Geoff Anderson back for another installment of the TMC Leader's Blog, and taking a slightly different tact. As a practicing product manager, I am a heavy 'tool' user in my daily duties. One benefit of the Web 2.0 revolution is the proliferation of some genuinely awesome services that make your life easier. I regularly use services like DropBox, Evernote, Remember the Milk, as well as others. They all help increase my productivity, and provide value to my workflow. But, as a marketer, I often step back and think about how these services become viable businesses. For these "service" offerings, it is increasingly common to use a business model called "Freemium". Different from the classic "limited time trial", these services are pitched as free to some level forever. The idea is to start with some level of capability that you give away, and as people become engaged and dependent upon the service, entice them to upgrade to the paid version giving them more function, more storage, or more options. Simple enough (I bet everyone can think of a analogous business model) in concept, but often difficult to execute well.
Instead of going into detail about conversion rates, and what defines success, I would rather step back and look at the original go-to-market strategy, and from that, a view of what makes a valuable customer. The "freemium" model really has two overarching market segments, the free-riders, and "customers". There are lots of variations, but little consensus on how the "-mium" enters the equation. Many great ideas start out as "Free" products. The advent of cloud computing and vendors like Amazon AWS, and Rackspace to name two greatly reduce the barrier to entry, and provide a straightforward path to a service product and scaling. But as buzz builds, and volumes go up, the costs also rise to match. One day, you have to seriously consider how to flip free-riders into paying customers. Here's where some forethought at the initial business case pays off, and highlights the need to engage marketing at the program start.
Marketing will guide you begin by focusing on the product that "customers" will pay for, what problem are you solving, or what pain you are relieving. The end state is the "whole product". Then you alter the whole product to come up with a tantalizing, addictive "free" offering. Promote the heck out of it, gain word of mouth, go viral, whatever. When it is time to turn on the revenue spigot, you have a lever that people will pay for. Think about DropBox. You get 2G free, sync across all your devices and computers, wherever you are, you have access to that 2G of data. But one day, you will hit your limit, and, knowing how much you have come to rely on it, you are going to buy the bigger space.
If your revenue spigot (the "whole product" that provides value that customers will pay for) is an after thought, or not properly planned for at the start, you're liable come up with a service like RunKeeper. I use this service to keep track of my workouts. I run/walk/cycle with it, and the app on my iphone feeds me updates, posts my workouts to their database, and tracks milestones. I can login to their web site, and see my progress. Pretty cool. All for free. Upgrade to "elite" for a mere $5 a month, and you unlock some features including more training plans, better mid-goal reports, and advice on how to maximize the effectiveness of your training. Perhaps that is useful to some people, but most of us pavement pounders will be just fine with the free version forever. I see no reason to spend that extra money.
These are but two examples, I am sure you can come up with more. The fact is that unless you plan for how to attract customers, anything you tack on to a "free" offering is not likely to generate a grat conversion rate, regardless of how much you scale the business. Work done at the genesis of a product development effort, particularly for a new, novel service, to identify the true customer segment, and the value that you will offer them, then you are well positioned to flip the switch to revenue. Neglect this component, and you will struggle to unlock value in your user space. Until next time, happy marketing!
Very thoughtful post Geoff, I've been thinking about linkedin freemium vs. premium lately. After I read your post and reflected, I'd say they did a pretty darn good job segmenting the market and matching value to premium charges. People using linkedin casually to stay in touch and have a personal brand presence in the community obtain fuzzy and casual value from linkedin for which they pay zero. People who are actively looking for a job, looking for people, have a real economic gain to realize, and the upgraded features are worth a premium. I also wonder if linkedin has missed an opportunity to provide real database/email list value for marketing applications. Myself, among many others, would likely pay for that!
Posted by: Chris Halliwell | February 08, 2013 at 12:54 PM