Freemium (free + premium) has arisen as a very popular model for new software initiatives. It seems counter-intuitive and costly to skeptics, but new companies are swearing by it and seeing results. As you can guess, the model is to give away a complete and fully functional software package with no time limits while placing certain restrictions such as data, user count, and bandwidth in model which require a paid subscription to access.
Big name freemium software examples are Evernote, Dropbox, Skype, Flickr, MailChimp, and Flavors.me. The Internet has allowed us to test a myriad of marketing strategies to introduce people to new software, and freemium is winning for a reason.
The Problem with Premium
Premium is the old standard for software, but many still cling to it. Forcing people to pay large up-front costs just to start using your software, or at least use it for anything productive, front loads the buying process full of barriers to entry. You are asking potential users to overcome all the doubts and questions about practicality, trust, and usability before they fork over the money for your product. This creates waste by requiring a huge marketing strategy to address these issues. You also have to keep selling more software just to break even. Once you have a user, they aren’t paying you any more money, but you still have to support them.
Demos Don’t Fix It
Making a “demo” of your software doesn’t help much. Sure, users can get a preview of your software before making a purchase decision, but now you create other barriers. A user has to invest time and energy in your product knowing that it all goes “poof” if they don’t go ahead and buy it. People are busy, a 30-day trial often expires before a user can try it out, but longer demos turn into “free” software as people game your product. Demos are a burden that build more anxiety than confidence.
Freemium for the Win
Freemium is the easiest and most confident key to entry for a new user. Users are happy to invest time and effort into your software, because they know they can keep it. They don’t feel anxious because they know they can learn it at their leisure. The best part is that they have the time and freedom to find out how the software actually impacts their day-to-day life and productivity. Users are also less likely to build up buyer-resentment since they don’t feel like they HAVE to pay you. When the time comes that a user needs the premium features, they feel more like it is a choice and not something they are pushed into. Users are more grateful and less demanding.
Growing Your Own “Herd Mentality”
Just like everything else, people are more likely to use software if they know someone else who is using it and receive a recommendation. Freemium multiplies this effect. Freemium grows faster than just about any other model because while people are still making up their mind whether or not to buy from you, they are are already evangelizing for you.
Controlling Your Cost with “Group Think”
When a user forks out cash for a program and then has trouble using it, they are indignant but when people are getting software for free they are less demanding. Freemium often off-sets the cost of the free users by turning them into volunteer “tech support”. By providing the tools for users to form a community, they can and will assist each other in learning and understanding the software. By the time a user converts from free to premium, they are already educated.
Working with the Numbers
There are no major industry studies out yet about the conversion rate of free-to-premium, but the published results of the companies I listed previously combined with my own research, shows an average conversion of 3% between 6-18 months and 5% after 18 months. Making money with Freemium is all about making sure the income from your 5% pays for all your resources and generates a profit. Some companies do have conversion rates just passing 10%, but that is a “great if it happens” number I wouldn’t count on.
Further Research:
Evernote – http://techcrunch.com/2009/12/30/evernote-two-million/
Case Studies – http://gigaom.com/2010/03/26/case-studies-in-freemium-pandora-dropbox-evernote-automattic-and-mailchimp/
Illustrations from Disposable (copyright 2011)
