Freemium: a challenging, fluid, evolving beast of a business model

by Colin Bell Email

Some may say I need to get a life, but I confess that Business Models fascinate me and I love applying them. One of the models that has fuelled tremendous interest, debate and offered a viable alternative to the traditional web based model of leveraging advertising revenue (although this may still be part of the revenue mix) is freemium.

Over the past few years freemium based businesses are among the few to achieve rapid growth. It's been pioneered by businesses that have evolved out of the bedrooms of web developers and has disrupted global industries and changed the expectations of customers.

Freemium works on the basis that a business will provide a basic version of their product or service to 95% of their customers for free and generate revenue from the 5% of customers willing to pay for a premium product or service. Hence the term freemium is a blend of 'free' and pre'mium'. Examples include:

>      Survey Monkey provides a basic web based survey service for free. They aim to embed the service in the customer's operations; the more customers use it the more value they gain and the more embedded the service becomes. The more embedded, the more surveys are carried out. This cycle continues until the point when the customer needs to carry out more surveys than the basic service allows. Objective achieved: the customer needs more, they're locked-in and now a paying customer.

>      Skype is another great example, providing free phone and video calls over the Internet and enticing a proportion of users to pay by offering cheap call rates to landlines and mobiles.

>      Spotify allows users to listen to music online but the free version is interrupted periodically with adverts, the premium, paid for version removes the adverts, and extends the range of music to virtually anything you could think of.

There are several things that excite me about freemium as a business model:

It's counter intuitive: There is something very exciting about starting something whilst not being 100% clear about how it will make money. For most freemium businesses true recognition of the value their service delivers is established overtime. Premium features evolve as the business increases its understanding of what users value. The business's understanding of how to generate revenue increases overtime as does the customers willingness to pay for premium features. The model succeeds by developing a deep understanding of what customers' value.

It's based on good old-fashioned marketing: A successful freemium model is reliant on an advanced understanding of marketing and how to lure and lock-in high value customers. AIDA is an age old marketing model and for some confined to the history books, yet it is at the very heart of freemium, its all about, generating Awareness - often through viral marketing, creating Interest - by removing the barriers to usage, creating Desire through providing people the opportunity to experience the value, and inspiring Action - through embedding the service in people's core operations.

The basic idea isn't new.  It's an evolution of 'loss leader' strategies such as that used in the mobile phone and razor industries, you get the handset or the razor at a low cost and revenue is generated through the purchase of a call package or razor blades (the Soda Stream is another great example). What has become more extreme however is the number of freemium businesses that continue to provide users with a great service for free for as long as 'they choose' to use the service. This is possible through technology's ability to deliver a low cost per user ratio (e.g. the costs involved in servicing 1 of 1,000 free users will be only marginally higher).

The question for you is - can providing what you do for free help grow your business?