The Freemium Business Model

I had a meeting with an Internet company yesterday and we discussed, among other things, what the right business model might be for them. Based on those conversations I thought it was time to revisit this great article and video on Longtail.com titled ‘The miraculous power of scale‘.

The primary point of the article is that the cost to reach thousands of potential customers online is so minimal that the old rules governing conversion rates in marketing don’t apply. The 2% conversion rate that is needed to make a direct mail campaign successful isn’t needed when marketing online where the cost to reach so many thousands of people is near zero now.

The “Freemium” business model takes advantage of this power of scale, where something of value is given away for FREE to attract prospective customers, by then converting a tiny fraction of these visitors into registered users (members, subscribers, etc…) and a fraction of these into paying customers that receive something more then what is being offered for FREE. Call it FREE+. This model has worked successfully for many a Dot Com company and continues to be one of the most common business models of recent start-ups.

So if this Freemium business model can work, what is required to put it to work for your organization?

• Even FREE needs to compete with millions of other Websites so how good is your FREE ? Is it good enough to cause people who see or hear about it to check out your site to learn more about your FREE?
• Once your FREE is good enough to drive thousands of people to look at your site how do you get them to register or otherwise get them to “stick” with you? Your FREE is competing with more competitive FREE than ever before. It has to offer enough “currency” or value to your prospective customers that they register, subscribe, join, sign-up, etc….
• A large audience taking advantage of your FREE can produce some ad revenue, affiliate revenue, and perhaps some other revenues, but this business model won’t typically get anyone excited as people have become expert at “ad avoidance”.
• So ideally you have a FREE+ to offer that is appealing enough to a portion of the crowd enjoying your FREE that they sign-up and actually pay you something for it.
• What can you offer that has enough value that people will pay you for it when there is so much FREE across the Web? Business or personal opportunities? Money savings? Time Savings? Recognition? Information? Whatever your FREE+ is, it had better be good because the Freemium business model is alive and well online. That and the fact that people still only have 24 hours a day is making it increasingly difficult to get people to take that step up from FREE to FREE+.

What is your FREE+ going to be and will it be good enough?

The 40 minute video below is from a talk at UC Berkeley, given by Google’s Sergey Brin, in which he confesses he thought Wikipedia couldn’t work. Most people wouldn’t contribute, he rightly assumed, and it would never reach critical mass. He goes on to explain why the power of scale allowed Wikipedia to work and proved him wrong.

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Dave Rosenberg wrote a couple of good articles on the Freemium business model over at cnet news:
Making ‘freemium’ work amid ad death spiral

Ad-supported sites will move to a “free-mium” approach or die by the end of 2009

And finally… one of my favorite Freemium promotions:

With the exception of the inevitable arguments at 12:00:01 every night, this has to be one of the better Freemium promo ideas out there.