What businesses have freemium potential?
What is the freemium potential of your company?
The freemium concept is thankfully catching up and today more and more companies are using the freemium model. Initially it was extensively used exclusively by the Information technology and Internet companies. But with the costs of digital duplications coming down drastically more businesses from diverse areas are moving into this area
The freemium concept due to its inherent nature calls for a high quality product that can be duplicated digitally. This is essential in order to use it in the freemium model.
Once you have a high quality product that can be digitally duplicated then there are two important parameters that will decide the freemium potential of the business. First, the possible reach of the free product and the possibility of complimentary products that will ensure profits.
Bigger reach of the free product is directly proportional to the number of free users. This in turn will result in a larger potential market for complimentary products. When more end users are aware of the complimentary products that you offer the chances of making handsome profits from each user of complimentary product goes up exponentially.
Hence to reach more number of potential buyers of complimentary products it is essential that you reach a larger number of free users.
Besides the number of possible buyers of complimentary products, the potential for successfully using freemium, depends on the complimentary products. In order for the model to be profitable,
The following graph best illustrates with three examples of industries with large freemium potential and some with less freemium potential, it should be possible to create complimentary products that are great at generating revenue.
VoIP telephony (Skype)
Skype is the best example of freemium potential of VoIP telephone technology. The freely available program has a large reach as it caters to the universal human desire to have cheap international calls. And since this desire is not limited to calls between two computers there are tremendous possibilities for complimentary products.
Consulting Companies
Consultants’ clientele depends on their vast knowledge, experience, tools, methods, and expertise that clients do not have. If all the information and the expertise is formatted and used for free distribution, the consultants can reach a wide array of potential clients within their area of interest and expertise.
While a large body of the knowledge and expertise can be transferred freely. There will always be a need for the consultants experience in implementation and independent assessment.
The Music Industry
Since the birth of napster and the mp3 file, there has been a huge amount of music spread this way. While this file sharing has been largely illegal, it demonstrates the potential of music to achieve wide reach.
At the same time. The music industry has seen successful experiments with complimentary products. These could be concerts, deluxe editions , physical CDs or simply an easy way to download the music.
Photography
This area of business has the possibility to have larger reach. However, the potential of offering complimentary products is limited. I look forward to seeing if someone will leverage the freemium model to build a successful photo business.
News
While the potential to reach all parts of the globe exists there are few known possibilities of having complimentary products that can be successfully used for generating revenue. This has not stopped people from experimenting with this business model but I have my doubts if any will be successful.
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17 Comments
Hi!
What are your thoughts on using the freemium model for either a) A piece of software for desktop collaboration over the web
and b) Video Tutorials for beginners.
Do you think it can work?
A couple points:
1) Freemium is enabled by the economics of digital creation and distribution, but digital is not a requirement, it’s just what’s more apparent and in use today.
2) An even bigger component is really the cost structure, the cost to serve the free + paid versions of the product/service.
I suggest checking out Alan’s series of posts on the costs to “free”: http://www.broadstuff.com/archives/1779-Limits-to-Freeconomics-Part-IV-Freemium,-or-if-you-aint-paying-you-aint-the-customer.html
3) Re: photography: actually, there are many, many complementary products that could be offered, and a freemium structure could be part of operating a photography business.
Not to promote (honestly), but it’s something I’ve written a bit about: http://www.taylordavidson.com/writing/2008/10/09/lesson-2-take-advantage-of-the-atomization-of-demand-and-expand-the-scope-of-consumption/
Not to sound cynical, but part of me thinks this is perhaps just a phase that was instigated by the likes of YouTube, Twitter and Facebook? That the users are so accustomed to getting things for free, but that could all change?
Especially if all these platforms find business models that actually work?
@Khuram
I don’t think that it is a phase. A lot of web companies have started with the intention of getting millions of users and then monetizing it. This makes sense you are twitter or Facebook, because they both have huge potential to develop great business models because of their giant user base. Yet all companies can’t be Facebook and you are right that more and more web companies are focusing on getting costumers to pay.
Yet one of the most successful ways of doing this is a freemium model. Some of the great examples are Flickr, Evernote and 37signals.
I think the change that is going on is from a focus on advertising based free to more freemium centered models.
I think that there is definately freemium potential for the products you are talking about. Yet it is hard to say more without additional details. Send me a mail at peter@freemium.org and we can talk about it.
@Taylor 1) & 2) It is true that you can create freemium like model that are not based on digital production. One example of this is the following of an eye hospital in India.
http://tbmdb.blogspot.com/2009/04/aravind-uses-freemium-business-model.html
Yet, as you mentioned, the cost side of freemium is paramount. Digitally duplicated content or tools seems to be virtually the only way to create free for freemium at a low enough cost. This is why almost all freemium model are based on a free product that can be digitally duplicated.
Yet this is not limited to internet and technology companies. http://www.flatworldknowledge.com is a great example of how freemium is used within the publishing industry.
@ 3) You are right that there are a lot of great business model around photography and you post does a great job of listing them. Yet these are business model that deals with photography, they are not the business model of a single photographer.
Mentioning the photography industry in the post, the point was those that actually take pictures for a living. For these there is little potential for a freemium model based on distributing their photos for free.
Regarding Photography. What about someone who is does photography as a hobby (but still has sellable pictures).
Could the freemium model work then?
Khuram and Peter: of course an individual photographer could use a dash of freemium in their business, even in distributing photos for free; to think otherwise would fail to think creatively about the opportunities and about how to upsell images (and other products).
I think that both part time and professional photographers has to think creatively about their business model. If that includes part that are inspired by freemium, that would be great.
