Recently, there has been a lot of talk about the role of “Free” in a business model, and particularly about the idea that “Freemium is Dead”. In fact, I was inspired to write this article by Ron Baker and Ed Kless, the hosts of The Soul of Enterprise (an excellent podcast). When they had me as a guest on their show, they asked me about whether freemium is still a useful element of a subscription model strategy.
Let the record show that Freemium is very much alive.
The issue is that too many organizations are not using freemium correctly. You should only give something away if it helps you achieve your business (or mission) objectives. And many freemium offers have no measurable return on investment.
The Role of Free in Subscription Models
I advise subscription business leaders to make sure to consider the role of “free” in their business model, in a deliberate way. They should ask themselves what the ROI of free might be.
There are two big categories of free in subscription models. There are free trials and there are freemium subscriptions.
A free trial is a taste of the most delicious thing you have. It can be useful if one of your big challenges is that prospects either don’t understand your value proposition or don’t believe your promise.
For example, if I say I have a software that makes video production easy, you might be confused about what features it has, what products it works best with and what level of sophistication is required for it to truly be easy. At first, you might not understand the value of the product, but if I give you an opportunity to play with the software, suddenly, lightbulbs will go off as you start to understand what I meant.
Or maybe you just don’t believe my promise that my subscription box contains the most delicious steak in the whole wide world. So I give you a tiny taste, on me, so you believe that what I’m putting in the boxes is really special.
With a free trial, you don’t want to provide too much, or to fully solve the problem. You don’t want to give such a big taste of steak that the prospect isn’t hungry. Many free trials do exactly that–and report the problem of “failure to launch” in which someone signs up for a trial, uses the trial very heavily and then cancels just before the first payment is due. You just want to allay the concerns and confusion, giving away as little as possible
In contrast, freemium is an ongoing membership which provides real value for free. You might use freemium for one of 3 reasons:
- to change behavior. If a news organization wants to move print readers to digital, it might make 10 articles a month available for free. If the freemium subscriber keeps bumping up against the paywall, eventually they’ll recognize that they actually use digital news more than they thought, and probably would benefit from a paid unlimited subscription.
- because the free members ARE the product. This could be true in a case like LinkedIn which has what is known as a “network effect”. Each new free subscriber makes the paid membership more valuable for the recruiters, job seekers and salespeople who are looking to find the right person. Or it could be an ad supported model, where the business is trying to attract enough of the right kind of “eyeballs”. Or even that archaic (and kind of gross) marketing strategy of “Ladies Night.” In all these cases, the free benefits are given to seed the bigger opportunities.
- because the free subscribers are an acquisition for paying subscribers. Put another way, some freemium models have a viral component in that just by using the product, freemium members are marketing the service to their community. Hotmail was the first “viral” product–I sign up for free mail, and send you an email with the hotmail link, so you sign up. Same thing works for any product where part of the onboarding process is for you to connect with all of your contacts.
These are the only reasons to justify giving something away (other than philanthropy, which is not necessarily a business decision, but rather a personal one).
Of course, in times of extraordinary events, these rules can be adjusted. This is true certainly of times like now, during a global pandemic, where people face dire and unexpected challenges. But it can also be true in cases of great time-limited or unexpected opportunity.
The Role of Free in Subscription Models (in Extraordinary Times)
In extraordinary times, there are additional reasons to give away free stuff.
- to take care of one’s members. My neighborhood yoga studio had to scramble to figure out how to offer remote classes. With no real digital footprint beyond a basic website, the owner worked quickly to figure out how to use videoconferencing to support her community. Drugstore chain CVS is offering delivery of prescriptions so at-risk patients don’t need to come into the stores. These thoughtful extensions of services to existing members at no additional costs make sense because they are guided by maintaining and deepening the long term relationships.
- to take care of the community. This goes beyond discretionary philanthropy and is what happens when organizations recognize that their entire community is at risk and that their organization has resources to be a source of relief. This is the philharmonic live streaming to help people connect to beauty. This is Zoom extending the benefits of freemium to all teachers.
- to build brand awareness. The more cynical among us can point out that these public and temporary acts of generosity are not altruistic. And in many cases this is true…or at least altruism isn’t the full reason for the generosity. Even my 83 year old neighbor is using videoconference combined with a second camera (for the blackboard) to continue tutoring. Never have so many people tried videoconferencing–so there may be a little “land grab” behavior to win these newcomers. We are all looking for new habits on everything from how to work from home, to how to get our groceries, and businesses are scrambling to gain trial as well as to gain media attention as “one of the good guys”.
Not everyone should give everything away though, even in these crazy times. And freemium offerings have a real cost, even if your variable costs approach zero.
So, I would encourage you to be deliberate about what you give away and what the rationale is.
If you believe that freemium helps you make more money in the long term, make sure you know how to measure that impact. If you can’t measure it, you may not want to offer it.
And if you’re offering freemium to a special group for altruistic reasons, make sure that’s actually what you’re doing. If you’re trying to help out people who have been laid off, then only make your offer to people who have been laid off. If you’re trying to help the elderly, be specific and explicitly.
The biggest risk is that you give away too indiscriminately. This can result in both a reduced perception of the value you provide AND a lack of revenue that drives you out of business.
Actually, that’s not true. The biggest risk is that you are so focused on short term revenue that you risk losing your humanity, and remembering the mission that got you into business in the first place.
Freemium is not dead. But it is not required in every subscription model either. If you’re offering a freemium option right now, be sure that you understand the why behind the free. And maybe it’s time to shut it down.