COMMENTS
A Web 2.0 called Mozy (online backup) uses the Freemium model, with the free service offering 2 GB of storage. Initially I thought I would never use that much, but after 6 months I'm almost at the limit.
My point, and one thing you have mentioned in this article or the startup pricing models one, is that Freemium offers a great way to lock your free customers into your paid service. With Mozy, I've backed up almost 2 GB of documents, code and photos - if I'm going to pay someone for remote backups, it would be silly for me to switch providers.
An idea: Start with the "mium" then do the "free". Prove people are actually willing to pay for the "mium" first. It doesn't have to be tons of people. Just a relevant handful so you can say, hey maybe I've got something here. Then do the "free" for marcomm. I know a company that is taking this approach.
You raise some very good points about the freemium pricing model. However, compared to other pricing models, it is hard to beat in terms of both marketing and maintenance. From what I have seen, the best freemium models involve removal of caps and limits, as Mozy does. There, the value is clearly defined for the user, as they already have a "taste" of your full product. I've seen other services that simply offer "support" and other things which are intangible and useless to the ordinary consumer. As a follow up to this, you might want to come up with a guide to developing a freemium pricing model.... However, responding to Nivi's comment... I would argue that the most important thing is just to establish a user base and web traffic, mainly to see if this is a viable product in the first place, before taking on paying users.
One issue I see with the freemium model is that in order to market your product you are relying on word of mouth....which is not necessarily under your control. It scales at it's own rate. Unless your well funded, you cannot take money from the premium users to fund these high cost programs to accelerate growth (You could if you didn't want to eat). Also, certain programs like affiliate programs or CPA marketing won't play well with the freemium model unless done very carefully with close attention paid to freemium-to-premium conversion rates.
I have used your website grader and it's very helpful. It provided quick due diligence on a domain/website a friend of mine was considering
I think lead generation could be a more profitable way to monetize the tool. You will get higher than 3% conversion on a free lead form "get expert help", the support costs are lower and you can resell the leads to multiple web/SEO vendors.
Website grader diagnoses the issues and sends people to the right doctor (who pays you a referral).
Dharmesh, M.D.
I agree that the mium is more important than its "freeness". the idea is to keep coming up with unique and innovative concepts that change the way we work in our everyday lives. I have been evaluating the free version of sugarsales and find it to be meeting most of my requirements. however, their premium models do have certain "must-haves" but thats the compromise any enduser would consider...there are many such models out there, waiting for breaking into the geometric progression growth in the premium offerings... just my two cents...
Another element to consider: I do sales consulting for early stage high-tech companies, and use a free version of Salesforce.com in my business. I've now recommended and implemented the fee version of Salesforce for a number of clients - another way the free version can pay its own way.
I have often seen an ad-supported free version. At least there is a chance of monetizing the free user base..
@Mike...If you are going to go the way using ads to monetize your site, try to get as much information about the user to build a profile during the registration. That way you can justify a higher CPM. A weekly email newsletter (with ads) is another way to monetize the base.
One other way I've seen the "Freemium" employed is the product is free for home/NPO use, but businesses/corporations must pay to use it. This of course does away with issue #5, although something designed for business use, such as HubSpot, would not benefit from this.
And sometimes free stays free not because it should but because it can.
At Spongecell we employ a version of the freemium model in that we do offer a free social calendaring platform complete with embeddable widgets users can put in their myspace pages, web sites, blogs, etc to promote the events that they are attending. We don't focus on the upsell as the core way to monetize these users, as we have other fairly obvious mechanisms for doing this. Further, our business doesn't revolve around "upselling" these free users, which allows us to focus our sales, marketing and customer support efforts on our paying clients who want the publishing features of the free product plus all of the analytical and messaging functionality that just doesn't hold the same utility to our free users. We are fortunate in that there are two distinct use cases amongst each of the market segments we are targeting with our products. Thanks for the post - well written and keep them coming - always great to read what's in the minds of other startup entrepreneurs.
Shareware
"freemium" is a catchy, but Isn't this just the web application version of shareware, which is as old a concept as the software industry itself ? The implications for websites are slightly different in that there's on-going work to keep the free customers (bandwidth, servers), but it's the same idea.
Great read