Yet I believe that I see very little chance of a business model based mainly on freemium. As I see it there will be a problem creating a demand for the current complimentary products and to create new scalable premium products.
you could give away low resolution and sell high and commercial versions. But most people that would want commercial quality would search databases of such. In this way the free picture would not contribute to creating a demand. I also have a hard time seeing what new products the photographer could implement to use the attention from the free product.
Yet it is fully possible that someone could make it work and I would always love to proven wrong by a creative person.
How do you think it could work ?
To be fair, i actually have no idea of how it might work.
I see, often with the freemium model the core product is given away for free, and additional services are then charged for, as with skype.
I have no idea how that could be done with photography, since the picture is the core product, and to my mind, nothing comes after that. I could be mistaken.
I have just been listening to Seth Godin’s “Tribes” audiobook, and he makes an interesting statement in Chapter 2, in that one man could bring forward a pricing model that could turn the market upside down.
Certainly if someone is able to crack the code for photography, that could be very interesting.
Peter, thanks for another interesting post and for linking to my story about Aravind! I just posted the list of 50 business models built on free from Chris Anderson’s new book
As I see it, it all comes down to if the premium versions of the product or service can cover the costs for the premium versions and the free versions, and still provide profit. This is not dependent on if it is a high quality product, if it can be duplicated digitally, or if it has a large possible reach.
When discussing the freemium business model (free version of something + paid for premium versions of the same) I would not only focus on complimentary products but primarily on additional benefits that the customer/user could be willing to pay for, after using the free version.
Also, you can have a small reach but high convertion rates or high margins on premium versions, or you can have a large reach with lower convertion rates or lower margins, to create profitable freemium models.There has been some really successful business models turning a very low number of free users to paying large amounts for limited editions of basically the same product.
Talk to you later,
//Anders
Hi Anders, thanks for your thoughts
You are right that the critical question that you have to pose when considering a freemium model is, ” can the premium version/product cover the cost of the free and paid version, while at the same time covering the possible lost profit from the free product”
I have made this graph as an attempt to make it easier to answer this question, based on the logic behind freemium and my analysis of previous successes.
Based on this it actually does matters a lot if it is a quality product, can be duplicated digitally or has a large reach. I am glad that you bring it up, I will make the rational behind this the subject of another blog post
Concerning your point about low conversion on very profitable products, I totally agree with you, but this might not have been communicated clearly enough in the post. I might need to change “great complimentary products” to something like “profitable premium products” or “profit from premium products” I will look into it.
Hi.. Your post got me thinking… What is more valuable for a software company (like facebook or flickr). 1,000 paying users or 100,000 non-paying users? What are your thoughts? View my blog post here: http://www.purlem.com/blog/?p=57
Good post here, just wanted to put in my two bits - as someone trying to run a freemium based business
Most debates tend to discuss high volume products - music/photos/skype etc and tend to ignore low volume but high involvement products like project collaboration tools. 37signals is a great example (and I think you mentioned them somewhere) but to me the idea of having a paid premium service feels like holding back something from the large community of “free” users who help get your product in a place where you expect get to paid.
We have taken a different position with our project management tool - Remindo. We plan to stay free for all our early users who helped us build it.
Posted something here:
http://www.remindo.com/blog/general/freemium-vs-free-project-management
Do you think its a viable position or are we just being too emotional?
@Prateek
I like the sentiment behind the idea of letting the initial costumers use for free. Yet I think that it is unnecessary.
If you give enough value in the free version, this could draw a lot of loyal users. If you then offer a great additional value in the paid version, then most people would be happy to pay for it.
The trick is not to set up the model in way where the users feels that you are taking something away from them.
Even though I think the offer mentioned was unnecessary, i think it would be a bad idea to change it for those that have already received the offer. This would make them feel like you are taking something away from them.
Have you already constructed the freemium model ?
There was a problem with the comment function and Prateek could not post his replay, here it is
@Peter
You are right when you say:
“The trick is not to set up the model in way where the users feels that you are taking something away from them.”
At the same developing a loyal, involved user base is easier said than done. Especially for a high involvement and highly competitive category like online project management. Think about it, when people start using our service, they trust their business information with us and bring in their own clients. Should something go wrong with us, they might end up getting stuck with us. We are going to revamp our product soon and it has been made possible because of user feedback and so we find it apt to reward them by letting them use it for free.
We are developing our freemium model and I’ll surely discuss it with you soon. As an aside though, there have been apps that let users pay as much as they want for the service (or nothing at all). Do you think this works?
Also, the last part of my blog with the “offer” was added more like an afterthought in the hope that there are more people like us who are probably looking for ideas and feedback on their own services but don’t know where to look.”
@Prateek
As mentioned I appreciate your sentiment behind letting the initial users use the program for free. My assumption is that these early users have contributed because they saw a great value for them in your software, or maybe because your ideas sparked their curiosity. If you took a pool I think very few would say that they contributed with the intent of receiving a monitory reward.
Personally I took part in a very interesting social network. It was a group of people gathered around the blog of Alexander Osterwalder and his process of writing a book on business model innovation.
Several hundred of us paid to be part of this network. We got previews of the book chapters as their where written and participated in a lively debate about the content.
This generated a lot of value for the author, while we all paid for being part of this. Our incentive was not to be financially compensated. It was to participate.
Yet it is important to recognize the effort and help of other. A thing that Alex did brilliantly by mentioning all the names in the book.
In brief: I think you sentiment of wanting to recognize the people that contributed is valid. Yet i don’t see a rebate as the only or necessarily the best way of doing this.
On the subject of “pay what you want”.
It has proven to be quite successful in the “real world”, with everything from restaurants to lawyers. Yet in the software market, voluntary donations are notoriously low.
It also seems to monetize the value of the free product to a far lesser degree then freemium models.
A properly constructed freemium model can deliver the same amount of appreciation and general costumer happiness as a “pay what you want” product.