Can you afford to be free?

There’s a lot of talk about ‘freemium’ business models, particularly when it comes to internet businesses so we thought we’d do a piece looking at a few of the considerations that matter if you’re trying to work out whether freemium would work for you or not.

When do businesses offer their main product for free?

  • when they can offer the cut down or lite version for free but charge for increased functionality e.g. many of the software as a service (SAAS) offers such as … so really the free version is to entice you to use it regularly at which point you’ll need the paid for version to meet your increased needs
  • when use of the free product gathers data that the company can sell on
  • when the free product leads to sufficient site traffic to enable them to make substantial revenues from online advertising.

Can you afford to be free?

  • Let’s be clear on this – you need to achieve a sustainable income stream for your business at some point (otherwise it’s not a business, nor is it social enterprise, it’s altruism)
  • Many of the companies who started out giving their product away either had financial backing or a very low cost of production at the start
  • Plus if you’re smart you’ll have either a fully worked up plan as to what you’ll charge for or at least a plan to work out what you can charge for once you get going! You’d be daft to do freemium on a ‘suck it and see’ basis :)
  • Do care about attracting a user base early (ie do be in the market early, particularly if is an online offer) as this will keep you pushing the company to develop.  But do consider users as customers not just a marketing route ie don’t only look at user figures and site usage, have income in there as a key performance indicator (KPI) … this means that even if you’re not charging for it consider what you would charge and calculate the ongoing cost of the opportunity ie if they were paying this user base would now be worth £X/month (make some assumptions about what proportion of the user base would pay and be conservative in this figure) … looking at the income you’re not getting is one way to see the cost of your chosen path and set levels at which you trigger launching other (paid) versions.

Do you need to be free?

  • The one time in particular where being free has been shown to be utterly crucial is in order to do a ‘land grab’ in the marketplace when the market is expanding and changing rapidly and when, once the market has set up, the barriers to entry will rise dramatically e.g. Amazon or Lovefilm where the cost of establishing the distribution centres was very high but resulted in close to a monopoly position in the market a couple of years down the line
  • If you are moving faster than the market is developing (and this looks set to continue) then a land grab probably isn’t necessary. If the market will remain a fragmented one again a land grab has little to offer
  • If your market is on the cusp of rapid expansion and you could get left behind then a land grab may be a sensible thing to consider (assuming you can raise the finance to support it which will in turn depend on the profits to be made in an expanded market).

If you’re free to start with will you convert people to paying later?

  • Businesses that offer a free version tend to be pretty clear on what they will charge for even it if takes a few years to develop the user base to a point where they value it highly enough
  • You need to be able to demonstrate to yourself (and to others) that what  you offer is valuable enough to pay for ie there is a need and it’s more than just a nice to have.

And as a last point to consider … why put off revenues until tomorrow if you can have them today (and thus use them to fund your growth)? That is to say just because the big guys do freemium doesn’t mean that it’s a market entry requirement universally nor does it mean that you’re more grown up than the other SME’s around you!

In summary – see if the market will demand it of you and if it doesn’t think hard about whether foregoing revenues helps or hinders your growth plans.

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