"Freemium" Business Models - How to Decide What's Free and What's Not

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A colleague asked me this the other day: *If a company is pursuing a “freemium” business model, how should they determine the optimal mix of features to offer in free vs. paid software? *

It’s a good question. Freemium – where a product is made available in both a free and paid-for version – is a scenario I’ve encountered quite a few times and one that’s becoming increasingly common.

Today, customers pretty much expect free versions from any kind of online service. Free versions are also becoming common in installed software, even in the case of very high-priced, server-based enterprise software.

The free vs. paid question is worthy of an entire project, but here are some high-level thoughts that may be helpful to your decision calculus.

First, there are three basic kinds of “free” software, though some companies offer a hybrid:

  1. Free product is functionality-limited.
  2. Free product is simply a limited-time trial of the paid product.
  3. Free product is identical to the paid product but includes neither customer support nor indemnification.

I strongly recommend staying away from offering only Option #3. In my experience, most companies that start this way eventually move to option #1 (functionality limited). Option #2 (time limited) is easiest to implement but may not garner the same widespread installed base as Option #1.

If you choose Option #1 (functionality limited), expect that all your customers will try the free version first. If they like it, fewer than 10%—often fewer than 1%—will go for the paid version. (Rarely will anyone to go for the paid version out of the gate.) After anywhere from a week to a few months to evaluate its benefits, the afore-mentioned small percentage of customers will upgrade to the paid product.

With this “typical purchase pattern” in mind, you’ll want to consider the following:

  1. Be sure you understand your product’s value proposition and benefits. Extra research to nail that down is worth it at this stage.
  2. Make sure the free version is a pleasure to use and delivers real value (see the previous bullet). If the user experience is not very good and if benefits take longer to percolate to the top than expected,then  don’t offer a free version to begin with. You’ll do more harm than good.
  3. The free version must lack key functionality that is in the paid version. The paid version should provide a “pain killer” that the free version does not. The paid version shouldn’t merely offer a “vitamin,” it should deliver real pain relief. Otherwise, users will never upgrade.
  4. If possible, encourage customers to integrate the free product into their business processes and IT systems, so that it is hard to remove. Then, when they hit the above-described pain point, they’ll buy the paid version instead of starting a selection process with multiple vendors. For example, you might want to make a free online product easy to integrate with the company’s single sign-on systems and other sercurity protocols, or maybe make it easy to integrate with in-house databases and services.
  5. The differences between free and paid versions must apply to a customer who has been using the free product for two to three months. This sounds obvious, but it is amazing how many companies botch this. For example, if you offer any of the following features, tools, and support, then they should be available in the free version and not limited to just the paid version. Remember, the whole point of Freemium is to get as many people as possible using your product. Without the following features, you’ll needlessly limit your audience: - Installation and configuration wizards.
  • Access to APIs and tools for developers. A goal is to have your customers’ programmers embed the free product into their business processes if possible (see previous bullet).
  • Documentation on setting up the product and integrate it with business processes / IT systems.
  • Assistance with getting started. For example, don’t limit access to “getting started” user forums to paying customers.
  1. Be sure that it is exceedingly easy to upgrade to the paid version, even if the free version has been programmatically embedded into business processes and IT infrastructure. If customers must rewrite code, install new software, or implement a migration process in order to use the paid version, they will likely continue to use the free version—or contact your competitors.

Finally—and this is important—realize that if you make too much available for free, it is very hard to put the genie back in the bottle—unless users understand that you are offering a time-limited free trial from the get-go. People were furious at Ning, for example, for charging for formerly free communities. Competitors immediately swooped in to snap up Ning's disgruntled customers. The company did not survive as an independent, and was acquired by Glam Media in 2011.