

When the start-up has a better idea of the service and how it meets the needs of consumers, Ellis said it can introduce a paid service, while providing the original users with a discount as a reward for their contribution.

When I pushed back about coming out of the gate without charging for services, Ellis said making money from early or beta users is somewhat irrelevant given the more significant revenue could come, in theory, from the large amount of users who come on board afterwards.

To be honest, I’m still not completely convinced that only having a free service is the right way to go. If people want to pay for premium services, there should probably be a way to take their money.

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