How to Make Freemium Work For You – Inc magazine

Interesting article. Free and Large group of users or small group but paying customers

Giving away your product or services isn’t as crazy as it sounds. Here are steps to get the most out of the strategy.

Reborn Free: Aaron Levie’s company embraced the freemium model in 2006 and saw sales increase by 1,822 percent.

Box.net‘s co-founder Aaron Levie is something of a freemium evangelist. In September, his lecture at the Web 2.0 Expo in New York—titled “6 Reasons You’d Be Crazy Not To Give Your Software Out For Free”—detailed how his company embraced the model in 2006 and saw sales spike 1,822 percent within three years.

Despite the flashy moniker and such stunning results, the freemium formula is actually quite simple: give customers a basic product for free but charge them for extra features or services. It’s a natural progression from the age-old practices of giving away teasers, promotional material, and free trials. The idea is to spread a product to as many potential customers as possible so that some of them will come around to paying.

Before turning to freemium, Box.net had been a paid-only software service providing file storage online. But then Levie and his partner, Dylan Smith, decided they wanted to go after a bigger market. To do so, they started delivering a free version of their service, offering 1 GB of space with an option to upgrade to a 10 or 25 GB product with added features. The results came almost immediately: “The two months after the switch were the most profitable in the company’s history,” Levie said, signing up close to 500 times the amount of new users each month.

The success, to Levie and Smith, demonstrated that freemium wasn’t so much a sales strategy as it was a marketing tool. The free version spread naturally among users with basic needs—all the while exposing the product to businesses and high-need customers willing to pay. As long as Box.net had enough pay users, it could support a version scaled to the limited needs of its free ones.

But it’s the possibility of an excessive number of free users that worries freemium’s detractors. Inc. columnist and 37Signals founder Jason Fried recently wrote that the idea of giving away products is “truly insane,” and that he’d much rather serve a smaller, pay-only customer base than a large, unwieldy—and possibly unprofitable—one. By taking on a massive amount of users, he writes, his company might not be able to sustain its level of quality and success.

Doing such a cost-benefit analysis is essential. And even if it doesn’t make up a large portion of your business, done right, freemium can give your online marketing efforts a big boost. Here’s how to make it work for you.

How to Make Freemium Work: Coordinate Your Team

While many like Levie have rushed to embrace freemium with open arms, its history remains a cautionary tale. The biggest problem companies run into is that they stake too much in freemium without coordinating all the parts of their business.

Take Helpstream, for example – the Silicon Valley software company that provided free customer relations applications. Even though freemium works for many software-as-a-service (SaaS) companies, it failed Helpstream because of a fundamental misunderstanding between marketing and sales. Helpstream’s former CEO Bob Warfield acknowledged as much when he wrote on his personal blog, “Sales was not particularly interested in any of the goals the CEO had set forth,” namely using freemium to spread sales. The sales staff contended the strategy was taking away commissions. What sales failed to realize, Warfield argued, was that even if it didn’t make money initially, freemium could bring in a ton of potential customers.

Levie, despite his success with freemium, acknowledges what a tough sell it can be with a sales team. “On one hand sales will love you,” he said during his presentation. “But on the other hand sales will hate you because you have to sell against something that people can use for free.” Indeed, Levie admitted in an interview that, “The No. 1 competitor we lose business to is our free product.”

With that in mind, you’ll need to clearly lay out the benefits to your sales team and make sure they’re on board.

Dig Deeper: How to Use Social Media for B2B Marketing

How to Make Freemium Work: Keep Support Costs in Check

When it comes to the product you give away for free, keeping costs down is obviously essential. Ideally, the only costs would be the initial money or time invested to create your product. That’s where technology and software companies have an advantage when it comes to freemium.

“The technology can exist and support itself,” says Lincoln Murphy, founder and director of Sixteen Ventures, a Dallas-based firm that develops business strategies for SaaS and Web app companies. “The best strategy is to take a subset of your core product and make it free.”

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