Why Freemium Is Not Always The Best Business Plan

FreemiumThere are many successful web services that have embraced the freemium business model over the years from Skype to DropBox, but it is not always the right plan for everyone. In order to make a success of the freemium model you need to be able to offer useful benefits for the paid upgrade, and even possibly other monetisation options for the free users.

As Tyler Nichols recently found out, just because you have a popular free service on the web, people will not generally upgrade for only minor improvements almost as a “thank you” to the developer. No, internet users are an increasingly savvy bunch that will make the most of any free service offered, and then generally only upgrade if they feel they really need to. This means that either the free service needs to be limited to push users to upgrade, or the paid service needs to show value and real and useful improvements to pull users to upgrade.

Flickr uses the freemium model to pull users towards its paid plan, by offering unlimited storage for photos for just a small yearly fee. The free option works very well, and if you only have a small number of photos to upload and share then there is no reason to upgrade, but has managed to convert large numbers of users to their paid plan by showing just how easy and useful the service is for free – but keeping a relatively tight limit on the space provided. Once users are hooked into using the service they will inevitably want to upgrade. Similarly, DropBox gives users 2GB of storage for free, but once you use the service and see how easy it is to have constant backup and versioning, then you start to want to use the service for storing more and more of your digital property. 2GB is quickly filled, and then upgrading seems to be the obvious option.

The freemium push is a little more difficult to employ, as the free service needs to be good enough for people to sign up for in the first place – but it can be done. Removing adverts from the paid plan is more of a push than a pull, as ads can be rather annoying and obtrusive making users want to upgrade. Some “leaky” paywalls are also examples of freemium pushes, as users of sites such as the New York Times or The Economist can read a certain number of articles for free before being hit by the paywall – they know the quality of the articles and are interested in the freely shared (via RSS/Twitter/Facebook) article title interests them – push they are pushed to upgrade before they can read it.

Some services manage to employ both the push and pull freemium models – Spotify being a good example. When the service rolled out in the US, the free service that had been enjoyed by huge numbers of Europeans was further limited so that as well as having adverts every now and again, free users were limited to only streaming any particular song – pushing them to the paid version for unlimited ad-free usage. By also making the iOS and Android apps (and offline playlists) only available to paid users, Spotify also managed to find an additional service that users want – pulling them to the upgrade.

As well as additional and improved services, support is a selling point to convert free users into paid customers – a service should be relatively self-explanatory to use and a knowledgebase and/or FAQ section could be avilable to all users – but being able to contact the developers could certainly be a reason to upgrade. A private support forum where the developers interact with only paid customers is another option – and if a community has been fostered then people will help each other as well.

The toughest part of the conversion process for simple and cheap web services is not the cost (people will happily spend £3 on a coffee in Starbucks), but the hassle of getting out their credit card and entering their details. Whilst some people might think the £2 cost of a service is reasonable, it might not be worth the 5 minutes of their time to enter the information. There is a reason that App Stores like those from Apple and Google are such successes – they have almost completely removed this point of friction in the sale. If you are offering a service outside of these app stores then the best way would be to offer as many payment options as a user could find useful – credit cards, Paypal, and Flattr could all be useful in reducing friction for different users and therefore increasing the conversion rate.

Moreover, free users to not have to be vampires on a service – developers should not ignore the possibility of monetising them to cover their costs. Advertising is a simple and obvious option to push on free users to offset some of their cost, but an email list is also useful. Email lists can be used for promoting a developer’s other services, explaining the benefits of upgrading to the premium service, or for affiliate marketing.

Freemium is always attractive to developers as it can rapidly grow a userbase and therefore word-of-mouth adoption of the service, but unless you can make money from those users then the exercise is rather redundant. Some services are free and completely subsidized by advertising, whilst others will need subscriptions to turn a profit – both are valid business models online, and freemium lets you straddle both. But if you can’t generate a decent conversion rate, then either your service isn’t one suited to the model or you’re doing it wrong.

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