Freemium Strategic Considerations

The obvious concern for anyone considering a Freemium model is what are the financial implications of just giving away your product for Free, and will users actually be willing to upgrade from the Free offering to Paid versions that drive revenue and profitability.  

 

Before moving forward with a Freemium plan, it is important software company executives give careful thought to the following strategic considerations.

 

 

‘Free’ Is Not A Value Proposition

 

Offering a Free product that can be used by most businesses to meet workflow, storage, user access, process efficiency, etc. should drive adoption.

 

Asumptions around how many clients will leave the competition and switch to the Freemium product need to consider the product quality, functionality, switching costs, switching risks and resource implications and price sensitivity in the market.

 

For some software, particularly products that address business needs and drive value, users may be less concerned about the monthly cost than the software providers realize.  An investment bank is not going to move users from its trading platform to a free platform just because it is has no cost associated with it. The decision for an investment bank's executive team will be heavily focused around the capabilities of the product and the costs and risks associated with switching.

 

 

It is important to remember, ‘Free’ is not differentiated value proposition

 

Competition can easily replicate a Free product model.

 

If the core product of a software company is free, R&D often is heavily focused on making the product look good, feel great and run smoothly. 

 

If the core product of a software company is a paid offering, the pressures from clients is for R&D on the product to be focused on items that will enable the product to deliver more direct business value to them. Requests are typically not heavily user interface focused.  Requests are typically focused on system integration capabilities, multi-colleague security and access, and other capabilities that help embed the software in business processes and workflows. 

 

In order to build a product that will generate revenue and profit, it is important to focus R&D investment on items fee paying clients request.

 

 

Support Model Costs can be Underestimated

 

A free product may add many new users that are not familiar with the product.  Supporting a high volume of new users of a new free product may require significant on-hand training and support.  Often new products are not as initiative and simple to use as anticipated and free product users may be less sophisticated than paid users.

 

Paying users are more likely to be familiar with the product, more likely to understand how they need to configure and use the product and paid users may even have their own developers, project managers and technology staff on hand to support them with implementation and ongoing support.

 

 

Viral Benefit can be Misunderstood

 

The excitment generated from a free product being introduced can be powerful.  The introduction of a free product may create a viral marketing impact that creates unprecedented interest in your products and services.  It is important to appreciate that there may be an expectation gap created.  Prospects may begin to expect your products and services to be free, and put pressure on the business to move in this direction by adding paid functionality to the free offerings.

 

 

Value Derived from Data can create New Revenue Streams

 

If your product collects data that can be consolidated and used to drive powerful analytics you may have a free product that can drives new revenue streams.  

 

Some companies offer free services in exchange for you giving them total access to resell and use your data. They take the aggregate data and use or sell it.

 

 

Sustainable Businesses are built around Products that Deliver Value 

 

As a data aggregator, it may make sense to start with a Freemium model.

 

As a consumer software company, it may make sense to introduce a Freemium trial product with you core product.

As an enterprise software company, it is important to build a product with inherent value that clients will pay to use and prove this before introducing a Freemium model.

 

It is critical to build a robust and healthy business model.  Introducing a Freemium model as a pilot or test can be very dangerous to the short and long term health of a business if the business model is not well thought out.

 

There are many cases where Freemium models push startups underwater. 

 

 

Conclusion

 

Assess the rationale to introduce a Freemium offering before moving forward.  Make sure you understand the business model and the implications for your paid products are well thought out.

 

Freemium can be a great customer acquisition strategy, and it can be a great way to collect data that has value in itself.

 

It is simply critical that there is a broader business plan in which a Freemium model sits in order to ensure success.