Just How Valuable Is Free?

Freemium, like so many ideas, concepts and products that we glibly label as new, actually has its roots in the early 1920s when Gillette’s razor and blade patents expired. As a result of the patent’s expiration, Gillette was forced to reduce the prices of its blades and handles to compete. Shortly thereafter, Gillette acquired a new patent for an enhanced blade and improved handle, which the company sold at a higher price.

Customers who bought the new handles were once again locked into Gillette’s blades because of their unique style. Meanwhile, the company flourished selling the old style blades to its loyal customer base. When these customers upgraded to the newer handle, they were locked in, at least until the patent expired. This was such a successful tactic that Gillette continues to play the game of “razors and blades” to this day.

Although Gillette wasn’t giving anything away, the company can be credited with pioneering the concept of building customer loyalty through proprietary products.

In the 1980s, along came crippleware, which was either free software designed to expire in a pre-determined time frame or, alternatively, a limited version of the software serving as a teaser to potential buyers.

Variations continue to this day and may be known to you as walled-garden, feature limited, etc. They are often seen in the software and gaming industries.

So, What Is Freemium?

Freemium has evolved from crippleware, just as crippleware evolved from “razors and blades.” Obviously, freemium is a combination of the words free and premium. It can be defined as a marketing concept or a business model structured to draw customers to a new product or service by offering it free of charge for a limited amount of time or offering a free version with restricted functionality for an unlimited amount of time.

Successes and Failures

One of the best examples of a freemium success story is Sirius XM Radio. Sirius XM is a satellite radio broadcaster. To receive the signal, a specialized receiver is required to capture the commercial-free broadcasts. The service is available via subscription.

The management team at Sirius made the bold decision to offer the service for free for a limited time. To make this happen, they needed to partner with auto manufacturers. Sirius was able to persuade the manufacturers to install the specialized receivers in their new cars. In turn, Sirius agreed to provide new car purchasers with six months of free service. At the expiration of the free trial, Sirius shared a percentage of the continuing subscription fees with the manufacturer. This represented a win-win for everyone involved.

On the flipside, Chargify launched its business in 2009 with a freemium model offering its billing software to merchants that billed fewer than 50 clients monthly. The theory behind the model was based on the assumption that as these merchants grew, it would be necessary for them to upgrade to the premium software at $49 a clip.

Although Chargify provided a great product, the economic downturn was so pervasive that most free users never required the upgrade. As a result, Chargify neared bankruptcy.

The management team recognized freemium was not the right fit for them and pivoted to a new strategy, put a pay wall in place and finally saw profits. Clearly, the freemium model is not the right strategy for every enterprise.

Identifying the Freemium Opportunity

A business seeking to use the freemium model must meet the following criteria:

1. It must offer a world-class product or service.
2. The cost of providing the product or service must be at or near zero.
3. User experience with the product or service must be compelling enough to cause the user to purchase or upgrade.
4. Support costs must not rise proportionately with the number of end users (free or paid).

Additionally, enterprises considering the freemium model must answer at least one of the following questions in the affirmative.

1. Does your business offer an upgradable product or service?
2. Will your business generate its revenue via subscription?
3. Is your product or service truly innovative?

The fact that the success of a freemium business model is heavily dependent on a product or service that is world-class, tremendously useful and/or extraordinarily fun cannot be evaded.

It is a lot like giving a car a test drive. If the car isn’t exceptional, there isn’t going to be a sale.

Many businesses, faced with escalating marketing costs to promote and advertise a new product or service, seek to employ the freemium model. But this model isn’t always in the best interest of a company’s bottom line.

The freemium model often generates significant market share, but it is frequently the victim of low revenue generation. For founders, the question then becomes which creates the greatest interest or “buzz” for potential investors? Many venture capitalists see greater opportunities in market share, while others have revenue orientation.

It is the ultimate balancing act for brands to gain market share and find a steady stream of revenue, but the freemium model could just lead to both.