The Freemium principle, relates to the term coined by venture capitalist Fred Wilson (Fred Wilson (financier) – Wikipedia, the free encyclopedia, n.d.) and it is the basis of the subscription model of media and is one of the most common web business models (Anderson, 2009).
It can take on the following forms/models:
- Time limited (thirty days free, then pay) called “salesforce model”
- Feature limited (basic version free, more sophisticated version paid example is WordPress model
- Seat limited (used by up to some number of people for free, more than that is paid) e.g Intuit QuickBooks
- Customer type limited (small and young companies get it free, bigger and older companies pay example is Microsoft BizSpark
Other good example of freemium – give away low-quality MP3s ,sell high-quality box sets (radiohead), give away demo software, charge for the full version (most video games, you are allowed to ply the first few levels to see if you like it)
Consider that Freemium as the opposite of the traditional free samples – instead of giving away 5% of your product to sell 95% – you give away 95% of your product to sell 5%.
This makes financial sense in the online markets where you are selling digital products and the marginal cost is close to zero , so 95% costs little and allows you to reach volume (long end of the tail). The result is that the 5% you convert is 5% of a very big number.
It has been observed that any company that is entirely or almost entirely based on Free will very likely at some point be replaced by another company (BlackSwan competitor). The Black Swan Theory or Theory of Black Swan Events is a metaphor that encapsulates the concept that The event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight. (Black swan theory – Wikipedia, the free encyclopedia, n.d.). The success of the black swan competitor is based on their skill and speed to market to deliver Free. If they can build scale and charge less to reach the audience and are differentiated enough and important enough to the audience they will succeed and they competition will fail. There are many opinions of the success or failure of free ;
“Free! Why $0.00 Is the Future of Business” (Anderson, 2009)
“Free isn’t the future of business, it’s the future of failure.” (Fried, n.d.)
Where it is likely to succeed
Sean Ellis, Founder & CEO Freejit (Ellis, n.d.) makes the following observation about successful freemium businesses:
These basic elements are present
1) A free version that provides users with a lot of value and at least one premium version that also offers users a lot of value but is clearly differentiated from your free version
2) Precise metrics-driven execution with a very optimized conversion funnel
3) Deep understanding of customer perceived value and use cases
One company that has achieved this is Evernote (Remember Everything | Evernote Corporation, n.d.). Evernote is a two-year-old Web and mobile app and calls itself “your external brain”. Nearly 3 million + users clip Web articles, take photos, record voice or text notes and store everything in the cloud. Evernote CEO Libin reflects “I wanted a clever product. I wanted that product to reach hundreds of millions of people. And I wanted 99% of them to be using it for free.” Evernote is a great Freemium example of getting it right.Evernote elevator pitch http://www.youtube.com/watch?v=wmNks09GZ3s&feature=related
Another good example of Freemium success based on large numbers converting to a profitable base of fee paying customers.
Where it is likely to fail – “Freemium is a numbers game,” “And most companies lose.” Lincoln Murphy, managing director of Sixteen Ventures
Phanfare http://phanfare.comis an online company that offers a service to manage your photos and videos online.The offering was 1GB of storage to free users and unlimited storage to paid users. Classic freemium (Erlichson, n.d.) and it failed.
Here is what happened.
- A surge in registered users.
- Drastically reduced margins. Customers with less than 1GB but paying our full subscription fee were our most profitable customers. With those at the free level the margins were down significantly.
- Lost ability to effectively use CPC search marketing (google). When we had a free trial, it was easy to see which clicks were worth paying for. But with freemium, the conversion funnel was so long (average of nearly a year before the person needed more storage) that any attempt to optimize price per conversion was hopeless. An unmanageable delay in the feedback loop
- Position as a premium provider lost.
- Minimal to no network effects to Phanfare which meant that Phanfare participants were low. No social network, just registration of the audience.
- Advertising did not bring enough profit as the page views per bytes/stored were so low to bring enough revenue to pay the bills ) that advertising, even if it was welcomed by our user base, would not pay the bills.
In the end, freemium, for Phanfare did not problem to be a good model because the cost of delivering service to free users was too high. In this scenario freemium proved to be a bad marketing plan for this premium business that was aiming to be a differentiated provider.
“I want Sandy” (Sandy — your personal email assistant – System Maintenance, n.d.) http://www.iwantsandy.com/,owned by Rael Dornfest’s company, Values of n, was an automated e-mail assistant which also integrated with Twitter, letting users remotely set reminders while away from their regular e-mail. The company won Webware 100 winner in April 21 2008 but by November 2008 they were acquired by Twitter. Like Six Apart’s acquisition of Pownce, Twitter shut down the business. The offering was Free and the company did not succeed. It is likely if they had charged for their service the revenue achieved could have supported the business.
