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Freemium Is Sucking. Here’s Why

Update: Fred Wilson ironically has a new post up today (10 hours after I published this) titled, “Free vs. Paid.” It directly addresses my thoughts below...

Two years ago Fred Wilson Jared Lukin coined the term “freemiumâ€� to describe a new type of business model prevalent across web 2.0 products. The idea of freemium is offering a base of features for free and then up-selling additional premium features. Freemium isn’t scaling on a mass-level and these are my thoughts on why that is.

Theoretically, freemium makes great business sense as it allows two things:

1) Offering stuff for free creates the lowest possible barrier to adoption meaning that a product can quickly gain mass adoption while also establishing its value proposition to individual users

2) Ultimately as this value proposition is solidified, the true goal of freemium emerges: using “free” as a catalyst to entice/convert users into paying accounts

The problem with freemium is that while the model makes sense from the standpoint of sellers, buyers (the users) see freemium as something more akin to to “pay-lite;� an unintuitive concept. Sellers must offer enough free features so that users get enough value to become regular customers (and hopefully tell friends to join as well). As competitors emerge, they kill one another off in a Darwinian manner as each competitor offers more free stuff than the other guy until there is nothing premium left to up-sell.

Even without competitors, freemium still has big problems. Consumers are trained to act in black and white terms: we buy or we don’t buy. Because freemium products offer services for free that are ‘good enough,’ this new idea of hybrid consumerism — that we actually need ‘premium features’ (i.e. the status quo ISN’T ACTUALLY good enough) — is contrary to what we are accustomed. The idea of paying for something we already get for free is counter intuitive. Not only is it counter intuitive, but it’s a question we normally revisit once a month as we are informed that our monthly subscription charge has been drawn down. Remember the inflection point between free and paying is an enormous gap. Under freemium sellers delay that buying decision while also improving the free offering over time. It simply doesn’t make sense to most people why they’d ever need to pay.

When you are given something for free, it’s difficult to understand why you can’t obtain more for it for that same great price. And when you can’t get more for the same price, it’s natural for us to seek alternatives or create work-arounds. It is human nature that if you’re given an inch, you assume you can take a mile. Psychologically it is difficult to remain loyal when you’re given a sense of power (getting stuff for free) and then having that power stripped away. Any college student understands this concept as related to open bars. We’ll drink our faces off while it’s free; top shelf all the way! But as soon as it becomes a cash bar, we’ll downgrade to $3 beers, or leave the bar entirely.

I believe it will still be years before the consumer adapts to this new psychology of online buying en mass. In the meanwhile, we’ll need to develop different models and strategies that are less direct departures from the traditional pschology underpinning consumer behavior.

Comments on this entry are closed.

  • Excellent post. Thanks for sharing.

  • Hi Sam

    I agree with the premise of most of what you are saying, but not the conclusion that freemium sucks.

    In a field where more then one provider uses freemium there will be competition, sometimes the size of the overall market. But this does not mean that it can not be profitable for the individual company. If you use the example of skype. The availability of free voip call has probably reduced the long distance and international market. But why should they care what happens to their competitors.

    In any business the one who wins is not the one who has the best features, so the competitors free product, does not necessarily destroy your premium. I just saw a video with Seth Godin where he has some great examples about how technical features will not win it for you.

    Lastly you have some ideas about why very few will pay for the premium features in a freemium model. whether or not i agree with you on this, the experience is that only a few percent pay for the premium within a freemium model.
    Again skype can be a good example. According to the data I could find on the net, they have over 300 million users of their free product and only about 5 million users of the main premium. So you are right that only very few buys something.

    Yet this does not mean that the model is invalid. Because of the ever decreasing cost of computing power, the price of offering a digitally duplicated product is very small. So even though few of the free users buys something, it can still make great business sense.

    (I don't believe that freemium can be a miracle cure, but in some cases it can be a valid business model.)

  • Hi Peter,

    I understand your sentiments, but as a model designed to bring a business to scale, freemium does indeed suck.

    For example, I my guess is you will never seen an IPO (aside from say Google) that is built around giving something away for free and then upselling premium features on top of it.

    Skype does indeed have a lot fo users but I have heard from numerous people that eBay has been loosing tons of money with that investment. Finally, check out Fred's post today which ironically addresses many of my sentiments: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

  • Hi
    I see the point in Fred’s posts and agree with his reasoning.

    On the issue of scale I no disadvantage in free products with possibilities of buying premium as appose to just premium. unless you release the free a period of time before the premium. In this case the free can be seen as part of the development process, as Fred says in his post.

    On the issue of goolge, they don't use freemium !. None of the users pay for even premium product. It is all payed by advertisers. See Chris Anderson's blog for a nice typology of free

    interestingly he also has a recent post around the fortunes created around free.

    How much money Ebay has lost is not an indicator of the skype business model, but the over evaluation of the company at the sale. It still makes a profit, just not enough to merit the $ 2,6 billion price tag.

    thanks for the link, had not seen that one

  • @Peter

    I'm not sure that Google isn't in fact freemium. I pay for Google Enterprise Services. However, I also consider my payment ($$$) to Google to be in the form of data and attention. But still, point well taken.

    Thanks for the great comments Peter!

  • A: I can usually walk in to a pub or bar for free.
    B: I usually pay to get in to a club.
    C: Some clubs I can pay a membership for.

    The perceived quality of the experience I expect goes up from A > B > C

    While building the multimedia conversation platform called 'Phreadz', we had a long discussion about what people would pay to become a member – if indeed they would pay.

    You can see the standalone version of the thread here : http://phreadz.com/p/930L6AIG8GK0/
    And the embeddable autoplay widget for this thread here : http://phreadz.com/widgets/player/?g=930L6AIG8GK0

    I floated the idea past my beta testers that other, free competitive services are like 'a pub' – and Phreadz could be thought of like a 'private members club'. The quality of conversation (and the environment which it takes place) would be perceived to be higher if paid for – and naturally, also if the 'product' is better.

  • How has that been working? Are you guys achieving a good conversion rate?

  • The free vs paying battle continues.

    Here's my take. All example used to represent free vs. paying are perfect to represent my point, here's why. Ebay, Skype, “Google” (Sam, not sure I agree that this is freemium but doesn't matter for this point) etc.. all have one major element in common. “They are all very very successful”

    Sure, success could be viewed as “number of users” on a site that may NOT be bringing in revenue, a la Facebook, Myspace and the likes”. However, Skype and Ebay do charge their users something and as a result both have seen much success.

    Recently, Ebay has made acquisitions that amount to well over 1B and the sell of Skype left it's shareholders with more money in the bank. Therefore, I do think freemium models work, especially for the companies being discussed.

    On a side note, why are people categorizing Ebay into a freemium model? Ebay in my opinion is primarily commerce.

  • Pingback: Free is Dead, Long Live Freemium | CloudAve()

  • Jeffrey Bentley-Johnston

    I could not agree more. Your customer perspective is telling. Well done.
    Sooner or later, you have to take account of customers and their buying processes. Better to do it at 'business model' stage than after spending truckloads of money.

  • Jeffrey Bentley-Johnston

    I could not agree more. Your customer perspective is telling. Well done.
    Sooner or later, you have to take account of customers and their buying processes. Better to do it at 'business model' stage than after spending truckloads of money.

  • Pingback: Is the Freemium Model Dead? : Texas Startup Blog()

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