freemium

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.

The Upside of Non-Free

By Mark Evans in Social Media 1 Comment Tags: ,

Paidfree

It may have happened subconsciously but over the past year or so, I’ve been paying for a growing number of online services. It may have to do with running a business and making sure there are solid roots supporting it. Or perhaps it’s a simple matter of getting over the novelty of getting everything for free…and waking up the reality you usually get what you pay for.

In any event, I don’t think twice about paying for online services. Don’t get me wrong, I’m not showering money around the Web and I try to use discount codes whenever possible. But the idea of coughing up for a good service that will make life easier, more productive or convenient is a no-brainer.

Some of the paid products within my digital portfolio include:

- Skype: a $2.99/month all you can calling plan for North America

- DropBox: After using the free file-sharing service for several months, I upgraded to the $99/year Pro 50 service that offers 50GB of data storage.

- Freshbooks: One of my business’ core service, I’m on the $29.95/month Evergreen service, which offers an unlimited number of clients.

- HostPapa: A green and cost-effective Web host with prices starting at $5.95/month. HostPapa has great customer service as well.

- Performancing: A Web analytics service to track the performance of my blogs and Web sites for $3.99/month. I also use Google’s free Google Analytics service but I like how Performancing is user-friendly and quietly robust.

- WordPress: In the past, I would scour the Web looking for free themes. Now, I’m content to pay for high-quality premium themes that provide great customer services. Some of my favourite theme makers include Themify and ThemeFuse. I’m also impressed with Pagelines but have yet to buy one of its themes yet.

- TweetBot: I have used a lot of Twitter applications for the iPhone but happily paid $1.99 for TweetBot recently because it is easy to use and it’s feature-rich.

- MarsEdit: I’m writing this post using a demo version of MarsEdit but I’ve been looking for a Mac-based blog editor so I’m seriously considering a purchase.

In the scheme of things, the services and products that I have been paying rather than trying to get for free are a tiny part of my overall expenditures. The difference in paid vs. free is based on a free themes:

1. When you pay for something, the expectations are different when it comes to things such as customer service and product upgrades.

2. Paying for a service supports the underlying business so it can build its business and be able to invest in new product development and sales.

3. It encourages entrepreneurs to charge prices for their services rather than simply offer something for free in the hope that it will attract enough customers to generate advertising revenue. I’m a big fan of the premium model because it offers a try before you purchase approach that can get lots of people in the door.

For more thoughts on paid service, check out The Next Web’s post on “Why you should want to pay for apps”.

When Pulling the Trigger on Premium is a No-Brainer

By Mark Evans in Social Media 2 Comments Tags: , , , ,

For all the talk about the freemium business model, the key issue is how consumers can be convinced to upgrade from free to paid. For many companies, the free-to-paid gap is enormous because consumers are so enthralled with free that paying for an online service is difficult to justify, even if the service is useful and valuable.

Among the freemium advocates, their optimism is based on the belief the model can work because lots of users can be attracted to a free service, and that only a small percentage – 5% to 10% – need to upgrade to a paid service. Of course, this is easier said than done because 5% seems like such a small number, it should be do-able if the service is any good.

The problem is the vast majority consumers find that free meets all of their needs, so premium is an unnecessary move. This leaves a company with lots of users completely content to pay nothing forever.

So, how do companies bridge the gap between free and paid? How do they provide a great service that still leaves room for consumers to justify eventually paying for something more. The reality is there’s no easy answer, which is why freemium is just as much art as science.

I started thinking about freemium after upgrading to Dropbox Pro 50. The free service was terrific but having only 2GB of capacity quickly became unworkable after Dropbox became a key way to do business with clients and partners. There was simply no work to continue using the free version of Dropbox, which made it easy to upgrade to the 50GB package for $99/year.

To be honest, it was a decision that didn’t happen right away. My immediate response to hitting the 2GB capacity limit was to delete unnecessary files and folders. Of course, this was like to trying to stop in a leak in a dyke with a band-aid so I finally sucked it up and did the right thing by upgrading.

In hindsight, it was a no-brainer decision because ROI on paying $10/month for a premium service will be high. In the scheme of things, it’s a small line item within the ME Consulting empire.

It is interesting, however, that I had to think about it before pulling the trigger. In some respects, this epitomizes the freemium dilemma. Even when it’s completely obvious that upgrading to a premium service has to happen, it doesn’t automatically happen.

Why Do Some Online Services Thrive?

By Mark Evans in Web 2.0 12 Comments Tags: , , ,

Last week, TechCrunch reported that Dropbox had attracted two million users, just four months after it reached the one million active user mark. It got me thinking about why some online service become so popular, while the vast majority struggle to get any kind of traction no matter how hard they try.

Now, if anyone had the definitive answer, they’d be sitting on a pile of gold. But there are some fundamental things that wildly popular online service have in common.

1. They meet a basic need that quickly resonates with users. For Dropbox, it’s a simple proposition: the ability to synch files across multiple computers. For people who work in multiple places or have multiple computers, Dropbox is a service that quickly strikes a chord.

2. They’re user-friendly and easy to use. These kind of services do what they need to do without unnecessary frills or feature creep. There’s nothing that kills a good idea than developers who believe that more (features) is better. This only confuses users by giving them too many options. At the end of the day, KISS (Keep It Simple Stupid) is a much better approach.

3. The barriers to entry are low because the basic service is free, while premium services are available for people who want more features, data, etc. For all the talk about freemium, the most successful online services seem to thrive because they make it easy for users to join the fray.

4. They have a user-friendly, intuitive interfaces that are accessible. Services that feature this kind of interface make it easy to people to quickly climb on board. Once people start using the service, they tend not to leave. In other words, the “bounce rate” is pretty low.

5. They tell great stories. There’s so much competition that success can often hinge on how well their stories are crafted and delivered. The ability to tell a good story can make a huge difference compared with other services that may be as good but don’t tell their stories as well.

Any other things that help make online services successful?


What Services Would You Pay to Use?

By Mark Evans in Web 2.0 6 Comments Tags: , , ,

“Sooner or later people are going to get addicted to some of these services and they’ll be willing to pay for it.”
- John Malone, the chairman Liberty Media, quoted by The Guardian about his belief that consumers will eventually pay for their favorite online services.

His comments begs a few questions:

1. what online services would you pay to use?

2. How much would you be willing to pay for them?

3. Is pay-to-play going to have a bigger role in the future of online services?

They are interesting questions because, in theory, you can understand why getting consumers to pay for the services they use makes sense for many people. Malone, for example, has been running cable services in which consumers happily pay healthy amounts of money to watch TV and movies.

In the Web 2.0 world, however, free – and, to some extend, freemium – has become a key element of the competitive landscape. Even services that people are “addicted to” have a difficult time convincing people to upgrade to the paid version from the free version.

For some services such as Google and Facebook, free works because you can attract a big enough audience that they become attractive to advertisers.

For many others, however, they struggle with free because the number of users never gets big enough – even if the service they’re offering is excellent and useful.

So, what would you be willing to pay to use?

What about Twitter? For many of us, Twitter has become an essential communications, marketing and sales tool. So what if Twitter announced one day that consumer accounts would now be $2/month while businesses would have to pay $5/month? Would you pony up the two bucks, or would you and many of your friends looking for another free micro-blogging service?

Personally, I’d pay at least $2/month to use Twitter. I’d pay to use Techmeme. I’d probably pay to use WordPress if came with some premium services.

What about you? What services would you pay to use? And what services are you paying to use now?

More: For more on how Twitter might be able to monetize its popularity, check out the New York Times’ DealBook.

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