In the early stages of a company or product when there is a strong drive to establish the business in the marketplace, Free is a very effective marketing activity. Getting new customers via the Freemium approach works well, and it is because it encourages a lot of new customers to try the product on offer with minimal risk that the end result delivers enough profit to make thing worthwhile. Overtime as the product matures, there are reviews and the general consensus is that it is a good product the need for Free becomes less essential. Analysis of any business’s’ running costs and compared to what financial value a new customer spends is the key to deciding the optimum time period of embracing any Free offering.
Learning’s of the Freemium for Thesis Project
The main winners in the Freemium game rely on converting large numbers of customers from Free to Premium, others are Free entirely but again the numbers for success are high and revenue is generated by utilising this following to generate revenue from advertising and other means. The thesis project is a niche player in the online training game and its low projected initial numbers do not bode well for Freemium success. Therefore a more considered approach is required to use Free to gain a following and other “Free” approaches can be borrowed from other successful online training companies.
One of the non-cognate websites reviewed previously is (Your CPD Net – Website Technology Profile, n.d.) http://www.yourcpd.net/ and they offer a Free 1 hour verifiable CPD course on “Strategy and You” which requires registration,. Gaining registration data allows instant follow up marketing to close sales of further training and this approach should be borrowed.
Alison http://alison.com/ offers free independent interactive multimedia training courses including health literacy.
The site is extremely heavy on ads – left side, top banner and right side of page layout.
On sampling the free health literacy course, it is disappointing and is delivered in a dry powerpoint style with ads on every page you read which is distracting. Free training but the quality appeared very low and the constant bombardment of ads was distracting. This delivery and layout is to be avoided but it may be worth considering posting some content free here to drive business to the paid courses. The site invites course developers to offer free content from commercial publishers for a revenue share with respect to the display of targeted advertising on the site.
Our main competitor Hutton (Hutton, n.d.) offers free exercises but does not require any registration and therefore once the Free training is consumed there is no reason for customers to come back and there are no ways of following up potentially highly interested customers, this approach will be avoided.
In summary, a completely free model will be avoided as the professional style of the site would be diluted by the need for advetising revenue to make the business wash its face. The Freemium approach for Talkmedicalonline will require all customers to register and they will received a free video training session, one free game and one free download of medical terminology (snippet version with offering to purchase the full version at discount). The data received will be used to follow up customers regularly with email newsletter and offerings.
- Anderson, C. (2009) Free, 1st edition, London: Random House Business Books 2009.
- Black swan theory – Wikipedia, the free encyclopedia, [Online], Available: http://en.wikipedia.org/wiki/Black_swan_theory [26 February 2011].
- Ellis, S. Freemium (Free-to-Premium) | Startup Marketing Blog – By Sean Ellis, [Online], Available: http://startup-marketing.com/category/freemium-free-to-premium/ [25 Februrary 2011].
- Erlichson, A. Phanfare Blog: Andrew Erlichson Freemium did not work for Phanfare, [Online], Available: http://blog.phanfare.com/2009/07/freemium-did-not-work-for-phanfare/ [25 February 2011].
- Fred Wilson (financier) – Wikipedia, the free encyclopedia, [Online], Available: http://en.wikipedia.org/wiki/Fred_Wilson_(financier) [26 February 2011].
- Free Online Courses, Workplace Skills Training, Interactive Education and Multimedia Learning | ALISON, [Online], Available: http://alison.com/ [28 February 2011].
- Fried, J. Make Money off Your By-Products | Think Vitamin, [Online], Available: http://thinkvitamin.com/web-industry/make-money-off-your-by-products/ [25 February 2011].
- HootSuite – Social Media Dashboard for Teams using Twitter, Facebook, Linkedin, [Online], Available: Hoot Suite Free Social Dashboard [28 February 2011].
- Hutton, A. Medical Terminology, [Online], Available: http://www.medterminologyforcare.co.uk/medical/ [18th November 2010].
- Remember Everything | Evernote Corporation, [Online], Available: http://www.evernote.com/ [25 Februrary 2011].
- Sandy — your personal email assistant – System Maintenance, [Online], Available: http://www.iwantsandy.com/ [25 February 2011].
- Your CPD Net – Website Technology Profile, [Online], Available: http://www.yourcpd.net [5 February 2011].